IAS 41 Fair Value Accounting and Fair Trade

Fair value accounting and fair trade: an analysisof the role of International AccountingStandard No. 41 in social conflict

Charles Elad

Department of Finance and Business Law, Westminster Business School, University of Westminster, London,

NW1 5LS, UK

Correspondence: [email protected]

The past decade has witnessed a proliferation of accounting pronouncements

that indicate that accounting rule-makers around the world are progressively

abandoning the traditional historic cost model and actively embracing the fair

value paradigm. In this regard, Barlev and Haddad (2003) argued that fair value

accounting has the capacity to enhance the stewardship function by providing

relevant information to stakeholders, thus alleviating social conflict. It is con-

tended here that far from reducing conflict and alienation in the agricultural

sector, the fair value approach is underpinned by neoclassical economic ideals

that are not conducive to emancipatory accounting. Drawing upon Marx’s

notion of commodity fetishism, this paper analyses the ideological role of

International Accounting Standard (IAS) 41 in legitimating social conflict in the

context of fair trade coffee and forestry companies that were compelled by dom-

estic legislation to adopt a full-fledged fair value accounting model in conformity

with structural adjustment reforms instituted by the World Bank.

Keywords: international accounting standards, fair value accounting,

commodity fetishism, corporate finance, trade, internationalization, World Bank

JEL classification: Q13 agricultural markets and marketing, cooperatives

agribusiness, Q17 agriculture in international trade, Q18 agricultural policy,

food policy

1. Introduction

In a recent issue of Critical Perspectives on Accounting, Barlev and Haddad (2003)

provide an interesting analysis of the evolution of fair value accounting (FVA)

from its early theoretical roots (e.g. Edwards and Bell, 1961; Chambers, 1966;

Sterling, 1970) to its emergence over the past decade as recommended practice

# The Author 2007. Published by Oxford University Press and the Society for the Advancement of Socio-Economics.

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Socio-Economic Review (2007) 5, 755–777 doi:10.1093/ser/mwm013Advance Access publication October 11, 2007

that is enshrined in some accounting standards around the world: e.g. Financial

Accounting Standard No 133 (derivatives) and No 157 (fair value measurements)

in the USA; International Accounting Standards IAS 19 (employee benefits),

IAS 39 (financial instruments), IAS 40 (investment property) and IAS 41

(agriculture), which are now mandatory for the consolidated financial statements

of listed companies in Europe. The present study seeks to demonstrate that

the desirable features of FVA identified by Barlev and Haddad (hereafter, B

and H) are in line with the extant literature on mainstream financial account-

ing theory which is underpinned by neoclassical economic ideals that are

not conducive to emancipatory accounting. For example, the design of

IAS is largely predicated on the assumption that the mission of accounting

is to provide relevant information that will help rational investors make

investment decisions. This “decision usefulness” orientation of pronounce-

ments issued by the International Accounting Standards Board (IASB)—like

those of its predecessor body, the International Accounting Standards

Committee (IASC)—is acknowledged in its Mission Statement which states,

inter alia, that its objectives1 are:

(a) to develop, in the public interest, a single set of high quality, understandable

and enforceable global accounting standards that require high quality, trans-

parent and comparable information in financial statements and other finan-

cial reporting to help participants in the world’s capital markets and other

users make economic decisions;

(b) to promote the use and rigorous application of those standards;

(c) to work actively with national standard-setters to bring about the conver-

gence of domestic accounting standards with International Financial Report-

ing Standards (IFRS) issued by the IASB.

The above declaration pays lip service to the public interest [i.e.(a)] because it

suggests that IASB standards are primarily designed to meet the exigencies of

only one social constituency, namely capital market investors, whilst the require-

ments of other stakeholders are merely glossed over (see also Biondi, 2004, p. 57).

Furthermore, the World Bank threw its weight behind the IASB’s agenda when it

recognized IFRS as one of the international standards and codes that promote

good governance, transparency and public accountability, within its market-

oriented reform programme involving privatization, public sector downsizing,

deregulation and trade liberalization (IMF, 2003). Accordingly, all large corpor-

ations, privatized public utilities and parastatals in countries that receive struc-

tural adjustment assistance from the World Bank and the International

1See IASB’s mission statement at its website: http://www.iasb.org/Home.htm (accessed in September

2006).

756 C. Elad

Monetary Fund (IMF), are expected to prepare their financial statements in con-

formity with IASB standards (see e.g. IMF, 1999, 2000). This unprecedented stra-

tegic alliance between the IASB and the World Bank not only confers legitimacy

on international financial reporting standards, but also plays a vital ideological

role in sustaining social conflict by bolstering the sectional interests of private

capitalist investors as opposed to the public interests. Indeed, Uddin and Tsame-

nyi (2005, p. 668) articulated similar concerns when they concluded that, in

Ghana, ‘the IMF, World Bank and Western capitalist states have provided the

technical infrastructure and organizational capacity to execute neo-liberal priva-

tization agenda with little regard for protection of the general public’.

In summary, although FVA has some merits, particularly when considered

from the vantage point of financiers and financees within a ‘decision usefulness’

framework, the main thrust of this paper is to show how it might also generate

conflict and alienation amongst stakeholders in the agricultural sector. Thus,

this study will provide a practical illustration of the contrasts between some of

the functional imperatives that are often articulated on behalf of accounting

and the ideological roles which accounting actually plays in society that Burchell

et al. (1980) discuss at a theoretical level. Most important in this context are the

socially partisan roles of IFRS which are often masked by pretensions to objecti-

vity and representational faithfulness as enunciated in the IASB’s Framework for

the Preparation and Presentation of Financial Statements (IASC, 1989). In general

terms, Burchell et al. note (p. 19):

Accounting, it would appear, can be intertwined with social as well as

organisational practice. Unfortunately, however, very little is known

about either the social nature of accounting thought and practice or

the interplay between the social and the organisational. Some scholars

have made occasional comments which have pointed to the social

origins and significance of the accounting craft, although these have

either not remained uncontested for very long or else have not been

subjected to further inquiry. Yet other insights have been provided in

more general historical studies of social and economic development. . .

