Financial accounting
FAIR VALUE
ADJUSTMENTS:
BENEFITS AND RISKS
03 / 06 / 2025
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Table of contents:
Introduction
I. Regulatory framework and standards
II. Advantages of fair value adjustments
III. Risks associated with fair value adjustments
IV. Case studies and concrete examples
Conclusion
Annexe
References
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Introduction
- Definition of fair value
Fair value is a measure of a product or asset's current market value, reflecting the price at which
an asset is bought or sold when a buyer and seller freely agree.
Several factors contribute to determining the fair value of an asset, including a comparison of
recent transactions for similar assets, an estimate of the asset's expected earnings, and an
assessment of the cost to replace it.
The International Accounting Standards Board recognizes the fair value of certain assets and
liabilities as the price at which an asset can be sold or a liability settled.
Fair value accounting, or mark-to-market accounting, is the practice of calculating the value of
a company’s assets and liabilities based on their current market value. In some instances,
companies that hedge their assets might use hedge accounting, in which the value of the asset
and its hedge are accounted for as a single entry. (1)
- The growing importance in modern accounting
Fair value remains a crucial measurement basis in financial reporting. It provides information
about what an entity might realize if it were to sell an asset or pay to transfer a liability. In
recent years, the use of fair value as a measurement basis for financial reporting has been
expanded, even as the debate over its usefulness to stakeholders continues.
Determining fair value often requires a variety of assumptions and significant judgment. Thus,
investors desire timely and transparent information about how fair value is measured, its
impact on current financial statements, and its potential to impact future periods.
There are numerous items for which fair value measurements are required or permitted. (4)
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I. Regulatory framework and standards
- Overview of IFRS and US GAAP standards regarding fair value
Fair value measurement plays a central role in modern financial reporting, providing users with
market-based information to inform their decision-making. Both IFRS and US GAAP have
developed comprehensive standards that define and govern the application of fair value across
a wide range of financial instruments and non-financial items.
- IFRS: The primary standard is IFRS 13 – Fair Value Measurement, issued by the
International Accounting Standards Board (IASB).
- US GAAP: The equivalent guidance is found in ASC Topic 820 – Fair Value
Measurement, developed by the Financial Accounting Standards Board (FASB).
Both frameworks define fair value identically as:
“The price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.”
Despite this common definition, there are important practical differences in their application,
as outlined below.
While the core principles are aligned, IFRS tends to be more cautious in recognizing
unobservable gains, aiming to limit subjectivity and enhance reliability. In contrast, US GAAP
offers more operational flexibility, particularly for investment valuation.
The NAV expedient under US GAAP is especially relevant for investment companies and private
funds, as it simplifies reporting. IFRS, by contrast, requires a direct valuation based on inputs
and models, even when active markets are absent.
Regarding disclosures, IFRS places greater emphasis on transparency, requiring entities to
provide sensitivity analyses to help users understand the effects of assumptions on valuation
outcomes. This is part of a broader trend within IFRS to enhance the decision-usefulness of
financial statements. (2)
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- Comparison of approaches
Aspect US GAAP (ASC 820) IFRS (IFRS 13)
Day-one gains and Recognized even when inputs are Generally prohibited when
losses unobservable, unless explicitly inputs are unobservable;
prohibited. gains/losses may be deferred
and recognized later.
Use of Net Asset Permitted for estimating the fair No equivalent practical
Value (NAV) as a value of investments without a expedient; entities must
practical readily determinable value (e.g., directly estimate fair value.
expedient hedge funds, private equity).
Level 3 disclosures No requirement to provide a Required to disclose a
quantitative sensitivity analysis for quantitative sensitivity analysis
Level 3 fair value measurements. for Level 3 financial
instruments.
Hierarchy levels Three-level hierarchy:
Level 1 – quoted prices
Level 2 – observable inputs
Level 3 – unobservable inputs
Objective Emphasizes market participant Same market-based objective,
assumptions and exit price notion. with emphasis on transparency
and consistency with market
conditions.
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II. Advantages of fair value
This section explores the numerous advantages of fair value adjustments and how they
contribute to more effective financial management and transparency.
