“Economic Accounting”: Fair Value and Full Fair Value

This chapter explains how the full fair value concept is derived from the fair value concept developed by the International Financial Reporting Standards (IFRS). Indeed, full fair value extends fair value to every product including products accounted at historical cost. The discounted cash flow analysis has to take into account all the flows associated with the product: capital repayments, interests. The A/L manager discounts these cash flows under a risk neutral probability. Moreover, full fair value is equal to the expectancy of the sum of all the future discounted incomes. Indeed, on the long-term horizon, all the accounting standards are equivalent. Nevertheless, many A/L managers fought against the introduction of full fair value in the IFRS rules: they categorically resisted this accounting methodology.