Essentially, this paper uses Marx’s notion of commodity fetishism, as set out in

the opening chapter of Volume 1 of Capital, to analyse the ideological role of FVA

in fostering alienation and social conflict in the agricultural sector. It is shown

here that, far from providing information to stakeholders that reduces agency

problems and social conflict as B and H claim, FVA has actually (a) aggravated

social conflict in some national settings; and (b) not faithfully represented the

value of natural resources, thus helping to facilitate the expropriation of the

wealth of some less developed countries where FVA models were instituted

under the auspices of the World Bank.

Fair value accounting and fair trade 757

The exclusive focus on the agricultural sector in this study is interesting

because, unlike all other FVA pronouncements, IAS 41 represents the most com-

prehensive and radical departure from historic cost accounting to date, thus pro-

voking a broad range of theoretical and practical problems that might affect its

widespread adoption (see Elad, 2004, for a detailed analysis).

This paper is broadly divided into four parts. The first part (i.e. the next

section) reviews the main provisions of IAS 41. The second part examines the

links between ‘full disclosure’ and the fair value paradigm in market-based

accounting research and reveals some underlying social allegiances that seem to

betray the claim that FVA has the capacity to reduce alienation and social conflict.

The third part analyses the complicity of FVA in bolstering commodity fetishism

in the context of coffee and tropical timber. Finally, the fourth part sums up the

issues at stake.

2. The development of fair value accounting in the

agricultural sector

In the late 1990s, the IASC broke new ground by issuing a draft statement of

principles and an Exposure Draft on accounting in the agricultural sector

(IASC, 1996, 1999). Having secured some financial support from the World

Bank for this project, the IASC proceeded unwaveringly to issue the final standard

on agriculture (IAS 41) in February 2001 amid strong opposition from many

agricultural enterprises, accounting practitioners and all the major professional

accountancy bodies in the UK, USA, Australia and Canada, as evidenced by

comment letters submitted to the IASC (IASC, 1998, 2000, 2001). Prior to

these developments, the most common criticism of the IASC related to its lack

of consideration of the accounting needs of less developed countries and its

strong emphasis on measurement and disclosure issues that are intended to

protect equity investors in industrialized countries with well developed stock

markets (see, for example, Briston, 1978; Samuels and Oliga, 1982).

IAS 41 defines agricultural activity as ‘the management by an enterprise of the

biological transformation of biological assets for sale, into agricultural produce,

or into additional biological assets’ (IASC, 2001, p. 11). In this context, biological

transformation comprises the processes of growth, production and procreation

that cause qualitative and quantitative changes in a biological asset. IAS 41

requires that the fair value of these physical changes be recognized in the

income statement for the period in which they occur irrespective of whether or

not the assets are sold. For example, if a cow is valued at £500 at the beginning

of a financial year and its value increases to £900 at the end of that financial

year, then the £400 increase, which is attributable to natural growth and

market price changes, must be recognized in the income statement regardless

758 C. Elad

of whether or not the animal was sold at the end of the accounting period. There

is a rebuttable presumption that fair values can be determined for all agricultural

assets. If an active market for a biological asset does not exist, the most recent

market transaction price, or market price for similar assets, can be used in deter-

mining fair values. However, if market-determined prices are not available, an

enterprise may use the present value of expected net cash flows from the asset

in determining its fair value.

The most contentious aspect of IAS 41 is the requirement that increments or

decrements in the fair value of biological assets, less estimated point-of-sale costs,

be recognized as revenues or expenses in the income statement for the financial

year in which the increments or decrements occur. Many commentators on the

IASC Draft Statement of Principles on Agriculture (hereafter DSOP) vehemently

opposed this practice as evidenced by the following excerpts from comment

letters from major professional accountancy bodies, banks and companies

around the world:

Agriculture is not an appropriate type of business for introducing

earlier recognition of profit, before it is recognised through sale of

the product, in place of the present, more prudent, historical cost

approach (Institute of Chartered Accountants in England and Wales

in IASC, 1998).

We do not wish to see the Principles as set out in the Draft by the

Steering Committee on Agriculture put into practice since they

would do little to help the Bank. They could well have an adverse

effect on many of our farming customers’ businesses by making them

bear additional and unnecessary valuation costs and laying them

open to tax liability on notional profit which might never be realised

(Barclays Bank plc in IASC, 1998, p. 175).

One is also concerned about the movement into the profit and loss

account of unrealised gains and losses as proposed under the valuation

methods suggested and the treatment of changes in value arising. This

is not good practice (Eastern Produce Kenya Ltd, in IASC, 1998, p. 333).

We believe that in proposing the measurement at fair value the

DSOP foreshadows a significant change from the present historical

cost accounting model. The recommendation that unrealised biological

gains and losses be recognised in the profit and loss account is of par-

ticular concern. This concern is based on the fact that recognition of

unrealised gains or losses, which may not be realised for many years,

in profit or loss will create a presumption on the part of equity share-

holders that they are available for the payment of dividends. We

strongly believe that this may provide misleading information to


users of general purpose financial reports, particularly as to whether

these profits are available for dividends. . . . the Group of 100 con-

siders the model proposed does not appropriately distinguish

between increases in value and profit (Group of 100 Inc, Australia, in

IASC, 1998, p. 157, emphasis in the original).

