The Use of Fair Value Measurement in Financial Reporting: A Literature Review

Abstract

Over the last forty years ago, fair value has increasingly been used in IASB and FASB accounting standards. In this sense, there has been significant debate with regard to the relevance and reliability of fair value as a measurement basis. In principle, IASB and FASB conceptual frameworks are based on the Utility Paradigm, and fair value should be used if it offers relevant information for investors. In this article we analyse previous fair value literature, focusing on financial instruments and value relevance. We structure the literature according to the different lines of research, and we describe the findings for each. The authors find that fair value is the model that better reflects risk management activities. Fair value information is generally relevant to investors. The evidence is higher in Level 1 and Level 2 fair value measurements.