Socio-Economic Review (2007) 5, 755777 Advance Access publication October 11, 2007

doi:10.1093/ser/mwm013

Fair value accounting and fair trade: an analysis of the role of International Accounting Standard No. 41 in social conict
Charles Elad
Department of Finance and Business Law, Westminster Business School, University of Westminster, London, NW1 5LS, UK Correspondence: c.elad@westminster.ac.uk

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 conict. It is contended here that far from reducing conict 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 Marxs notion of commodity fetishism, this paper analyses the ideological role of International Accounting Standard (IAS) 41 in legitimating social conict in the context of fair trade coffee and forestry companies that were compelled by domestic legislation to adopt a full-edged 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 nance, trade, internationalization, World Bank JEL classication: 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
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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 benets), IAS 39 (nancial instruments), IAS 40 (investment property) and IAS 41 (agriculture), which are now mandatory for the consolidated nancial statements of listed companies in Europe. The present study seeks to demonstrate that the desirable features of FVA identied by Barlev and Haddad (hereafter, B and H) are in line with the extant literature on mainstream nancial accounting 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 pronouncements 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, transparent and comparable information in nancial statements and other nancial reporting to help participants in the worlds 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 convergence of domestic accounting standards with International Financial Reporting 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 requirements of other stakeholders are merely glossed over (see also Biondi, 2004, p. 57). Furthermore, the World Bank threw its weight behind the IASBs agenda when it recognized IFRS as one of the international standards and codes that promote good governance, transparency and public accountability, within its marketoriented reform programme involving privatization, public sector downsizing, deregulation and trade liberalization (IMF, 2003). Accordingly, all large corporations, privatized public utilities and parastatals in countries that receive structural adjustment assistance from the World Bank and the International
See IASBs mission statement at its website: http://www.iasb.org/Home.htm (accessed in September 2006).
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Monetary Fund (IMF), are expected to prepare their nancial statements in conformity with IASB standards (see e.g. IMF, 1999, 2000). This unprecedented strategic alliance between the IASB and the World Bank not only confers legitimacy on international nancial reporting standards, but also plays a vital ideological role in sustaining social conict by bolstering the sectional interests of private capitalist investors as opposed to the public interests. Indeed, Uddin and Tsamenyi (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 privatization 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 nanciers and nancees within a decision usefulness framework, the main thrust of this paper is to show how it might also generate conict 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 objectivity and representational faithfulness as enunciated in the IASBs 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 signicance 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 Marxs 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 conict in the agricultural sector. It is shown here that, far from providing information to stakeholders that reduces agency problems and social conict as B and H claim, FVA has actually (a) aggravated social conict 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.

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The exclusive focus on the agricultural sector in this study is interesting because, unlike all other FVA pronouncements, IAS 41 represents the most comprehensive and radical departure from historic cost accounting to date, thus provoking 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 rst 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 conict. 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 nancial support from the World Bank for this project, the IASC proceeded unwaveringly to issue the nal 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 denes 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 nancial year and its value increases to 900 at the end of that nancial year, then the 400 increase, which is attributable to natural growth and market price changes, must be recognized in the income statement regardless

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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 determining fair values. However, if market-determined prices are not available, an enterprise may use the present value of expected net cash ows 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 nancial 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 prot, 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 prot which might never be realised (Barclays Bank plc in IASC, 1998, p. 175). One is also concerned about the movement into the prot 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 signicant change from the present historical cost accounting model. The recommendation that unrealised biological gains and losses be recognised in the prot and loss account is of particular concern. This concern is based on the fact that recognition of unrealised gains or losses, which may not be realised for many years, in prot or loss will create a presumption on the part of equity shareholders that they are available for the payment of dividends. We strongly believe that this may provide misleading information to

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users of general purpose nancial reports, particularly as to whether these prots are available for dividends. . . . the Group of 100 considers the model proposed does not appropriately distinguish between increases in value and prot (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 nancial 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 nancial instruments and derivatives. Many continental European nancial 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 inuences on the development of international nancial 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 conict 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 entitys 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 transparency means that the nancial statements provide true, accurate and complete information about business activities and the nancial position of a rm. Financial statements based on FVA supply transparent

