Consequences of Fair Value Accounting for Financial Instruments in the Developing Countries: The Case of the Banking Sector in Jordan

The introduction of International Financial Reporting Standards (IFRS), mandatory for many listed companies in the developing countries, has proven to be a challenge for accountants, given the standards' emphasis on fair value as a means to improve the true and fair presentation of the financial statements. This study aims to provide evidence on the effect of implementing fair value measurements of financial instruments on the financial performance of a firm and its Earning Per Share (EPS). The study sample comprises Jordanian commercial and investment banks, and covers the period of 2002-2006. The researchers make a comparison between accounting results reported under valuing financial instruments at fair values and those under cost for the same set of years, and they document how fair value accounting changes key financial measures and the value relevance of financial statement information. This study finds that financial performance of a bank is generally very significantly affected by valuing financial instruments at fair values. It also finds that there is a positive and extremely high value of Earnings Per Share (EPS) when implementing the fair values in evaluating the financial instruments, compared to when income is calculated without adding holding gains and losses. In case of some of the developing countries such as Jordan, where the financial markets are inefficient and go through bubble years, using fair value accounting to value financial instruments may distort the income and mislead the users of financial statements. The study concludes with questioning the suitability of the worldwide application of IFRS for fair value accounting measurement :