A Professional Judgement Framework for the measurement of the fair value at level 3

Abstract:

Objective: In the process of convergence with the development of International Financial Reporting Standards (IFRS) as national standards, the application of professional judgment by accountants is increasingly recognized as an important and controversial issue. In fact, international financial reporting standards are often known as principle-based standards, and the role of judgment becomes more prominent in it. This is due to the complexity of economic conditions and environment, followed by freedom in choosing accounting and disclosure procedures and methods. Of course, freedom of choice may also cause some problems in accounting quality. However, one of the most difficult areas of professional judgment in the preparation of financial statements is determining the replacement value of various items. In IFRS as well as Iranian accounting standards, the use of fair value is clearly supported. Fair value is a hypothetical value based on the current market. This market value is not always directly observable. Measuring fair value often requires experience and judgment and has the potential to introduce bias into the financial statements. Considering the importance and breadth of judgment in fair value estimation and it’s becoming more prominent in the third level of the fair value hierarchy and in order to prevent disruption in the quality of financial reporting, the current research seeks to formulate a professional judgment framework in fair value measurement. The third level is in Iran's financial reporting. The purpose of the research is to develop a principles-based framework to help preparers of accounting information in making professional judgments for the third-level fair value measurement. In order to formulate this professional framework, the background (effective factors), characteristics and consequences of professional judgment should be identified and finally the principles of professional judgment should be extracted.

Method: The general approach of the current research is a mixed approach based on the positivist paradigm, in which the research methods of systematic review of documentary studies and field method are used. Research data using two tools: a) semi-structured interview, to collect the views of 10 experts in Iran's accounting and auditing profession from four different groups (appraisers, auditors, drafters and drafters of regulations) from the beginning of 1402 until the end of July 1402 and b) a structured questionnaire compiled on the basis of fuzzy logic (with closed-answer and open-answer questions) was collected from 30 experts (in four different groups of valuers, auditors, senior financial officials and regulations compilers). Then, it was analyzed with the fuzzy Delphi method and the best and worst criterion method. In order to confirm the research results, 5 participants from the above four different groups were interviewed.

Results: The main outputs of this research are: Developing a professional judgment framework in measuring fair value, especially the third level. This framework includes a) the process of judgment in measuring the fair value of the third level 1- identifying the areas of judgment (27 items in 9 categories) 2- evaluating accounting guidelines (11 items in 3 categories) 3- collecting information and analyzing it. 11 items in 7 categories) 4- drawing conclusions and making judgments (17 items in 9 categories) 5- documenting the judgment (15 items in 1 category), b) the impact of the person and its characteristics (4 items) c) the environment of the organization and The specific characteristics of the company (6 items) d) The influence of the external environment (8 items) in judging the measurement of fair value, especially the third level. On the other hand, the characteristics (6 items) of fair value measurement in the financial reporting environment of Iran and the consequences of professional judgment (8 items) in the third level fair value measurement were also extracted. Finally, the areas of judgment, person and its characteristics, organizational environment, external environment on professional judgment and also the impact of the consequences of professional judgment in measuring the fair value of the third level of fair value were ranked through the best-worst (BWM) method. The most important option from the point of view of experts in the field of judgment is "input data" and the least important option is "classification of fair value hierarchy levels". The most important option from the point of view of experts in the field of a person's influence in judgment is "skill and experience" and the least important option is "level of conservatism". The most important option from the experts' point of view in the field of organizational environment's impact on the judgment is "complexity of the organization in terms of type of activity" and the least important option is "stage of the life cycle". The most important option from the experts' point of view regarding the impact of the external environment is "macroeconomic conditions" and the least important option is "credibility, reputation and quality of independent auditing". The most important option according to the experts in the field of the consequences of professional judgment in measuring the fair value of the third level is "asymmetry of information and transparency" and the least important option is "damages, fines and legal complaints".

Conclusion: In order to control the consequences of professional judgment and maintain the quality of financial reporting, the judgment process including identifying the judgment area, evaluating accounting guidelines, gathering information, making judgment and documenting the judgment should be done by financial information preparer.