Why Do Companies Not Like Fair Value Measurement 2404 2021



Established in 1884, Marks and Spencer (M&S) Group PLC is a major department store retailer in the United Kingdom, offering services which range from homeware, clothing and groceries, to banking and energy. As one of the UK’s leading retailers, “M&S employ over 80,000 staff worldwide, with over 600 UK stores” (M&S, 2019). Operating within a number of industries, M&S is listed on the London Stock Exchange and is a constitute of the FTSE 250 Index (M&S, 2019a). Given the nature of the company, M&S publish a Full Annual Report, comprising of their strategy, governance and financial statements. The purpose of an annual report is to provide shareholders, local authorities and potential investors with information regarding the company’s business activities and financial performance. Within the Financial Statements, M&S will present their assets, liabilities and equity, income and expenses.

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As issued by IFRS 13, the fair value measurement is required when measuring the value of some items and is permitted for others. However, there is indication that many companies do not use fair value when measuring a large amount of their assets and liabilities. The aim of this report is to discuss whether or not M&S use fair value measurement when completing their financial statements. Using M&S’ full annual report, this report will identify the measurement basis used when valuing their assets, explaining the reasons why they use the bases they do. It will also focus on the reasons why companies like Marks and Spencer, don’t use Fair Value Measurement, providing reasons and justifications for this, consequently suggesting which alternative bases are used. 

What is Fair Value Measurement?

Traditionally, companies will use historical cost (what the item originally cost to buy when acquired (Cost, 1970) as a way of measuring the current value of an asset, however in times of inflation, this does not represent the true current value of a business’ asset. With historical costs, companies have the ability to manipulate the timing of profits by advancing or deferring the sale of assets that have increased in value, which can clearly be understood as a favourable advantage for companies to use. However, in the Conceptual Framework for Financial Reporting, the International Accounting Standards Board (IASB) explains a range of measurement bases, fair value being one of them. As defined by IFRS 13, fair value is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” (IFRS, n.d.). Where historical cost is the transaction was done, fair value is the current market price which an asset would be worth if sold at current day. Fair Value measurement seems to be a topic of “significant interest and debate among those who prepare and use financial information” (Koleva, 2017).

Asset Bases

Property, Plant and Equipment

M&S Group’s policy is to initially value their property, plant and equipment using the historical cost bases minus any accumulated depreciation. This will include any costs which were necessary to bring the items to desired use; purchase price, transaction fees and any improvements made to the building (Investopedia, 2019). When comparing this method to alternative retailers such as Sainsburys (www.sainsburys.co.uk, 2019) and Debenhams (ir.debenhams.com, 2019), its noted that this is a frequent method of calculating the value of property, plant and equipment. The main advantage of using historical cost on the balance sheet for these, is that “historical cost can easily be verified” (Averkamp, 2019). This is because when purchasing properties and or plants, the cost is generally documented through contracts and/or invoices for example. Although this cost is easily proven through said documents, it’s not arguably not “representing a fair value of the asset” (Bragg, 2019), as its likely to fall in value over time from its original purchase cost. The method of using fair value helps to provide an up-to-date accurate valuation of the asset, therefore there’s going to be a reduced amount of discrepancies in the valuation difference from the transaction. With regard to the difficulties which could be faced by M&S, I would say they’re rather high for this asset. I believe the reason that M&S have chosen to use historical cost as a measurement basis for this asset, is to reduce the discrepancies. By using historical costs, M&S will have clear evidence of how much was spent when purchasing stores and buildings. Although can be said, by some, that fair value would be more appropriate due to its recentness, historical cost

Intangible Assets

An intangible asset is one which you’re unable to physically touch. With regard to M&S, in their financial statements they include goodwill, brands and software intangibles. These are valued differently for each asset. Goodwill is measured through the use of fair value. Assets, such as good will which have an indefinite useful life, are not subject to amortisation, and are tested annually for impairment whenever there is a change in circumstances. The recoverable amount is the higher of an asset’s fair value less costs to sell and value-in-use. However, when calculating brands and software intangibles, M&S use historical cost when held on the statement of financial position. These are both amortised on a straight-line basis, annually, over their estimated useful life. All methods used here by M&S are those which are similarly used by those at Debenhams and Sainsburys, making it a usual process. In order for M&S to use fair value for all of these assets (especially brands and software) would be rather difficult, giving the fact that these items are difficult to cost historically, let alone with fair value. I would suggest that M&S are this valuation method due to the complexity of the assets’ valuation against time, therefore a measurement as simple as historical cost, would not suffice.