1. Relevance and timeliness
One of the primary benefits of fair value accounting is its capacity to provide current and
up-to-date valuations of assets and liabilities. Unlike historical cost accounting, which records
assets at their original purchase price, fair value reflects the current market conditions. This
feature is especially critical in dynamic and volatile markets where asset prices can change
rapidly.
For investors and analysts, access to real-time valuations means that the financial statements
present a more accurate snapshot of an entity’s financial position. When companies report at
fair value, users can evaluate how economic fluctuations are impacting the company right now,
not just how they affected it in the past.
2. Enhanced transparency and market-based measurement
Fair value accounting promotes transparency by requiring companies to disclose the inputs,
methods, and assumptions used in determining fair value. This level of detail helps users of
financial statements better understand the valuation process and the risks associated with
various assets and liabilities.
Moreover, fair value is typically determined using observable market inputs (when available),
making the reported figures more objective and verifiable. This is particularly important for
financial instruments such as derivatives, which can be complex and difficult to value using
historical costs. By anchoring valuations to market data, fair value accounting reduces the
scope for managerial discretion and manipulation.
3. Better decision-making for investors and stakeholders
Fair value information supports more informed and rational decision-making. Investors,
creditors, and other stakeholders rely on financial statements to assess a company’s financial
health, profitability, and risk exposure. When valuations are based on current market data,
stakeholders can make more accurate assessments of an entity’s performance and outlook.
This is particularly valuable when evaluating investments, granting credit, or assessing the
viability of mergers and acquisitions. The ability to understand the real-time worth of assets
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and liabilities empowers stakeholders to make decisions that are better aligned with economic
reality.
4. Improved risk assessment and management
Another major advantage of fair value adjustments is their role in risk identification and
mitigation. Because fair value reflects market volatility, it provides an early indication of
changing conditions that might affect the value of financial instruments or operational assets.
By continuously updating asset and liability values to market conditions, companies can
monitor fluctuations and adjust their strategies accordingly. For example, sudden drops in the
fair value of certain investments can prompt businesses to restructure portfolios, hedge
positions, or reallocate capital. This proactive risk management is vital in financial institutions
and industries exposed to high levels of uncertainty.
5. Accuracy and reflecting economic reality
Fair value accounting offers a more accurate reflection of economic reality than historical cost
models. Since asset prices are adjusted to reflect current market values, the resulting financial
statements present a more faithful representation of a company’s net worth. This is especially
useful in sectors like banking, insurance, and real estate, where asset values can shift
significantly over time.
The dynamic nature of fair value measurements means that the company’s reported
performance is more aligned with actual market-driven income and losses, as opposed to
accounting results shaped by arbitrary cost assumptions. This helps reduce the disconnect
between accounting figures and economic truth.
6. Comparability across firms and industries
Fair value accounting fosters comparability of financial reporting by adopting a consistent,
market-based valuation approach. When companies report on a fair value basis, stakeholders
can more readily compare financial performance and positions across entities.
This comparability is valuable to investment analysts and regulators, especially in
international markets where cross-border benchmarking is standard practice. Fair value helps
eliminate distortions arising from historical costs that may vary widely depending on when and
how assets have been purchased.
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7. Accountability and active asset management
Fair value reporting challenges companies to constantly scan their assets and liabilities.
Knowing that these assets are remeasured on a regular basis keeps management in touch with
market conditions and the true position of company assets.
The process facilitates a culture of vigilance and responsibility, where financial positions are
not permitted to deteriorate unchecked. In addition, fair value facilitates active portfolio
management, as companies attempt to rationalize their holdings according to current market
opportunities and dangers.
8. Facilitates complex financial reporting and M&A activities
For complex financial instruments, such as derivatives, structured products, or foreign currency
contracts, fair value is often the only consistent approach to report their value. These
instruments fluctuate in value based on market conditions, and reporting them at cost would be
misleading.
In addition, in mergers and acquisitions, fair value plays a central role in the purchase price
allocation process since the assets and liabilities of the target firm are measured at fair value.
