YEDITEPE UNIVERSITY FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION DEPARTMENT OF BUSINESS ADMINISTRATION FAIR VALUE THEORY Kaan Çalışkan 20190501110 Submitted to: Mehmet Nurin ÖNORTAÇ Istanbul, 2021 1 TABLE OF CONTENTS INTRODUCTION ..................................................................................................................... 3 1. REVIEW OF THE FAIR VALUE CONCEPT ..................................................................... 5 1.1. Definition ........................................................................................................................ 5 1.2. Determination of fair value ............................................................................................. 6 1.3. Measurement methods used ............................................................................................ 8 1.4. Opportunity in which the concept of fair value is used ................................................ 10 1.5. Revelations.................................................................................................................... 10 1.6. Recognition of value differentials ................................................................................. 11 1.7. Relationship of the concept of fair value and impairment ............................................ 12 2. EFFECTS OF THE IMPLEMENTATION OF FAIR VALUE .......................................... 14 2.1. User satisfaction ............................................................................................................ 14 2.2. Prudent or Conservative Criterion ................................................................................ 14 2.3. Fair value reliability ...................................................................................................... 16 2.4. Heritage model to maintain........................................................................................... 17 2.5. Statement of income and variations due to fair value adjustments ............................... 18 2.6. Distributable results ...................................................................................................... 19 2.7. Administrative costs linked to the revaluation model .................................................. 19 2.8. Enforcement of compliance with standards .................................................................. 20 2.9. Taxes and use of fair value ........................................................................................... 21 3. CONCLUSIONS ................................................................................................................. 22 REFERENCES ........................................................................................................................ 24 2 INTRODUCTION In the current regulations issued by the International Accounting Standards Board (IASB), the concept of fair value is incorporated in approximately 72% of the standards; 1 however, these provide disparate and sometimes limited guidance on how to measure fair value. In Conceptual Framework 2For the preparation and presentation of financial statements (IASC, 1989) the concept is only stated a couple of times, in addition, when referring to the measurement of the elements of financial statements, it does not include it in the measurement bases and it has been planned to generate a draft on this point for the second half of 2011 (IASB, 2010b). In the same year, the standard that establishes how the entity should measure fair value and disclose the information of its calculation will be issued (IASB, 2009a). In September 2005 the IASB added to its agenda a project to clarify the meaning of fair value and provide guidance for its application in International Financial Reporting Standards (IASB, 2009b) and has taken into account FAS 157 Fair Value Measurements 3 as a basis for the joint work that the IASB and the FASB have developed and that seeks to improve the comparability of financial statements prepared in accordance with International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles of the United States (IASB). , 2010a). The objective of this work is to briefly address different aspects related to fair value: definition, considerations and measurement criteria used in its determination, timing in which it is used, required disclosures and recognition of the value differentials that are generated by its use. This study is mainly based on the revision of the current regulations issued and revised by the IASB, as well as on the documents that correspond to the drafts of the standard on the measurement and disclosure of fair value. It is justified to specifically address this matter because the complexity of the valuation processes increases "with the introduction of fair value, the central axis of valuation in international regulations" (Mejía, Montes and Montilla, 2008, p.76). 3 The presentation of this work is structured in three sections. The first presents the compilation of the matters included in the review of the concept of Fair Value. In the second section, a brief reflection is made on the different scopes produced by the use of fair value. The third and final section sets out the limitations of the study, the conclusions and briefly presents future lines of research that may arise on the matter addressed in the document. 