It may well be that the IASC wanted to push through these reforms in order to

establish a precedent on FVA and the recognition of unrealized income, and

then use this as a basis for instituting a similar approach for the treatment of

more contentious issues relating to financial instruments and derivatives.

It would be recalled that before the IASC metamorphosed into the IASB in

the late 1990s, it was struggling to assert its authority and independence

when it formulated IAS 39, a highly controversial accounting standard, which

mandated FVA for financial instruments and derivatives. Many continental

European financial institutions protested against the application of FVA in

the banking sector on the grounds that it would increase the volatility of

reported income, particularly the marking of derivative hedge positions to

market (see e.g. Bignon et al., 2004). But unlike the agricultural undertakings

that also protested against the introduction of FVA, the large European banks

(mainly French and Italian) had a much stronger capacity to lobby and bring

pressure to bear on accounting regulators in order to secure some concessions

and ultimately avoid the perceived undesirable economic consequences of IAS

39. This episode in European accounting regulation provides a good insight

into some of the socio-economic and political influences on the development

of international financial reporting standards.

The foregoing review of the main provisions of IAS 41 was intended to set the

scene for a subsequent analysis of the way in which the fair value paradigm is

founded on the assumptions of neoclassical economics, thereby playing a vital

ideological role in legitimating social conflict in the agricultural sector.

3. Full disclosure and the fair value paradigm

Under FVA, the key objective is to measure individual assets and liabilities that

represent an entity’s net worth in terms of quoted market prices. The main

merits of this approach were spelled out by B and H (2003, p. 385) thus:

The FVA [Fair Value Accounting] paradigm provides a more complete

full disclosure and is compatible with transparency. Accounting trans-

parency means that the financial statements provide true, accurate and

complete information about business activities and the financial posi-

tion of a firm. Financial statements based on FVA supply transparent

760 C. Elad

information, since the income statement would reflect real economic

value of business activities and the balance sheet mirrors assets, liabilities

and equity measured at fair value (emphasis in the original).

Although such categorical statements are broadly in line with the neoclassical

economic ideals that underpin market-based accounting research, they appear

to overstate the case for FVA by conveying the erroneous impression that the

fair value paradigm is the holy grail of accounting since representational faithful-

ness (e.g. as analysed by Tinker, 1991) would no longer be seen as an unachievable

ideal under this model.

As Scott (2003, p. 11) explains, the notion of ‘full disclosure’ is defined in

financial accounting theory as ‘the supplying of large amounts of information

to help [rational] investors make their own predictions of future firm perform-

ance’. This information perspective on decision usefulness serves the needs of

only one social constituency, namely investors comprising equity shareholders

and to a lesser extent, creditors. Indeed, Solomons (1991) acknowledged this

bias in mainstream accounting when he pointed out that, for pragmatic

reasons, the US Financial Accounting Standards Board defined the role of

accounting exclusively from the standpoint of equity shareholders, neglecting

or de-emphasizing the requirements of other social constituencies.

This paper will analyse the operationalization of FVA in the context of fair

trade coffee and tropical timber in order to unveil some inherent social alle-

giances that are irreconcilable with B and H’s claim that FVA has the capacity

to reduce social conflict and to enhance the stewardship function, by providing

relevant information to stakeholders other than equity shareholders.

The theoretical bedrock on which B and H’s main arguments rest can be

appreciated in terms of the linkages between full disclosure, decision usefulness

and FVA that are set out elegantly in introductory textbooks on market-based

accounting research such as Scott (2003). The attractiveness of FVA in this

context is that it provides valuations which are closer to the fundamental value

of equity than those based upon historic cost accounting, thus reducing the

premium over book values that financial analysts need to forecast. This is

evident from the residual income model which can be stated thus:

Value of equityðVE0 Þ ¼ B0 þ

RE1

rE

þRE2

r2E

þRE3

r3E

þ � � � þVE

T � BT

rTE

where

Residual earnings : REt ¼ Earnt � ðrE�1ÞBt�1

and where

Earnt ¼ comprehensive earnings


rE ¼ required return for equity

B0 ¼ beginnning - of - period book value of equity

If the book value of equity (B0) is equal to the fundamental value of equity,

then both residual earnings and the premium over book value will be zero. Inter-

estingly, Penman (2005[2001]) points out that the residual income model effec-

tively marks equity to market, not by measuring individual assets and liabilities

that make up equity at fair value, but by forecasting the returns on book

values. This means that valuation does not depend on how book values are

measured since a conservative valuation will yield a low book value and a

higher resultant residual income that compensates for the undervaluation.

Many of the key arguments in favour of the fair value paradigm are based on

ideal conditions that do not prevail in practice: e.g. the existence of perfect and

complete markets, rational investors and lack of information asymmetry. To

some extent, B and H acknowledge these limitations; for instance, they point

out that:

The FVA [fair value accounting] paradigm reduces the ‘manager’s

voice’ in favour of the ‘market’s voice’. In an economic setting of

perfect and complete markets the ‘market’s voice’ takes its power

from the measurement, valuation and reporting of assets, liabilities

and consequently, income, at fair values, which are independent of

the manager’s influence. In a more realistic situation, the fair value

of many accounting items is not well defined. This situation gives

rise to problems of implementing the fair value paradigm, but in no

way, as discussed later, nullifies its use. Hence, when analyzing FVA

financial statements, stockholders should be sensitive to the ‘market’s

voice’(p. 384).