This gives a more accurate reflection of the financial position post-acquisition, and it helps
stakeholders evaluate the impact of the transaction.
9. Asset reduction and financial flexibility
In case of impairment or overestimation of assets, fair value accounting provides the provision
for asset reduction, which enables companies to write down carrying values to approximate
market values.
This flexibility can be critical during economic downturns, in the sense that it allows companies
to present a more conservative and realistic financial portrait. By earlier recognition of losses,
companies are able to respond more quickly to adverse conditions, restructure where necessary,
and retain investor confidence.
10. Limiting manipulation and enhancing credibility
Finally, fair value accounting offers less scope for manipulation than historical cost accounting.
As it is derived from external market inputs, especially at Level 1 and Level 2 of the fair value
hierarchy, there is less room for arbitrary estimation or concealment.
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This enhances the relevance and trustworthiness of financial reporting, particularly helpful in
the restoration of trust after financial crises or corporate scandals.
III. Risks associated with fair value
As much as fair value accounting has its benefits, it also contains some setbacks and criticisms.
Here are some of the key disadvantages and risks: (3)
While fair value accounting (FVA) contains numerous benefits, e.g., greater transparency and
relevance, it also comprises some significant weaknesses. The weaknesses have incited ongoing
debates among scholars, practitioners, and regulators, particularly in the aftermath of financial
crises. The following elaborates on the primary criticisms of FVA, referencing its potential
weaknesses and challenges.
1. Subjectivity and lack of uniformity
One of the primary criticisms against FVA is that it relies on estimates and assumptions,
especially when there are no market prices available. For assets and liabilities that lack active
markets, firms have a tendency to employ valuation models with unobservable inputs, which
are termed as Level 3 measurements. This subjectivity can lead to inconsistencies among
entities and render the financial statements less comparable.
Stanford Graduate School of Business professor Charles Lee thinks FVA introduces uncertainty
into financial reporting by bringing speculative inputs into what should be a historical record of
transactions. He thinks accounting's core purpose is to provide an accurate representation of
what happened in the past, not to project future market values.
2. Increased volatility in financial statements
FVA can introduce unnecessary volatility in financial statements, as asset and liability
valuations fluctuate based on market movements. This volatility has the potential to obscure
the actual economic performance of a firm, and it may be challenging for stakeholders to
ascertain long-term stability.
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During periods of market volatility, such as the 2008 financial crisis, FVA forced institutions to
recognize huge losses due to decreasing market prices even though the underlying assets
continued to perform. Critics argue that this kind of approach can contribute to financial
instability by triggering a spiral of forced sales and asset write-downs.
3. Challenges in valuing illiquid assets
Valuation of illiquid or complex assets is a major issue under FVA. In the absence of active
markets, firms must rely on internal models and assumptions, which increases the danger of
10 incorrect valuations. This issue was particularly acute in the subprime mortgage crisis,
where market illiquidity caused difficulties in estimating fair values of mortgage-backed
securities. The reliance on subjective estimates for illiquid assets can undermine the integrity
of financial reports and annihilate stakeholder trust.
4. Potential for earnings management and manipulation
The flexibility of FVA can create room for earnings management and manipulation.
Organizations can utilize the discretion allowed in valuation models to report a better financial
standing. The Enron failure is an example, in which the misuse of Level 3 fair value
measurements contributed to the company's demise. Such practices can mislead investors and
other stakeholders, resulting in poorly informed decisions and potential losses in terms of
money.
5. Procyclicality and economic amplification
FVA has been criticized for being procyclical in nature, tending to amplify economic cycles. In
booming markets, rising asset prices can inflate balance sheets, resulting in higher risk-taking.
Conversely, during economic downturns, declining market prices can force firms to recognize
losses, deplete capital, and induce asset sales at distressed prices. This dynamic can exacerbate
financial instability and result in systemic crises.
6. Complexity and increased reporting costs
The application of FVA requires sophisticated valuation techniques and a high degree of
judgment, making financial reporting more complex. Companies may need to hire new people
and systems to fulfill FVA requirements, which may be more expensive. Additionally, FVA
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complexity can make financial reports more difficult for users to understand, potentially
reducing their usefulness.