4 1. REVIEW OF THE FAIR VALUE CONCEPT The bodies responsible for issuing international (IASB) and national (FASB) financial reporting standards have taken on the task of clarifying and systematizing the use and application of fair value. The IASB has set the same objectives as the FASB in FAS 157 (FASB, 2006) to generate a standard referring to measurement using this concept: (i) Establish a single guide for fair value measurements required in the different standards, (ii) Clarify the definition of fair value and establish guidelines in order to communicate more clearly the measurement objective, (iii) Expand fair value disclosures. The reason for generating a specific standard is because different accounting elements need to be measured at fair value, however, the methodology to measure them is dispersed through different standards, which adds difficulty for valuation and affects the quality of the information disclosed. in the financial statements. By specifying the criteria to be applied when determining fair value, multiple interpretations and applications that could even lead to the manipulation of the results are avoided. 1.1. Definition Fair value is the price that would be received when selling an asset or paid when transferring a liability in a regular transaction between market participants on the measurement date (FASB, 2006; IASB, 2009b). This definition states that the fair value measurement is at an exit price, from the perspective of a market participant who controls the asset or owes the liability. The definition preserves the notion of exchange price contained in the definition of fair value existing in IFRS, the most complete being that stated in IFRS 2 on share-based payment: the amount for which an asset could be 5 exchanged , a liquidated liability, or an equity instrument granted could be exchanged, between interested and duly informed parties, in a transaction carried out under conditions of mutual independence. However, it does not specify whether the company is acting as a buyer or a seller, it does not explicitly indicate whether the exchange takes place on the measurement date or on some other date (IASB, 2009b). The new IASB definition limits and corrects these aspects. An exit price of an asset or liability reflects the expectations of future cash flows associated with the asset or liability from the perspective of market participants at the measurement date; whether the intention of the company is to obtain these flows either through the use of the asset or through its sale. An exit price is always considered to be a relevant definition of fair value (IASB, 2010a). The price is established from the perspective that the transaction in which it is set (whether it is the sale of an asset or the transfer of a liability) is hypothetical on the measurement date (FASB, 2006; IASB, 2009b) . 1.2. Determination of fair value The fair value measurement is based on the market measurement and not on the measurement of a specific entity. Therefore, a fair value measurement uses the assumptions that market participants would use when valuing the asset or liability (FASB, 2006; IASB, 2009b). In developing these assumptions, the reporting entity should identify the characteristics that generally distinguish market participants, considering the specific factors relating to (1) the asset or liability, (2) the primary (or most advantageous) market for the asset. or liabilities and (3) the market participants with whom the reporting entity would trade in that market. An important contribution of this regulation is its characterization of the market, clearly distinguishing between the main market and, in its absence, the most advantageous market for the asset or liability (FASB, 2006; IASB, 2009b, 2010a). 6 When referring to valuation techniques, it is indicated that valuation techniques consistent with the market approach, with the income approach and / or with the cost approach should be used to measure fair value (FASB, 2006; IASB, 2009b). In the fair value regulation, a distinction is made between the assumptions that market participants would use in setting the prices of assets or liabilities, including assumptions about risk, clearly differentiating between observable input data and input data not observable . The valuation techniques used to measure fair value will maximize the use of observable inputs and minimize the use of unobservable inputs (FASB, 2006; IASB, 2009b). Faced with the difficulty in determining the fair value of assets and / or liabilities and to increase consistency and comparability in fair value measurements and related disclosures, the fair value hierarchy is explicitly established according to the input data used in the techniques valuation of this, distinguishing three levels that must be expressed and carefully disclosed in notes to the financial statements. At Level 1, there is the highest hierarchy that gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 contains quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide price information on an ongoing basis (FASB, 2006; IASB, 2009b). It also notes that a price quoted in an active market provides the most reliable evidence to measure fair value and will be used when available (FASB, 2006; IASB, 2009b). At the IASB, the concept of an active market is expressly defined in three IASB standards (IAS 36, IAS 38 and IAS41). An active market is a market in which all the following conditions exist: (a) the goods or services exchanged in the market are homogeneous, (b) buyers or sellers for a given good or service can be found at all times, and (c) the prices are available to the public. 7 In intangible assets (IAS 38), the possibility of using the valuation at fair value as a subsequent measurement procedure is reduced and in cases made impossible by the indications of the standard itself, which states that only the application of this value is allowed when there is an active market for the intangible in question, that is, a market with enough buyers and sellers, in which the assets traded are substantially homogeneous and the prices are known. Few will fulfill this condition, due to their specific nature and in some cases unique (González and Herreros, 2002). Another very significant aspect to take into account when determining fair value is risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and / or the risk inherent in the input data of the valuation technique, these can be observable or unobservable: to. The observable inputs data are those that reflect the assumptions that market participants would use in setting asset or liability prices, developed based on market data obtained from sources independent of the reporting entity. b. Unobservable inputs are data that reflect the reporting entity's own assumptions about the estimates that market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances (FASB, 2006; IASB, 2009b). The following are the methods indicated in the measurement of each asset item, in which the application of fair value is prescribed. Only the asset items will be analyzed since they are elements that present the greatest difference according to their nature. 