Nonetheless, three noteworthy inferences can be drawn from the above passage.

First, by highlighting the way in which FVA is solidly welded to the ‘market’s

voice’, its authors have inadvertently revealed how this accounting model

reinforces the ideological power of market exchange in reducing the productive

process to ephemeral prices. The strong emphasis on market-determined prices

serves to divert attention away from exploitative social relations in the sphere of

production. But the Fair Trade Labelling Organisation, on the other hand, seeks

to make the social and environmental relations of production that lie beneath

market exchanges a visible part of traded commodities such as coffee and tropical

timber. This point encapsulates the essence of Marx’s notion of commodity fetish-

ism which will be considered in more detail in the next section of this paper.

The second inference that emerges from the above citation is that it is congru-

ent with the narrow decision usefulness framework in financial accounting theory

which considers the mission of accounting exclusively from the standpoint of

762 C. Elad

investors, and de-emphasizes the needs of other social constituencies (Ijiri, 2005).

This is clearly irreconcilable with the argument that FVA reduces social conflict

and agency problems by enhancing accountability to stakeholders.

The third inference is that practitioners may have to exercise their own subjec-

tive judgement when operationalizing FVA in more practical settings where ideal

conditions do not prevail (see also Penman, (2005[2001]), p. 45). In the context

of agricultural activity, the lack of an active and liquid market for some biological

assets makes it virtually impossible to properly implement FVA. But, as Elad

(2004) shows, IAS 41 recommends the use of surrogates for market value in

cases where fair values cannot be determined reliably: e.g. market price for

similar assets, sector benchmarks or the present value of expected net cash

flows that the asset will generate. This means that, in practice, FVA in the agricul-

tural sector involves considerable subjective judgement and may be more subject

to bias and manipulation than historic cost-based information, thus contradict-

ing some of the merits of FVA enunciated by B and H.

It is important to appreciate the contrasts between the idealized notion of FVA

and watered-down versions of it that are being implemented on pragmatic

grounds. In this regard, Scott (2003, p. 12) traced the history of FVA in the US

from the period preceding the Great Depression to recent times, pointing out

that the leeway for exercising subjective judgement when ascertaining fair

values resulted in abuses which were widely viewed as contributing to the 1929

stock market crash:

Recent years, however, have seen a considerable increase in the use of

fair values in financial statements proper . . . This is called the measure-

ment perspective on decision usefulness . . . we noted that abuses of

FVA were widely viewed as contributing to the 1929 stock market

crash, and that the result was a strengthening of historical cost-based

accounting. It is interesting that accountants are finally moving back

to increased use of fair values. Whether this means that accountants

have forgotten the lessons of 1920s and 1930s, or whether improve-

ments in measurement tools, such as statistical analysis of large scale

data bases and the use of mathematical models to estimate fair values

will help to avoid the documented abuses of fair values during the

earlier period, is difficult to say. Only time will tell . . .

In line with the assumption in modern finance theory that the objective of the

firm is to maximize shareholders’ wealth, the notion of ‘full disclosure’ in market-

based accounting research does not take cognizance of externalized environ-

mental and social costs. Stenzel and Stenzel (2002, p. 3) echoed this view in an

article aptly titled ‘What if “Full Disclosure” Really Was?’ when they drew atten-

tion to an apparent lack of awareness on the part of many neoclassical economists


that Adam Smith actually advocated the recognition of externalized social and

environmental costs:

Adam Smith is widely quoted by economists, but most of them seem to

forget that Smith insisted that a business recognize and ‘internalize’ all

of its costs. Current corporate accounting systems not only do not

account for environmental damage (e.g. toxic waste, destruction of

habitat), but actually give corporations an expense deduction for

‘natural resource depletion.’ In essence, this twisted logic acts on the

false assumption that the planet’s common heritage is owned by

corporations!

As such, the fair value approach will not offer a satisfactory solution even in the

case of biological assets that have well-established active and liquid markets. The

cases of coffee and tropical timber will be used to illustrate the ideological role of

FVA in social conflict.

3.1 Coffee

If we consider a plantation crop, such as coffee, it would be difficult to defend the

claim that accounting information that is based upon fair values will faithfully

represent anything approaching a true or accurate, let alone complete, picture

of the financial position of coffee farms. As explained earlier in this paper, IAS

41 requires that biological assets be marked to market prices. This means that

IAS 41 only takes cognizance of notions of value that are measurable in the

prices of market transactions.

However, not all stakeholders accept that the fair value (or world market price)

of coffee beans is a fair price that fully reflects the value of the commodity; indeed,

the whole concept of a ‘fair price’ can be seen as a contested terrain. This point

encapsulates the rationale behind recent global campaigns launched by a

diverse group of ethical investors, religious groups, environmental non-

governmental organizations and human rights activists around the world.

For example, according to an article that appeared in the New Internationalist, 2

only 10% of the profit arising from the sale of coffee beans goes to farmers, whilst

a disproportionate share goes to shippers and roasters (55%) and retailers (25%)

and exporters (10%), thus evidencing an unequal exchange as illustrated by

Figure 1.

It could be argued that, far from alleviating social conflict or agency problems,

the FVA paradigm would only serve to legitimate the status quo. The Fairtrade

Foundation, by contrast, is the most prominent advocacy group that seeks

2http://www2.gol.com/users/bobkeim/Foodhunger/Coffee/unfair.html (accessed in March 2000).