7. Limited applicability to certain assets
FVA may not be suitable for all types of assets, particularly those not expected to be sold in the
near term. Long-term assets, such as property, plant, and equipment, typically are held for use
rather than sale, and thus market-based valuations will be less relevant. In such cases,
historical cost accounting is likely to be more revealing about the value and usefulness of an
asset to the business.
8. Impact on loan covenants and regulatory capital
Movements in fair values can affect a company's compliance with loan covenants and
regulatory capital requirements. For instance, declines in asset values can breach debt
covenants, triggering penalties or loan call-ins. Similarly, asset value declines can drain
regulatory capital, diminish the lending capacity of a financial institution, and potentially
exacerbate economic contractions.
9. Market distortions during crises
In times of market turbulence, prices may not reflect the underlying value of assets, leading to
distorted fair value measurements. Forced sales and illiquid markets can result in "fire-sale"
prices that underestimate the value of assets, making companies take losses not representative
of the long-run economic value of the assets. An example is during the 2008 financial crisis,
when market dislocations resulted in large write-downs based on distressed prices.
10. Inadequacy for certain intangible assets
FVA may not be appropriate in valuing certain intangible assets, such as brand reputation or
customer relations, which do not possess observable market prices. It necessitates putting fair
values on such assets, which, in most instances, entails significant estimation and judgment
and therefore raises the likelihood of failing to employ solid valuations. Also, the subjective
nature of such valuations may diminish the creditability of financial statements.
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IV. The Case of Airbus
1. Context and general use of fair value at Airbus
Background and general use of fair value at Airbus Airbus is an international aerospace and
defense company that is subject to complex-featured financial instruments, long-term
agreements, foreign exchange exposure, and massive acquisitions. For the sake of transparency
and global harmonization, Airbus uses IFRS 13, Fair Value Measurement, in the disclosure of its
financial instruments and certain non-financial items. Airbus applies fair value accounting
extensively throughout its financial reports, particularly for:
● Derivatives and hedging instruments
● Business combinations and acquisitions
● Employee share-based payment schemes
● Investments in financial instruments (e.g., bonds, securities)
● Assets liable to impairment (e.g., airplanes, leasing assets)
Through the implementation of fair value, Airbus aims to provide investors with a better, more
accurate, and timely picture of its financial situation, especially during risky markets such as
defense contracts or commercial aviation.
2. Concrete examples from the 2024 financial report
a) Derivative financial instruments and hedging
Airbus makes very wide use of derivatives to hedge against interest rate, exchange rate, and
commodity price risks. The majority of these derivatives are cash flow hedges, i.e., their fair
value changes are reported in Other Comprehensive Income (OCI) and not profit and loss. This
minimizes earnings volatility while still presenting fair value transparency.
For other cases (i.e., interest rate derivatives), Airbus uses the fair value hedge model, where
gains and losses on the hedged item and the derivative instrument are presented in profit or
loss. This is a symmetrical and fair representation of hedge effectiveness.
Annexe, figure 1: Airbus SE: Extract from the 2024 consolidated statement of comprehensive
Income, showing the impact of fair value changes on other comprehensive income.
b) Business acquisitions (Airbus oneweb satellites)
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Airbus acquired complete ownership of Airbus OneWeb Satellites in 2024 by purchasing the
joint venture partner. This acquisition triggered a revaluation of the previously held interest at
fair value, which gave rise to an increase of €51 million.
This is a standard IFRS 3 requirement: all acquired assets and liabilities are to be measured at
acquisition date fair value. Airbus also calculated goodwill on the difference between fair value
of net assets acquired and total purchase price. This shows how fair value plays an important
role in properly measuring financial effects of strategic mergers and acquisitions.
c) Financial instruments with level 3 inputs
In Note 37.2, Airbus reports the carrying amount and fair values of its financial instruments,
including certain ones for which there are significant estimates required since there is no
observable market data. These are classified as level 3 instruments in IFRS 13.