1.3. Measurement methods used When assets are valued at fair value, the application of this concept can be done through the application of various measurement methods, among the most used is the market value of an asset or the discounted value of the flows expected to generate said asset. asset (present value). 8 Regarding the measurement methods used, it is observed that depending on the type of asset, the use of the following criteria is recommended: (i) market value, (ii) replacement cost (8% of cases), (iii ) present value of expected future flows (60% of cases), and (iv) net realizable value (20% of cases). The replacement cost (when there is no evidence of an appraised market value) is recommended as a measurement method for applying the concept of fair value when it comes to property, plant and equipment. Market value is recommended as a measurement method for applying the concept of fair value when it comes to intangible assets and investment properties. The fair value of an investment property will reflect market conditions on the balance sheet date. The present value of expected future flows (present value) is recommended as a measurement method for applying the concept of fair value when it comes to financial assets and liabilities, leasing, investment properties and realizable assets. For the particular case of biological assets and agricultural products, the regulations indicate five possible methods: a) active market, b) price of the most recent transaction in the market, c) market prices of similar assets, adjusted to reflect existing differences, d) sector references, and e) present value of expected net cash flows of the asset, discounted at a pre-tax rate defined by the market. It can be seen that the measurement method adopted will depend on the nature of the asset and the possibility that said asset has an active market. Therefore, the application of these methods is subject to the interpretation of the person preparing the information, which in some cases may be subjective. The latter justifies the existence of a specific regulation regarding the use and application of fair value. 9 1.4. Opportunity in which the concept of fair value is used In International Financial Reporting Standards, it is mandatory to apply the concept of fair value in the valuation of certain accounting elements and in others it can be applied as an optional valuation method. In some cases it is established that fair value should be applied to the accounting elements included in the respective standard at the time of the initial measurement, however, for others, it is recommended as an alternative treatment, at the time of subsequent measurement. For example, the concept of fair value is used in the initial measurement of: finance leases (from the lessee's point of view), ordinary income, government grants, financial instruments, biological assets, agricultural products. As can be seen, these are income, financial assets, and realizable assets. In other cases, it is used in the subsequent measurement, as an alternative treatment, of: property, plant and equipment, intangible assets, investment properties. They are then immobilized assets. 1.5. Revelations In the Conceptual Framework (IASC, 1989), paragraph 14, it is stated that the financial statements also show the results of the administration carried out by the management, or give account of the responsibility in the management of the resources entrusted to it. He adds that users who want to evaluate the administration or the responsibility of the management, do so to make economic decisions, such as, for example, keep or sell the investment and keep or replace the administrators in charge of the management in the entity. The disclosure of reliable, comparable information, useful for decision-making, is increasingly necessary and required, in fact if one considers Principle V on Corporate Governance formulated by the Organization for Economic Cooperation and Development (OECD, 2004), refers to transparency and disclosure of information, and requires, among other things, that the financial situation and results of the company be 10 included. It establishes that the information must be prepared and disclosed in accordance with high-quality standards in accounting and disclosure of financial and non-financial information. The importance of complying with these requirements is due to the fact that the Financial Stability Forum 5 has incorporated, in the compendium of standards, the principles of the OECD as one of the twelve key areas of standards to have healthy financial systems. The foregoing fully justifies the disclosure requirements present in the International Financial Reporting Standards. Cases such as Enron, Worldcom, to point out the most emblematic, will make users doubt the veracity of the information, and in cases where there is no evidence of the value used in the measurement, such as when it arises from assumptions or valuation techniques (Silva and Azúa, 2006). Both the IASB regulations and the requirements established by FAS 157 aim to consider greater disclosures about measurements based on fair value and to give more confidence to the users of the information. 