764 C. Elad

greater equity in international coffee trade not only by arguing that world market

prices do not reflect the real value of coffee, but also by launching campaigns that

have compelled the world’s leading coffee sellers, such as Starbucks and Procter

and Gamble, to consider ethical coffee brands that guarantee a minimum ‘fair

trade’ price (i.e. as established by stakeholder advocacy groups and ethical share-

holders) of 126 cents per pound to coffee farmers (Raymond, 2003, p. 1):

Small-scale coffee farmers around the world scored a victory this week

when Procter & Gamble (NYSE: PG), the largest seller of coffee in the

U.S., announced that it would introduce Fair Trade CertifiedTM coffee

products through its specialty coffee division, Millstone.

The announcement comes in response to dialogue with shareholders

about the company’s practices, as well as pressure from consumers,

people of faith, human rights activists, and humanitarian organiza-

tions. With P&G’s announcement that it will offer Fair Trade

CertifiedTM coffee through Millstone, the advocacy groups have

agreed to suspend their campaigns against the corporation and the

shareholders have withdrawn the resolution they had filed on the issue.

‘With world market prices as low as they are right now, we see that

many coffee farmers cannot maintain their families and their land

anymore. We need Fair Trade now more than eve’, says Jeronimo

Bollen, Director of Manos Campesinas, a Fair Trade CertifiedTM

coffee cooperative in Guatemala. Over the past three years, the price

of coffee has fallen almost 50 percent, and now hovers near a 30-year

low. This has resulted in a widespread humanitarian crisis for

25 million coffee-growing families in over 50 developing countries.

Figure 1 Allocation of profit from sale of coffee.


Unable to cover their costs of production, small farmers cannot earn

the income necessary to feed their families, send their children to

school, purchase essential medicines, and stay on their land.

These developments appear to tie in well with the arguments of stakeholder

theorists (e.g. Roberts, 1998; and Ullmann, 1985) who point out that, as the

level of a stakeholder’s power increases, the importance of meeting that stake-

holder’s needs also increases. But this does not necessarily mean that companies

that engage in corporate social responsibility activities orchestrated by ethical

investors and stakeholder advocacy organizations are actually demonstrating a

genuine commitment to the public interest. As Fridell (2006, p. 11) observes,

many multinational coffee retailers have devoted only a small percentage of

their turnover to fair trade brands in order to secure positive publicity whilst con-

tinuing to carry on business-as-usual in the vast majority of their other opera-

tions. In a similar vein, Elad (2001) provides case study evidence that vividly

illustrates the use of corporate social responsibility activities as part of a strategic

posture that is adopted to actively defend a company’s enlightened self interests

or to deflect undesirable stakeholder demands.

Essentially, FVA downplays capitalist exploitation of disadvantaged peasant

farmers by forging a tight link between accounting and market prices, repackaged

as ‘generally accepted’ practice under IAS 41, and implemented in jurisdictions

where the regulation of accounting for large entities was influenced by the

World Bank’s neo-liberal globalization agenda. By contrast, the mission of the

Fair Trade Labelling Organisation is to defetishize commodities, such as coffee

and timber, by alerting ethical shareholders, investors and consumers in the

North (notably Europe and the USA) to the oppressive and unjust socio-

economic relations of production, expropriation of natural resources and

environmental degradation in the South (mainly Africa and Latin America).

In this regard, Figure 2 illustrates the contrasts between world market coffee

prices that fell dramatically below production costs over the last few years,

ruining the lives and livelihood of peasant farmers, and the minimum ‘fair

trade’ price of 126 cents per pound. Furthermore, if the world market price of

coffee exceeds the guaranteed floor price of 126 cents per pound, the fair trade

price will automatically be increased to remain at 5 cents per pound above the

market price. As Lyon (2006, p. 458) explains, this minimum fair trade price

was established after extensive field research into the production and living

costs of coffee growers around the world. But some critics (e.g. Fridell, 2006)

have pointed out that although fair trade prices are higher than conventional

market prices, they cannot be so high as to scare off consumers and that such

compromise prices ‘must be radical enough to attract a core group of ethical con-

sumers but not so radical as to alienate a broader base of semi-ethical consumers’.

766 C. Elad

Nonetheless, farmers who want to sell their coffee beans at the agreed fair trade

price (i.e. at least 126 cents per lb), as opposed to the relatively low and volatile

world market price, would have to comply with a set of very detailed standards

established by the Fairtrade Labelling Organisation that cover inter alia: member-

ship of democratic cooperative organizations, non-use of child labour in coffee

farms, non-use of forced or slave labour, non-use of pesticides and fertilizers

that contribute to environmental degradation and so on (see e.g. Fairtrade Foun-

dation, 2002; Fairtrade Labelling Organisation, 2003, for details). Compliance

with these criteria is ascertained by way of a third party audit of farming opera-

tions carried out by accredited coffee auditors under the Fairtrade labelling

scheme, the modalities of which are broadly similar to those of other audit assur-

ance schemes established by the Forest Stewardship Council and the US Single

Audit Act described in Elad (2001). Furthermore, part of the fair trade

premium (referred to as the social premium) is earmarked for socio-economic

development (e.g. healthcare facilities, clean water supply, education, sanitation

and other community projects) and spending decisions are made under the aus-

pices of farmers’ cooperative organizations. This means that, in principle, the

premium over conventional market price will, at least, make a modest contri-

bution toward the internalization of some externalities, poverty alleviation and

protection of the environment.