Internal models like Discounted Cash Flow (DCF) are used by Airbus for these instruments,
based on its assumptions (e.g., future cash flows, discount rates, and market risks). Changes in
assumptions can lead to high volatility in fair values, representing both the flexibility and
complexity of fair value accounting.
Annexe, figure 2: Airbus SE Note 37.2 Overview of the carrying amounts and fair values of financial
instruments, highlighting the use of fair value measurement across different asset categories and
valuation levels.
d) Impairment and asset revaluation
Fair value is used also in the assessment of possible impairments on assets such as leased
aircraft or inventory. When the market value of such assets is lower than their carrying amount,
Airbus uses fair value less cost to sell or value in use to account for the impairment loss. This
gives a more realistic measure of assets, particularly when markets are going down.
e) Share-based payments
Share plans of Airbus employees are also accounted for at fair value. For example, the fair value
of stock options and performance units issued to employees is estimated based on
market-based 14 models taking into account volatility, risk-free interest rate, and dividends.
The fair value estimates are remeasured at each reporting date and have a direct effect on
personnel expenses.
3. Key takeaways and implications
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Airbus' example presents some significant lessons regarding the application of fair value
accounting to a significant multinational organization:
● Risk management strategic instrument: Fair value is utilized not only for disclosure
purposes, but as an element of the financial strategy of Airbus, specifically for currency
risk and interest rate management.
● Better transparency in mergers and acquisitions: Using fair value in business
combinations (e.g., OneWeb Satellites) makes stakeholders gain a clearer understanding
of the financial effects of mergers and partnerships.
● Complexity and estimation risk: While level 1 and level 2 instruments are fairly
simple to measure, level 3 instruments require judgment and estimation, and therefore
transparency and disclosure become essential in order to preserve confidence.
● Inter-linkage with other standards: Fair value is not alone; it is inter-linked with
other standards including IFRS 3 (Business Combinations), IFRS 9 (Financial
Instruments), and IFRS 2 (Share-based Payment), a reflection of its overarching role in
today's financial reporting.
This movement is also evident in Airbus's equity movements, where fair value adjustments to
financial assets and hedging instruments can be clearly viewed in the "Other components of
equity." These movements illustrate how fair value contributes to transparency but also to
equity volatility, as illustrated below.
Annexe, figure 3: Airbus SE Extract from the statement of changes in equity, illustrating the
evolution of reserves related to financial assets measured at fair value (2023–2024).
Airbus depicts how disciplined application of fair value accounting, along with transparent
disclosure, can enhance financial reporting and decision-making. But it also shows the price of
balance and how fair value brings market reality in exchange for subjectivity and complexity.
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Conclusion
This report has examined the advantages, disadvantages, and real application of fair value
accounting, highlighting its growing relevance in modern financial reporting. By comparing
IFRS and US GAAP, we have ascertained how fair value is defined and applied in both regulatory
systems, whereby there is consistency in concept but revealing some operational differences.
While fair value provides more transparency market relevance and decision-making utility it
also poses issues such as complexity, estimation risk, and greater financial volatility. Airbus
case study outlines the manner in which a multinational organization takes fair value into its
financial strategy. From derivatives and hedging activities to share-based payments and
business combinations, Airbus is the epitome of strategic use of fair value to provide investors
with a more realistic and transparent perspective of its financial standing.
The extent of the detailed disclosures in Note 37.2 and the impact rendered in the equity and
comprehensive income statements guarantee that fair value adjustments are not just a
technical exercise but helpful measures that affect the perceptions of stakeholders regarding
firm performance. As accounting standards evolve further, fair value is likely to play an
increasingly central role, particularly as markets demand more real-time visibility and risk
insight. For financial managers and accountants, fair value accounting is not just a technical
requirement but a strategic skill. It is about walking a tightrope between market-based realism
and professional judgment and ethical responsibility.
Overall, fair value accounting is a great opportunity as well as a tremendous responsibility. Its
proper application supports informed decision-making, strengthens stakeholder trust, and
aligns financial reporting with economic reality, making it an indispensable element of today’s
financial landscape.
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Annexe
Figure 1:
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Figure 2: Note 37.2
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Figure 3 :
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