1.6. Recognition of value differentials Changes in the valuation of assets and liabilities based on fair value, occurring between one measurement and another, have an impact on equity. This differential can also occur when, at the time of the initial measurement of an asset, its acquisition or production cost has been used, and later it has been chosen to use the revaluation method. It is possible to distinguish three modalities of recognition of the differences in value: (i) with a charge or credit to income, (ii) with a charge or credit to an equity account, or (iii) a mixed modality in which a profit or loss account or an equity account. For example, the first modality would be indicated for the accounting treatment of increases or decreases in the book value of assets that are held for trading (financial assets) or to obtain income and / or capital gains (investment property). Regarding the second modality, it would be indicated for the accounting treatment of financial assets available for sale. As for the third modality, it would be indicated for the accounting treatment of 11 increases or decreases in the book value of fixed assets, such as: property, plant and equipment and intangible assets. The IASB is in favor of not affecting the results of the period, because of the recognition as gains of the increases in value, due to the holding of the fixed assets. Considering, then, that these increases constitute recognized but unrealized results that should be shown by increasing equity and not distributable results. In IAS No. 1 Presentation of Financial Statements, it is required that the variations in equity that originate in the application of certain standards and that have been recognized with a charge or credit to equity accounts, be presented separately in a Comprehensive Income Statement (IASB, 2009a). 1.7. Relationship of the concept of fair value and impairment This compilation on fair value, which obviously can be expanded, should not be closed without first making a scope and distinction in relation to three concepts that are regularly confused: depreciation, fair value decreases and impairment. The three concepts are related and affect the value of a fixed asset, however they have different meanings. Depreciation corresponds to the distribution of the cost or value of a fixed asset, whatever the valuation model is used (at cost or at fair value) during the periods in which its potential life is consumed, whether recognized as an expense for the period or as the cost of the manufactured product. In this way, the adequate correspondence between income and expenses indicated in paragraph 95 of the Conceptual Framework for the preparation and presentation of financial statements of the IASC (1989) can be achieved, that is, linking the achievements made in the transactions and operations of the company. company with the efforts developed to obtain them. Through depreciation, Fair value write-offs, in this case of fixed assets, are recognized with a charge to loss unless an increase in value paid to the revaluation reserve has been recognized before, since in that case it is charged up to the amount of the write-off or the amount of the reserve account balance (if less than the impaired amount) leading the difference to a loss. The fair value at which the fixed asset is valued must be the appraised value and if this cannot be determined, it will be at the amortized 12 replacement cost; however, it refers to a market-determined value given by market participants willing to pay for this asset if it were sold (hypothetical transaction). Exchange impairment is raised vis-à-vis the specific entity and impairment will be recognized when the book value (whatever the valuation model, at cost or at fair value) is greater than the recoverable value, and this is considered between the sale price net and its value in use (present value of future cash flows), whichever is greater. In any case, it should be clarified that fair value decreases and impairment can also be recorded for other assets. The subject has not been exhausted, it has only been intended to be a wake-up call. The relationship between the use of fair value and certain matters is analyzed below. 13 2. EFFECTS OF THE IMPLEMENTATION OF FAIR VALUE 2.1. User satisfaction The analysis is carried out from the perspective of preparing information under current values and not under historical values. Do information users achieve greater satisfaction of their requirements? When considering what is stated in the IASB's Conceptual Framework (paragraph 26): To be useful, the information must be relevant to the decision-making needs of users. Information has the quality of relevance when it exerts significant influence on the economic decisions of those who use it, helping them to evaluate past, present or future events, or to confirm or correct evaluations previously carried out. (IASC, 1989, p.80) In a globalized world, in which new ways of doing business are emerging every day, and where the requirements for information referred as closely as possible to the events that generate it are increasing, it could be thought that the incorporation of fair value provides more information. relevant to users of financial statements because it considers the assumptions that market participants would use. However, as noted in the same Conceptual Framework, the information can be relevant, but unreliable in nature, so its recognition can potentially be a source of misunderstandings (IASC, 1989). Therefore, when using this valuation concept, one must be sure that the information it generates will be free from bias, material error or prejudice, so that users can trust that it is the true image of what it purports to represent, or of what it can reasonably be expected to represent (Silva and Azúa, 2006). The IFRS on fair value defines the scope and subjectivity of its application. 