The foregoing analysis of the coffee trade was intended to buttress the substan-

tive argument that fair values established by market forces do not faithfully repre-

sent a ‘real value’ of the commodity that is acceptable to all social constituencies

and would only aggravate, rather than resolve, agency problems and social

Figure 2 World Market Price for Arabica Coffee: 2000–2002.


conflict induced by inequitable allocation of wealth. By marking financial

statements to market values that are substantially less than the minimum fair

trade price of coffee beans established by stakeholder advocacy groups and

human rights activists, IAS 41 fosters alienation arising from wealth mis-

specification as analysed by Tinker (1985, pp. 169-207), thus favouring the inter-

ests of capitalist investors to the detriment of other social constituencies.

3.2 Commodity fetishism, fair trade coffee and fair value accounting

The discussion in the preceding section suggests that the plight of coffee farmers

has been eclipsed by a preoccupation with commodity exchange in the market

place. Generally speaking, social relations at the level of production appear to

be imperceptible whereas the everyday phenomena of market-mediated com-

modity exchanges are clearly visible. The mission of Fairtrade Labelling Organisa-

tions is to lift the veil on exploitative social relations in the sphere of production,

in respect of coffee farmers and to mitigate the impact of unequal exchange on

commodity producers (see, for instance, Hudson and Hudson, 2003; Watson,

2006; and Bernstein and Campling, 2006). These observations readily call to

mind the orthodox Marxist notion of commodity fetishism which refers to a ten-

dency in capitalist societies to attribute to commodities a power that really

inheres in the social labour expended to create them.

Fetishism is an anthropological term that has traditionally been used to denote

the belief that natural objects created by people have magical or supernatural

powers over them: for instance, some primitive societies ascribe godly powers

to inanimate objects such as totems. But Marx’s use of the term has been inter-

preted by some commentators as an ironic comment on the supposedly rational

scientific mindset of industrial capitalist society of his time.3 As Marx (2001,

pp. 102–104) explains in the first chapter of Volume 1 of Capital, people in capi-

talist societies tend to treat commodities as if value is immanent in objects rather

than in the amount of real labour expended to produce the objects:

A commodity appears, at first sight, a very trivial thing, and easily

understood. Its analysis shows that it is, in reality, a very queer thing,

abounding in metaphysical subtleties and theological niceties. So far

as it is a value in use, there is nothing mysterious about it, whether

we consider it from the point of view that by its properties it is

capable of satisfying human wants, or from the point that those pro-

perties are the product of human labour. It is as clear as noon-day,

that man, by his industry, changes the forms of the materials furnished

3See, for example, http://www.explore-dictionary.com/economics/C/Commodity_fetishism.html.

768 C. Elad

by Nature, in such a way as to make them useful to him. The form of

wood, for instance, is altered, by making a table out of it. Yet, for all

that, the table continues to be that common, every-day thing, wood.

But, so soon as it steps forth as a commodity, it is changed into some-

thing transcendent. It not only stands with its feet on the ground, but,

in relation to all other commodities, it stands on its head, and evolves

out of its wooden brain grotesque ideas, far more wonderful than

‘table-turning’ ever was.

In essence, Marx is saying here that the value of commodities (e.g. tables or

coffee) is determined by their ability to be exchanged for other things, implying

that even human labour, an aspect of man’s humanity, is seen as a commodity

which can be bought or sold. Hence, the social character of labour disappears

from our consciousness whilst we perceive only a set of relationships between

things. This concept of commodification of labour is succinctly summarized by

McKernan and O’Donnell (1998, p. 574):

Marx’s analysis exposes the real disjunctions in capitalism between sub-

stance and form and reveals the ideological power of exchange to forge

equivalences between incommensurables: concrete inequalities and

exploitative social relations appear as abstract equivalence, for

example exploitative wage relations appear as equal exchanges of the

commodities of money and labour.

By marking assets and liabilities to market prices, the fair value paradigm cements

a link between accounting and market exchange values and, in this respect, not

only reinforces commodity fetishism, but also reveals accounting’s ideological

role in social conflict in the sense that it downplays exploitative relations and

environmental sustainability issues pertaining to the production process. This

complicity of FVA in bolstering commodity fetishism clearly renders untenable

the claim that FVA alleviates social conflict and fosters accountability to

stakeholders.

It is important to note here that some neo-Marxist theorists have redeveloped

and applied the concept of commodity fetishism in a wider context. For example,

Lukacs uses the term ‘reification’ to articulate a form of fetishism wherein all

human relationships are perceived as commodities or independent objectified

‘things’ that are divorced from the consciousness of the individuals who

created them (Lukacs, 1971). In a Lukacsian context, the tendency to perceive

appearances rather than real underlying relationships can also be described as

alienation occasioned by reification.

Another interesting attempt at re-conceptualizing commodity fetishism is

found in the work of Jean Baudrillard, a French semiotician, whose writings


are mostly associated with post-modernism and post-structuralism. According to

Braudillard, a commodity in the post-modern era can be thought of as a sign in

the Saussurian sense with its meaning arbitrarily determined by its position in a

self-referential system of signifiers (see, e.g. Sarap, 1993, p. 162). For instance, a

diamond ring can have different kinds of value in that it might: adorn the hand of

its owner (use value), be worth five months’ salary (economic relative value),

signal public declaration of love between two parties, or confer social status. In

general, Baudrillard was particularly interested in the cultural mystique added

to objects by advertising which stimulates consumers to purchase them as they

strive to construct their own personal identities.