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information, since the income statement would reect 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 faithfulness (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 dened in nancial accounting theory as the supplying of large amounts of information to help [rational] investors make their own predictions of future rm performance. 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 dened 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 allegiances that are irreconcilable with B and Hs claim that FVA has the capacity to reduce social conict and to enhance the stewardship function, by providing relevant information to stakeholders other than equity shareholders. The theoretical bedrock on which B and Hs 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 nancial analysts need to forecast. This is evident from the residual income model which can be stated thus: Value of equityVE B0 0 where Residual earnings : REt Earnt rE1 Bt1 and where Earnt comprehensive earnings RE1 RE2 RE3 VE BT 2 3 T T rE rE rE rE

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rE required return for equity B0 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. Interestingly, Penman (2005[2001]) points out that the residual income model effectively 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 managers voice in favour of the markets voice. In an economic setting of perfect and complete markets the markets voice takes its power from the measurement, valuation and reporting of assets, liabilities and consequently, income, at fair values, which are independent of the managers inuence. In a more realistic situation, the fair value of many accounting items is not well dened. This situation gives rise to problems of implementing the fair value paradigm, but in no way, as discussed later, nullies its use. Hence, when analyzing FVA nancial statements, stockholders should be sensitive to the markets 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 markets 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 Marxs notion of commodity fetishism 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 congruent with the narrow decision usefulness framework in nancial accounting theory which considers the mission of accounting exclusively from the standpoint of

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investors, and de-emphasizes the needs of other social constituencies (Ijiri, 2005). This is clearly irreconcilable with the argument that FVA reduces social conict and agency problems by enhancing accountability to stakeholders. The third inference is that practitioners may have to exercise their own subjective 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 ows that the asset will generate. This means that, in practice, FVA in the agricultural sector involves considerable subjective judgement and may be more subject to bias and manipulation than historic cost-based information, thus contradicting 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 nancial statements proper . . . This is called the measurement 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 nally moving back to increased use of fair values. Whether this means that accountants have forgotten the lessons of 1920s and 1930s, or whether improvements 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 difcult to say. Only time will tell . . . In line with the assumption in modern nance theory that the objective of the rm is to maximize shareholders wealth, the notion of full disclosure in marketbased accounting research does not take cognizance of externalized environmental 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 attention to an apparent lack of awareness on the part of many neoclassical economists

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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 planets 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 conict.

3.1

Coffee

If we consider a plantation crop, such as coffee, it would be difcult 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 nancial 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 reects 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 nongovernmental 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 prot 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 conict 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
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http://www2.gol.com/users/bobkeim/Foodhunger/Coffee/unfair.html (accessed in March 2000).

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Figure 1 Allocation of prot from sale of coffee.

greater equity in international coffee trade not only by arguing that world market prices do not reect the real value of coffee, but also by launching campaigns that have compelled the worlds 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 shareholders) 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 CertiedTM coffee products through its specialty coffee division, Millstone. The announcement comes in response to dialogue with shareholders about the companys practices, as well as pressure from consumers, people of faith, human rights activists, and humanitarian organizations. With P&Gs announcement that it will offer Fair Trade CertiedTM coffee through Millstone, the advocacy groups have agreed to suspend their campaigns against the corporation and the shareholders have withdrawn the resolution they had led 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 CertiedTM 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.

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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 stakeholders power increases, the importance of meeting that stakeholders 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 continuing to carry on business-as-usual in the vast majority of their other operations. 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 companys enlightened self interests or to deect 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 inuenced by the World Banks 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 socioeconomic 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 oor 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 eld 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 consumers but not so radical as to alienate a broader base of semi-ethical consumers.