2.2. Prudent or Conservative Criterion Valuation through fair value seems to break in some cases with a concept so deeply rooted in the accounting systems of different countries: the Prudent or Conservative Criterion. For many years the spirit contained in the statement that losses are recorded as soon as they are aware of them and the gains only when they are realized has been 14 reflected in the valuation of assets and liabilities, taking care not to reflect greater equity when it does not derive of a real aggregation of new resources. Under certain IASB regulations and applying fair value, increases are recognized in profit or loss or in equity items that originate exclusively in a valuation procedure in the face of a market, to the assumptions made by market participants, or to the techniques of valuation used, without there really being new resources that guarantee this increase in assets. Will this mean a departure from the Prudent Criterion and a recognition of capital increases that have not been realized? If it is agreed that the concept of prudence, as defined by the IASB's Conceptual Framework (paragraph 37) is: The inclusion of a certain degree of precaution, in the exercise of judgments necessary to make estimates required under conditions of uncertainty, so that assets or income are not expressed in excess and that obligations and expenses are not expressed in default. (IASC, 1989, p.82) One might think that when applying the fair value, according to the criterion of the value obtained from an active market, there would be no uncertainty regarding it at the time of the valuation, in such a way that it would not be necessary to apply the Prudent Criterion in the valuation of actives and pasives. However, if IAS 16, referring to property, plant and equipment, is taken as an example, when the optional criterion of measurement at fair value is applied, that is, if the value of an asset is increased as a result of a revaluation, the The increase must be credited to a revaluation surplus account, within equity. The defenders of this practice would argue that there should not be the risk of an overvaluation of equity, since the revaluation would be given by a value obtained in an active market. However, given that the risk of overvaluation exists, the use of this revaluation criterion could be questioned by the defenders of the Prudent Criterion (Silva and Azúa, 2006). 15 On the other hand, the same IAS 16 indicates that the increase should be recognized as a profit for the period when it corresponds to the reversal of a decrease due to devaluation of the same asset, which was previously recognized as a loss (paragraph 39). When it comes to a decrease in the book value of an asset, as a consequence of a devaluation, such decrease should be recognized as a loss for the period. However, the decrease should be charged directly against the revaluation surplus if it has been previously recorded in relation to the same asset, provided that it does not exceed the balance of the aforementioned equity account (paragraph 40) (IASB, 2009c). This difference in treatment could indicate that, in general, Valuation prudence loses its prevalence over other accounting principles, it is simply one more, since otherwise the Fair Value would never apply, since it is more prudent to do the opposite. (Canibano, 2007, p.14) 2.3. Fair value reliability What is the reliability offered by the use of fair value in the valuation of the company's assets and liabilities? If it is considered that, generally, this type of valuation is based on those values that are determined in organized markets for goods, rights and financial instruments (active markets), the degree of reliability of the fair value should be related to the operating conditions of the market that determine it (Silva and Azúa, 2006). In this way, it could be thought that if the markets work well, bias-free prices are established, which will be known to all interested in a timely manner. The use of this concept to value assets and liabilities provides useful information for making decisions, perhaps more useful than that provided by the Historical Cost Model that provides values from the past. On the contrary, if the markets do not function well or there is no active market, the different revised regulations indicate that fair value can be obtained through the use of valuation techniques based on estimates or appraisals. In this case, there is a risk of obtaining a subjective value that leads to the information for making decisions not being reliable, nor free from bias, and therefore not useful to the user (Silva and Azúa, 2006). 16 2.4. Heritage model to maintain Fair value implies the use of current values that are typical of an operating equity model. The question arises whether a change in the equity model to maintain is required, from a financial equity approach to operating equity. The company's choice of the appropriate concept of equity should be based on the information needs of the users of its financial statements. Thus, a concept of financial equity should be adopted when such users are primarily interested in preserving the invested equity (nominal or constant purchasing power). Instead, if the primary interest of users is in the operational capacity of the company, the concept of operational or physical equity should be used (IASC, 1989, paragraph 103). The standards issued by the IASB are aimed at measuring the result of the management, in a period, under the financial equity approach, obtaining a profit only if the financial amount (or money) of the net asset at the end of the period, exceeds the amount financial (or money) of net assets at the beginning of the period, excluding any distribution and contributions from owners during the period. In this way, increases or decreases in the valuation of assets and liabilities recognized under the concept of fair value, during the period, will produce a result that has not been the