Review and Prospect on Fair Value Measurement

The main purpose of this paper is to review the theoretical development and its important documents related to the fair value since the 1990s,with the hope of giving prospects of future research.The structure of this paper is organized as follows: Part 1 briefly reviews the history of the development of fair value in the 1980s.Part 2 and Part 3 respectively review the related papers of foreign and domestic researchers since 1990s.Part 4 will give the summary and put forward 4 possible future directions of research. Before the 1970s,the fair value measurement had been developed relatively slowly.Since the 1970s,the fair value has gradually been recognized by accounting standards setters,which has began to release related guidelines.After entering the 1990s,in the context of the rapid development of financial innovation,the FASB and IASB released several important accounting standards and guidelines concerned the fair value,with the purpose of promoting the use of fair value in the accounting measurement.These standards and guidelines includes: SFAC7(Using Cash Flow Information and Present Value in Accounting Measurement) and SFAS157(Fair Value Accounting Standards) issued by FASB,IAS 39(Financial Instruments: Recognition and Measurement) and IAS7(Financial Instruments: Disclosures) issued by IASB. Most papers of value relevance are involving various types of financial instruments,some also involves non-financial assets.Two literature from Holthausen and Watts(2001) and Barth et al(2001) has given the detailed description of such literature,and therefore this paper will not repeat these contents.In addition to focus on the value relevance of fair value,some other papers studies the factors which may affect value relevance,these factors include the company type(service-oriented enterprises or high-tech enterprises),the corporate governance environment,the form of financial instruments and the intention of holding financial instruments of the management.Furthermore,some literaturealso investigate how the institutional factors of different countries affect value relevance.These institutional factors include legal system,capital market size etc.The financial crisis of 2009 has caused the fair value been questioned by many scholars,these questions include: does the fair value is contrary to the principles of accounting conservatism? Does the bank earnings based on the fair value are more volatile than that under the historical cost? Whether the fair value has resulted in a pro-cyclical effects of financial markets.These issues will be reviewed in Part 2. Most domestic papers use method of normative research to study fair value,the empirical research are less likely to be used.These normative research discusses the theoretical basis of fair value,and its relationship with other measurement attributes,fair value measurement model and technology,t Li Su(2007) has discussed these contents in detail in his doctoral thesis,and so this paper will no longer repeat them.As the same with the foreign,Chinese scholars also discusses on the relationship between fair value and the financial crisis,andChinese scholars recognize the fair value may affect financial crisis,but is not the root causes of the financial crisis.In exploring the relationship between fair value and the accounting conservatism,Chinese scholars believe that in current environment it is impractical to implement fair value measurement completely and fully abandon the accounting conservatism.The empirical research of Chinese paper on the fair value has mainly focused on the role fair value in enhancing the value relevance.There is also some empirical literature studying on the role of fair value inexecutive compensation,the relations between the fair value and earnings management.These issues will be reviewed in Part 3. Based on the review of the domestic and foreign literature on the fair value,this paper argues that the future research in this area could be carried out from the following four aspects: The first direction is to study the how the fair value affecting the stock price.The second direction is to study how the economic effect of fair value changes due to other factors.The third direction is to study correlation relationship between the accounting system and the specific characteristics of the fair value.The fourth research direction is to study the relations between the contract with and fair value from the contract perspective.