Although several other theorists have offered different versions of commodity

fetishism, the term is used in this paper to describe one aspect of ideology in capi-

talist societies, namely the tendency for social relationships to appear as relation-

ships between things (i.e. reification). One important implication of this

commoditization of labour is that FVA lays emphasis on economic (or market

exchange) values which are largely determined in the North, and, at the same

time, ignores the exploitative human and environmental conditions under

which agricultural production takes place in the South (see e.g. Bernstein and

Campling, 2006, p. 425).

Against this backdrop, alternative trade organizations, such as the Fairtrade

Foundation, Forest Stewardship Council and the appropriately named Equal

Exchange4 seek to subvert the reification of commodity fetishes by making the

social and environmental conditions under which commodities are produced a

visible part of the products. For example, the fair trade movement makes a

modest contribution in helping to reduce alienation by bringing the plight of

peasant farmers in far-flung corners of the globe to the attention of altruistic con-

sumers in industrialized countries who demonstrate empathy and solidarity by

their willingness to pay a price premium to alleviate the inequities of free

trade. The next section will examine these matters, using the specific case of tro-

pical timber.

3.3 Tropical timber

B and H (2003, p. 405) observe that one potential undesirable political cost of fair

value financial statements, from the standpoint of companies, is the likelihood

that tax authorities will use them as a basis for taxation in jurisdictions where

FVA is implemented. It is interesting to note that this has already happened in

the Congo basin rainforest: indeed, Elad (2000, Chapter 4) shows how the auth-

orities in Cameroon have successfully instituted a system of forestry taxation that

4See http://www.equalexchange.com/.

770 C. Elad

is based on the fair value of timber. This shift from a forest tax system based on

historic cost accounting to a forest tax system based on FVA was recommended by

the World Bank to the Cameroonian authorities as part of a package of radical

reforms within its structural adjustment programme in the face of an acute econo-

mic crisis (see Ferrer and O’Halloran, 1997). However, since market-determined

fair values cannot faithfully represent the intrinsic value of biological assets and

forest ecosystems, governments of developing nations that use them as a basis

for taxation might actually be fostering the expropriation of agrarian labour

and natural resources by default.

Under this new fiscal regime, fair values of all conceivable commercially

exploitable species of local tree are set out in official tax tables, published period-

ically by the government, that are based upon market-determined FOB (free on

board). These tables specify different tax bases for three geographical segments

that are intended to compensate for transport costs and show how an established

taxonomy of forest resources dovetails into the relevant accounting codes of the

Organisation Commune Africaine, Malagache et Mauricienne (OCAM) Plan

Comptable General (see Elad, 2000, Chapter 4, for a detailed discussion and

analysis). For example, the tax base for logs coming from Zone 1, which is

close to the seaport, is higher than the tax base for logs coming from Zone 2

and Zone 3, which are relatively far away from the port.

The adoption of fair values as a basis for taxation, in lieu of historic cost, has

resulted in a substantial increase in government revenue (Ferrer and O’Halloran,

1997). However, it is argued here that fair values established by market forces do

not fully reflect the value of this resource. For example, unlike full cost accounting

(see, for example, Bebbington et al., 2001), fair values do not take account of the

adverse environmental impact of the operations of logging companies in pristine

old-growth forests that have been widely recognized as ranking amongst the

world’s most biologically diverse terrestrial ecosystems: e.g soil erosion; effect

on temperature, rainfall, wind and humidity; impact on rural people whose live-

lihood is inextricably linked to the rainforest; disturbance of wildlife habitat and

other forms of environmental degradation.

Forest exploitation companies do not bear the costs of environmental degra-

dation arising from their operations. Such costs are not included in the timber

market prices that are used as a basis for forestry taxation in Cameroon. These

omissions clearly illustrate some of the deficiencies of the fair value paradigm

in market-based accounting research in a tropical forestry setting and its con-

comitant concept of ‘full disclosure’, which were considered earlier in this paper.

Full disclosure was defined in terms of information that will help investors to

predict share prices. As such, it does not take cognizance of the exigencies of

environmental sustainability or externalized costs which are imposed on

society. Nor does it consider inter-generational equity issues.


By contrast, forest stewardship audit schemes play an important role in

eroding the pervasiveness of fetishism in the lumber industry by issuing eco-

labels that throw a spotlight on the social and environmental conditions under

which timber is harvested. These eco-labels serve as signals to stakeholders that

wood products come from well-managed forests in conformity with the Forest

Stewardship Council’s extensive principles which cover inter alia key eco-justice

matters such as protection of the customary rights of indigenous people, land

tenure and sustainable forest management plans, as well as eco-efficiency issues

such as environmental impact assessment (see, for example, Elad, 2001, p. 650).5

The cost of forest certification is borne by entities that seek to advertise their

‘green’ or sustainable forest management practices. Just as fair trade coffee is sold

at a premium over conventional market price, certified wood products are sold at

a premium over market price which is intended to cover the additional costs of

timber certification, thus internalizing some externalities.

Under the spell of commodity fetishism, the old adage ‘consumers see no evil,

hear no evil’ seems applicable even to well-meaning consumers in high places. For

example, in response to allegations made by a member of parliament regarding

Balfour Beatty’s use of £460,000 worth of tropical hardwood from Cameroon’s

endangered sapele trees in the construction of new Cabinet Offices, Tony Blair,

the British Prime Minister, declared that the wood actually came from ‘sustain-

ably managed and certified forests’ (Lister, 2002). The Forest Stewardship

Council promptly issued a rebuttal that attracted considerable media attention,

claiming that none of the timber exploitation companies operating in Cameroon

had ever secured a certification for sapele wood. Greenpeace also added its voice

to the ensuing debate, pointing out that the sapele wood in question was in fact

supplied to Balfour Beatty by companies that have a long history of illegal logging

in Cameroon’s rainforest (see Vidal, 2002).