result of the management of its administrators, nor generated in the development of its normal cycle. of operations. In an operating equity approach, a profit is obtained only if the physical productive capacity (or operational capacity) of the company (the resources or funds that are needed to reach such capacity) at the end of the period, exceed the physical productive capacity at the beginning. of the period, excluding all distribution and contributions from the owners during the period. Under this approach, the recognition of price variations that affect assets and / or liabilities during a period, under the concept of fair value, would allow adjusting the operating capacity of the company, provided that such variations are charged or credited to equity and not to results. In this case, only asset 17 inflows in excess of the amounts required to conserve equity can be considered useful (Silva and Azúa, The financial statements show the results of the management carried out by the administrators with the resources entrusted to them (IAS 1, paragraph 7) (IASB, 2009a). Thus, it can be affirmed that it is intended that the good or bad administration of resources is reflected in the financial statements and their notes, for this the nature of the resources and market prices must be taken into account (Silva and Azúa, 2006). 2.5. Statement of income and variations due to fair value adjustments Where should equity changes that do not arise from transactions but from changes in the value of assets and liabilities be shown? The value of the company is the result of its ability to generate equity increases derived from its work, measured periodically based on the recognition of its income less the expenses incurred for services and resources consumed to obtain them, whatever the method used to measure it. , be it cost, replacement cost, net realizable value, among others. Therefore, The application of fair value can cause net results to vary for reasons that are beyond the control of the company, thus becoming volatile and distorting equity (Silva and Azúa, 2006). The use of fair value allows equity variations to be recorded (charged or credited directly to equity, or charged or credited to income for the year) for the sole possession of assets and / or liabilities. This would make it necessary to distinguish in the information presented through the income statement, the unrealized gains and losses generated by changes in the value of assets and liabilities. The changes incorporated in January 2008 by the IASB to IAS 1 (Presentation of Financial Statements) largely converge with FAS 130 (FASB, 1997) and incorporate the concept of comprehensive income ( total comprehensive income , as translated into English), which includes, in addition to gains and losses, the identification and separation of other comprehensive income, for its English translation). The latter 18 correspond to changes in equity that originate from the application of specific IFRS, with recognition directly in equity items. However, in profit and loss for the period there are variations that arise from value adjustments due to the use of fair value (for example, in the case of investment properties or financial assets held for trading) and that are not presented separately from the result generated in the transactions and operations of the company. When it is indicated that the price differentials when valuing at fair value, in some cases are incorporated into the result, the question arises, will these results be distributable? 2.6. Distributable results Neither the Conceptual Framework nor the International Financial Reporting Standards qualify whether or not the result can be distributed (Tua, 2004). Companies should differentiate the distributable and non-distributable part of the profit achieved in an exercise (Gonzalo Angulo, 2003). The problem will not be the items that are presented separately in other comprehensive income, which are publicly known that have been recorded in equity, and which are adjustments resulting from the application in the case of specific regulations. When appropriate (by law or company statutes), or it is resolved to distribute profits, it will be necessary to identify the items charged or credited to results arising from adjustments and revaluations, since there is a danger that the assets of the company will be It is detrimental when distributing profits recognized but not yet realized, or that the beneficiaries of these distributions (dividends, bonuses) receive less than the real profits due to charges to results that reduce them. In addition, the result will vary from period to period, 2.7. Administrative costs linked to the revaluation model When faced with a valuation that needs to be reviewed periodically or at some later period, the question is immediately raised, how much will the administrative costs be affected by the continuous review of fair value that must be carried out? 19 Compared with the historical cost concept, the use of the fair value concept would imply incurring higher administrative costs given the continuous review of the fair value of the different assets and / or liabilities to verify the revaluations or impairments of value (Silva and Azúa, 2006 ). The depth required in the information to be disclosed requires maintaining adequate information and control systems. It is necessary to design and implement systems capable of generating all the reports required by auditing entities, by administrators and internal users of the information, as well as by external users. Companies are currently working on implementing reports in Extensible Business Reporting Language (XBRL) format. Charles Hoffman, an accounting expert and auditor, proposed this system to simplify the automation of the exchange of financial information through the use of XML (Hoffman, 1998; cited in Baue, 2007). 