Fair Value Measurement of Liabilities under Financial Distress - A Theoretical Perspective

Sammanfattning: We study the effects of financial distress on fair value measurement of liabilities from a theoretical perspective. We identify assumptions underlying fair value measurement in IFRS standards and by employing a theoretical framework, five issues with these assumptions under a condition of financial distress are identified. The issues relate to 1) judgments made by preparers, 2) discrete transactions' impact on own credit risk, 3) the inclusion of own credit risk in liability measurement, 4) instrument complexity and 5) the effective interest rate method. The five issues are tested on a case, where fair value measurement of liabilities is conducted during financial distress. The study contributes to existing research by exploring the theoretical grounds of assumptions used by accounting standard setters. We find that the validity of the assumptions underlying fair value measurement of liabilities in IFRS is affected by a condition of financial distress