This brief expose reveals how forest certification schemes and eco-labels can

play an important role in defetishizing tropical timber by throwing a spotlight

on environmental problems that are associated with the unsustainable harvesting

of timber, as opposed to market exchange which determines fair values. It drew

the attention of major stakeholders—i.e. government officials, journalists,

members of parliaments, the British Prime Minister, advocacy NGOs and

environmental campaigners—to the conditions under which timber is produced.

Whereas government officials sought to use forest certification and eco-labelling

schemes to justify the procurement of endangered wood, their sustainability

claims were hotly contested by [enlightened] interest groups who were concerned

about the degradation and destruction of tropical rainforest habitats by

5See the Forest Stewardship Council’s Principles and Criteria at: http://www.fscus.org/

standards_criteria/.

772 C. Elad

unscrupulous managers bent on maximizing shareholders’ value arising from

their operations.

4. Conclusion

By and large, accounting standard setting bodies around the world are progressively

abandoning the historic cost model and adopting the fair value approach in many

of their recent pronouncements. Indeed, Walter Schuetze, a founding member of

the US Financial Accounting Standards Board, and former Chief Accountant of

the Securities and Exchange Commission, used the phrase ‘True North of finan-

cial reporting’ to describe this recent shift from historic cost accounting to the fair

value paradigm pointing out that, since everyone knows where the North lies on a

compass, the mission of accounting is to navigate towards it (Schuetze, 2001).

More recently, Barlev and Haddad (2003) analysed the key merits of FVA

vis-a-vis historic cost accounting and arrived at the conclusion that it contributes

to the stewardship function by providing relevant information to stakeholders,

thereby alleviating agency problems and social conflict.

The main objective of this paper was to demonstrate that far from enhancing

accountability to stakeholders or resolving agency problems in the agricultural

sector, FVA has actually played a major ideological role in sustaining social con-

flict. It was shown that, by forging a link between accounting and market values,

FVA reinforces commodity fetishism because it ignores the social and environ-

mental relations of production that lie beneath market exchanges. But Fair

Trade Labelling Organisations, on the other hand, seek to subvert the fetishiza-

tion of coffee and timber, by making the social and environmental conditions

under which commodities are produced a visible part of the products, and, as

a result, bringing the plight of disadvantaged coffee farmers in Africa and Latin

America to the attention of altruistic consumers in the major industrialized

countries.

The gravity of FVA’s complicity in legitimating unjust socio-economic

relations of production and exchange in poor countries is most poignantly

brought to bear in the context of the global impact of agricultural protectionist

policies of industrialized nations in general, including European Union’s

common agricultural policy (CAP). For example, European farmers receive sub-

stantial subsidies which amounted to 44 billion Euros in 2005 (almost half of the

EU’s budget), despite recent attempts at reforming the CAP. As a result, European

farm products are exported to less developed countries at prices which are

substantially below production costs. This dumping of subsidized agricultural

products in developing countries undermines local market opportunities

because local farmers cannot compete with cheap imports. Also, farmers in devel-

oping countries have a limited capacity to export their products to Europe


because import tariffs are imposed on agricultural imports under the CAP.

Hence, western agricultural policies in general distort market prices, and

effectively subsidize western farmers, unlike their counterparts in developing

nations.

But the IAS 41 requirement that elements of financial statements be marked to

such artificial and highly subsidized or politically mediated market prices not

only highlights the ideological role of FVA in legitimating an unequal exchange,

but also renders untenable, the claim that FVA can ‘faithfully’ represent under-

lying economic reality.

In a nutshell, this paper has argued that the recent shift from the historic cost

model to FVA does not necessarily represent an improvement in accounting prac-

tice as some of its leading exponents have claimed. Far from being an accounting

panacea, FVA accounting for agricultural activity is a profoundly ideological

enterprise since it serves the sectional interests of capitalist investors as

opposed to public’s interests. The exposition in this paper has also illustrated

the contrasts between some of the functional imperatives that are articulated

on behalf of accounting and the roles which accounting actually plays in

society that Burchell et al. (1980) discuss at a theoretical level.

Nonetheless, it is important to point out here that the arguments in this paper

do not constitute a wholesale critique of FVA since they relate mainly to the

implementation of IAS 41 in the agricultural sector. Even then, from a purely

pragmatic standpoint, it can be argued that there are circumstances where

some variants of FVA might be more appropriate than historical cost accounting.

In this regard, it is interesting to note that a form of FVA, referred to as the

‘deemed cost’ method, is widely used in the British agricultural industry (for

pragmatic reasons) as a valuation benchmark in cases where it is not feasible

to ascertain historical costs of production from farm records.

Summing up, it is clear that some of the unintended socio-economic con-

sequences of IAS 41 analysed in this paper will continue to pose major challenges

to accounting rule-makers and advocates of the fair value paradigm. Further

research on this topic might address: (a) the extent to which a market-driven

approach can be used by the fair trade movement and the Forest Stewardship

Council to accomplish the ultimate goal of defetishizing commodities and (b)

impediments to the implementation of IAS 41 in both industrialized countries

and less developed countries.

Funding

The author would like to thank the Institute of Chartered Accountants of

Scotland for funding the research upon which this paper is based. All views

expressed in this paper are the author’s own.

774 C. Elad

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IAS 41 Fair Value Accounting and Fair Trade

Documents

mission of accounting

emancipatory accounting

international standards

financial accounting

accounting rulemakers

international trade

fair value approach

fair value measurements