2.8. Enforcement of compliance with standards In order for the purpose underlying the spirit of the regulation to be fulfilled, that is, to promote a faithful reflection of the economic reality to offer reliable information to users and especially to investors, there must be regulatory force on the part of the supervisory bodies of your application. There is a positive relationship between the growth and profitability of the company and the greater information that is delivered to the market through good corporate governance practices (Khurana, Pereira and Martin, 2006). The logic presented by these authors is that if the market receives more information, it will react positively, assign less risk to the company and therefore demand less for the funds invested; This will generate an increase in the acceptance of the projects that the company had in its portfolio (decrease in the capital cost rate, Net Present Value-NPV- positive) and an increase in the profitability that it had, favorably impacting the investment level of the company. capital market. 20 The International Financial Reporting Standards should not be incorporated ex post, that is, after the events have occurred, but before making the decisions that will give rise to the assets and / or liabilities in the entity. Another aspect to consider in IFRS is that although each of them refers to specific issues and cases of assets and / or liabilities, it is equally or more important to evaluate their application when appropriate to understand the framework and scope that it defines, and This contributes to the analysis of the introduction and the bases of conclusions issued for each standard by the IASB. The most useful financial statements for the user are those that make the relationship between the entity's business strategy and the figures that appear as a consequence of it more transparent in the figures displayed by the accounting elements (Gonzalo Angulo, 2003). Therefore, it is necessary that the supervisory bodies require the publication of notes to the financial statements that really allow the user of the same to understand the criteria used in the application of the concept of fair value, which require compliance with this obligation both in terms of the form (content) and the substance (usefulness and veracity of the content), otherwise the credibility of the information disclosed in these documents will be put at risk. 2.9. Taxes and use of fair value When capital increases that may be taxable are recognized, the question immediately arises whether this will mean paying more taxes. Depending on the tax law of each country, at least two types are distinguished: one that establishes the accounting result as the taxable base for the tax, and another that establishes it independently of the accounting result, which must be reconciled to determine the tax in accordance with tax regulations. The first way has the disadvantage against increases in fair value that companies will end up paying more taxes for recognized and unrealized gains, and the second has the disadvantage that the company must reconcile the accounting result to determine the basis for calculating the taxes. 21 3. CONCLUSIONS Through the study, a compilation of the valuation model based on fair value is achieved. In this model, the use of historical cost is changed for the valuation of assets and liabilities, based on the considerations and expectations that market participants have at the date of their measurement, in addition, the perspective from the entity that has the assets / rights or obligations. The reader should consider that the compilation of the different aspects that comprises the Fair Value Model has been prepared from the documents and drafts prepared by the IASB and the FASB and that the final regulation has not yet been issued and also it is subject to future changes to adjust to the reality of business, capital markets and users of financial accounting information. The use of fair value constitutes a paradigm shift, the justification for the objectivity of the cost model is insufficient to provide adequate information to its users, which in a globalized world requires more and more transparency to the market and greater speed to obtain the information . The Fair Value Model contains risks, however, measurements and disclosures require these to be made explicit. Using this valorization model allows to reflect the essence on the form. Compliance with the regulations that uses it will be the guarantee of more faithful information, therefore the role that corresponds to the participants of the legal systems and the financial information auditing entities is to enforce these regulations and they must be invested with sufficient legal force, independence in their actions and adequate human and financial resources. The auditing companies will have the social responsibility of certifying the delivery of quality information by the reporting entities. This topic has not been exhausted and therefore, it is possible to carry out other studies, for example, in relation to the discretion and management of the results using this valuation model, or to analyze the effect of the information disclosed in the development of corporate governance more efficient, or study the degree of compliance with the fair value disclosures and the effects on the transparency index (in the context 22 of the principle of Data Disclosure and Corporate Governance Transparency indicated by the Organization for Economic Cooperation and Development ( OECD). 23 REFERENCES Baue, B. (2007). If You Tag It, It Will Be Used: Sustainability Reporting in XBRL. SRF World Group. Retrieved from http://www.sba.pdx.edu/faculty/kristiy/kyaccess/GRIXBRL.pdf Canibano, L. (2007). The accounting reform will imply changes in depth and the need for training of professionals. Double Game, 181, 10-14. Financial Accounting Standards Board – FASB. (1997). 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