Trade Receivables

As defined by ACCA as a “representation of the amount of sales which have not yet been paid for by customers” (ACCA, 2019), M&S record their trade receivables initially at fair value and after this are measured at amortised cost. The reason for this is that it results in “their recognition at nominal value less an allowance for any doubtful debts” (M&S, 2019). Around “one-sixth of all of the assets of industrial firms are in the form of trade receivables” (Hillier et al., 2017). The concern here, is whether or not the historical cost is going to be repaid, or if there is going to be interest added, and such fair value would be a more suitable measurement basis here. The difficulty M&S would face here, from using fair value measurement, is calculating the value of the product once it’s been sold. The product sold will fall in value once has been used by the customer, and so revaluing this would reduce the trade receivable as an asset. Therefore, it could be suggested that M&S have used historical cost as it is the most relevant and practical measurement basis to use here as the customer is going to repay the amount of which the product was valued for, at the time of the transaction. Regardless of the devaluation of the product, the same amount of money will be returned.


The way in which M&S value their inventories is with a weighted average cost basis, which is carried towards the lower cost and net realisable value. These costs will include all direct expenditure, as well as additional costs which are incurred to bring the inventories (finished goods) to the correct current position. When necessary, M&S will apply an adjustment basis on purchases so that the cost is “established by reference to the hedged exchange rate” (M&S, 2019). The main reason why M&S uses this as a method of cost basis, is that it minimises the impact of unusually high and low material costs, making it a practical and suitable method to charge costs of material used to production. However, there are a number of difficulties which M&S may face when using this valuation method. The first struggle which I would suggest they would face is the risk of mispricing – this method of weighted average costing assumes that all items are identical. What is meant by this is that the system will not change the price of a new product with the same name – leading to a number of further complications. As well as this, the number and complexity of these calculations can cause ‘rounding off’ issues, further increasing the chance of errors. If M&S were to use Fair Value measurement for this asset, it would become too complicated and a timely process as they have such a large variety of different items of stock.

Problems with Measuring Fair Value

As made clear through the explanation of the asset measurement bases, M&S tend to use historical cost as the primary method of valuing assets. Through additional research, it is clear to see that this is not rare and seems to be the case for a number of retailers in the UK. Fair value measurement seems to only be used when required, and there are a number of reasons why fair value isn’t completely supported. One of the main reasons why Fair value measurement is disregarded as useful basis of valuing assets, is the understanding of it being less reliable than historical costs. This comes down to the fact that it is seen as more of a guess, rather than physically being calculated, therefore discrepancies can arise regarding the method of valuation. Another reason why fair value is seen as a problem is the actual inability to value specialised assets. Although this may not relate specifically to M&S, it seems to be a regular concern of those preparing and using financial reports. For specialised products, i.e. tailored software packages, where no market value or information is available, accounts have to rely on judgement to value these items. However, “a new credential was recently designed within the valuation community, the Certified in Entity and Intangible Valuations (CEIV) credential, to enhance consistency and transparency in the fair value measurement process” (Fargason et al., 2019). This could be an approach which increases and encourages the use of Fair Value Measurement as a basis for valuing assets.


To summarise it is clear to see that M&S use the historical cost as a basis of accounting when valuing the majority of their assets, except from a few; financial instruments and benefit pension schemes which are measured at fair values.  Generally, the findings for M&S suggests that fair value is the most accurate, and agreed upon method of valuing assets, providing a true measurement of income. Yet, with that said, there are a number of flaws which are argued by those who use and produce financial statements, explaining that it’s not as “fair” due to the nature of how the calculations made, and the complexity of valuing certain assets. Following on from these findings, it can be argued that companies, such as M&S, should not have to be more willing to use fair value measurement for a wider range of their assets, if the measurement basis being used is relevant, consistent and practical for both those producing the financial statements, and understandable for those using and reading the documents.


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Approximately 250 words