AUDITING FAIR VALUES IN A
                  SENSITIVE SOCIO-ECONOMICAL CONTEXT

                        Nicoleta Farcane, West University of Timişoara
                           Delia Deliu, West University of Timişoara
                       Maria Gheorghian, Valahia University of Târgovişte

ABSTRACT: The concept of fair value was subject of many debates and disputes in recent
years. These debates have focused mainly on the relevance of the concept, but also on the
practical difficulties in determining reasonable estimates, raising particularly the interest of
practitioners in terms of identifying the best valuation procedures and techniques,
respectively auditing fair values. Determining the fair value involves a broad spectrum of
approaches, from the simplest to the most complex and burdensome ones. In the current
socio-economical context, market and stock volatility raises questions about fair values, even
if there are conditions for the existence of market information. The problem gets more
complicated where fair value is determined based on cash-flows, especially where there are
uncertainties about the value and timing of cash-flows and adjustment rates, and the impact
of used assumptions related to future conditions, transactions and events.
Last but not least, assessment of fair value is based on the going concern assumption, which
may not be applicable in the context of an economic crisis.
The International Financial Reporting Standards (IFRS) provide for financial instruments to
be measured generally at fair value. Because fair value is primarily assimilated with market
price, its assessment requires the existence of a market able to operate under normal
conditions, or in other words, sufficiently liquid to assess the price of financial instruments.
And, one of the features of the current crisis consists in the significant decrease of liquidities
on the market, which in turn caused a high impairment of derivatives (those based on
American real estate). As American real estate can never be zero, market prices are not the
real ones. However, this situation highlights the volume of liquidities available to buyers,
which is a feature of imperfect markets. But the International Financial Reporting Standards
did not anticipate the effects of liquidities on financial instruments, as their development is
based on perfect functioning of financial markets. Under these circumstances, fair value
measurement started to be increasingly criticised, and the International Accounting
Standards Board (IASB) has changed the rules for measurement of financial instruments at
fair value.
Given the high degree of volatility, auditors should ensure that valuation methods and
assumptions used by management under normal conditions for determining fair values are
appropriate in a sensitive socio-economical context as well, and that the valuation model
includes also the effects of subsequent events.

Key words: fair value, historical costs, fair value audit, volatility, economic crisis

JEL codes: M10, M40, M42