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

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: membership 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 Foundation, 2002; Fairtrade Labelling Organisation, 2003, for details). Compliance with these criteria is ascertained by way of a third party audit of farming operations carried out by accredited coffee auditors under the Fairtrade labelling scheme, the modalities of which are broadly similar to those of other audit assurance 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 auspices of farmers cooperative organizations. This means that, in principle, the premium over conventional market price will, at least, make a modest contribution 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 substantive argument that fair values established by market forces do not faithfully represent a real value of the commodity that is acceptable to all social constituencies and would only aggravate, rather than resolve, agency problems and social

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conict induced by inequitable allocation of wealth. By marking nancial 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 misspecication as analysed by Tinker (1985, pp. 169-207), thus favouring the interests 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 commodity exchanges are clearly visible. The mission of Fairtrade Labelling Organisations 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 tendency 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 Marxs use of the term has been interpreted by some commentators as an ironic comment on the supposedly rational scientic mindset of industrial capitalist society of his time.3 As Marx (2001, pp. 102 104) explains in the rst chapter of Volume 1 of Capital, people in capitalist 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 rst 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 properties 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
3

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

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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 something 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 mans 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 commodication of labour is succinctly summarized by McKernan and ODonnell (1998, p. 574): Marxs analysis exposes the real disjunctions in capitalism between substance 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 accountings ideological role in social conict 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 conict 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 reication to articulate a form of fetishism wherein all human relationships are perceived as commodities or independent objectied 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 reication. Another interesting attempt at re-conceptualizing commodity fetishism is found in the work of Jean Baudrillard, a French semiotician, whose writings

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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 signiers (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 ve 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 capitalist societies, namely the tendency for social relationships to appear as relationships between things (i.e. reication). 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 reication 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-ung corners of the globe to the attention of altruistic consumers 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 specic case of tropical timber.

3.3

Tropical timber

B and H (2003, p. 405) observe that one potential undesirable political cost of fair value nancial 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 authorities in Cameroon have successfully instituted a system of forestry taxation that
4

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

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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 economic crisis (see Ferrer and OHalloran, 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 scal regime, fair values of all conceivable commercially exploitable species of local tree are set out in ofcial tax tables, published periodically 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 OHalloran, 1997). However, it is argued here that fair values established by market forces do not fully reect 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 worlds most biologically diverse terrestrial ecosystems: e.g soil erosion; effect on temperature, rainfall, wind and humidity; impact on rural people whose livelihood 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 degradation 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 deciencies of the fair value paradigm in market-based accounting research in a tropical forestry setting and its concomitant concept of full disclosure, which were considered earlier in this paper. Full disclosure was dened 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.

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By contrast, forest stewardship audit schemes play an important role in eroding the pervasiveness of fetishism in the lumber industry by issuing ecolabels 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 Councils 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-efciency issues such as environmental impact assessment (see, for example, Elad, 2001, p. 650).5 The cost of forest certication 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, certied wood products are sold at a premium over market price which is intended to cover the additional costs of timber certication, 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 Beattys use of 460,000 worth of tropical hardwood from Cameroons endangered sapele trees in the construction of new Cabinet Ofces, Tony Blair, the British Prime Minister, declared that the wood actually came from sustainably managed and certied 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 certication 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 Cameroons rainforest (see Vidal, 2002). This brief expose reveals how forest certication 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 stakeholdersi.e. government ofcials, journalists, members of parliaments, the British Prime Minister, advocacy NGOs and environmental campaignersto the conditions under which timber is produced. Whereas government ofcials sought to use forest certication 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
5

See the Forest Stewardship Councils Principles and Criteria at: http://www.fscus.org/ standards_criteria/.

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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 nancial 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 conict. 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 conict. It was shown that, by forging a link between accounting and market values, FVA reinforces commodity fetishism because it ignores the social and environmental relations of production that lie beneath market exchanges. But Fair Trade Labelling Organisations, on the other hand, seek to subvert the fetishization 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 FVAs 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 Unions common agricultural policy (CAP). For example, European farmers receive substantial subsidies which amounted to 44 billion Euros in 2005 (almost half of the EUs 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 developing countries have a limited capacity to export their products to Europe

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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 nancial statements be marked to such articial 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 underlying 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 practice 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 publics 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 consequences 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 authors own.

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