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An analysis of the extent and use of fair value by JSE Top 40 companies

Fair value’s advantages, disadvantages and ideology have been debated thoroughly by academics and practitioners for decades. The few implementation papers which do exist are primarily concerned with developed economies. This gap is despite the prior literature acknowledging the likely difficulties of fair value use by less developed markets and economies. This paper contributes to addressing this gap by providing an analysis of the extent and use of fair value by Johannesburg Stock Exchange (JSE) Top 40 companies for the period 2013–2017. This paper finds limited use of fair value by JSE Top 40 companies. On average, only 184 assets and liabilities make use of fair value each year and this has not changed significantly over time. Most fair value use is by the financial services industry (41%) and for financial instruments (80%). Critically, only 28% of all financial elements made use of Level 1 inputs, and only 15% were classified overall as Level 1 inputs. The findings suggest Level 1 inputs are not widely available for financial elements and are rarely available for non-financial assets. When fair values are used for non-financial assets, this is mainly for investment property, commodity-inventories and impairment tests. Because of the reliance on Level 2 and 3 inputs, the results suggest fair value is a costly measurement basis to implement in South Africa and frequently requires management judgement. The consequence is that many fair values are susceptible to bias and manipulation.