Epistemic Fragility: Institutional Stability and the Ongoing Acceptance of Unverifiable Measurement in IFRS 13 Level 3

Abstract

Purpose: We examine how IFRS 13 Level 3 fair value measurement continues to be treated as epistemically adequate by preparers, auditors, regulators, and users, despite requiring measurements whose correctness cannot be independently confirmed against any observable market transaction. We introduce the concept of Epistemic Fragility to name this condition and explain both how it persists and how the standard's own provisions continuously regenerate it.
Methodology: Three analytical methods are integrated into a single research design. The deductive method establishes that the compliance mechanisms required by IFRS 13, covering sensitivity disclosures (IFRS 13, para. 93(h)), documentation requirements (IFRS 13, paras. 91–93), valuation models (IFRS 13, para. 89), and audit procedures (ISA 540), are each consistent with the decision usefulness objective (CF 1.2), while none can satisfy the knowledge requirements of predictive value (CF 2.8) and confirmatory value (CF 2.9). Foucauldian genealogy traces three historically specific and contestable institutional decisions through which procedural compliance came to substitute for independent verification. Derridean deconstruction exposes the logical contradictions within the standard's own wording through which Epistemic Fragility is actively reproduced.
Theoretical perspectives: The deductive analysis is grounded in the IASB Conceptual Framework (2018), treating decision usefulness (CF 1.2), predictive value (CF 2.8), and confirmatory value (CF 2.9) as the epistemic premises against which IFRS 13's Level 3 provisions are assessed. The genealogical analysis draws on Foucault's account of power and knowledge, treating accounting standard-setting decisions as contingent institutional choices that produce particular knowledge systems rather than neutral technical improvements. The deconstructive analysis draws on Derrida's concepts of the supplement, the trace, and différance to expose the logical contradictions embedded in the standard's own wording. The concept of Epistemic Fragility provides the integrating theoretical framework across all three methods, naming the condition in which the standard's own provisions continuously regenerate the appearance of epistemic adequacy without delivering it.
Empirical foundation: The empirical material consists of close readings of IFRS 13 Fair Value Measurement (2011) together with its Basis for Conclusions (2009), the IASB Conceptual Framework (2018), and ISA 540 Auditing Accounting Estimates and Related Disclosures (Revised 2018). Each document is examined according to its own internal logic and against the IASB's own declared purposes. No primary fieldwork is conducted.
Conclusions: The structural impossibility of independent verification at Level 3 is not produced by poor implementation but is built into the standard's own architecture. The Conceptual Framework requires that useful information support users' expectations about future outcomes, which the Framework calls predictive value (CF 2.8), and provide feedback on earlier estimates against independently observable reference points, which the Framework calls confirmatory value (CF 2.9). The gap between these epistemic requirements and the measurement conditions at Level 3, where no observable market data exist by definition (IFRS 13, para. 86), cannot be bridged by any mechanism available within IFRS 13. Three historically contingent institutional decisions produced the conditions under which this structural gap became invisible. The first is the subordination of stewardship to decision usefulness. The second is the replacement of reliability with faithful representation, first proposed in IASB (2008) and formalised in 2010, and the concurrent repositioning of verifiability to an enhancing qualitative characteristic (CF 2.30). The third is the subsequent normalisation of Level 3 measurement practice across standard-setting, audit, and user behaviour. The market participant construct (IFRS 13, paras. 21 and 89) inscribes the absence of observable market inputs within the standard's own text rather than resolving it, and the uniform measurement goal (IFRS 13, para. 2) constitutes a logical contradiction that the hierarchy's own knowledge structure denies. These two contradictions form a self-reinforcing loop that regenerates Epistemic Fragility each time the standard is read and applied. The structural limitations of Level 3 fair value measurement cannot be fully resolved through stricter enforcement, more rigorous audit procedures, or enhanced disclosure requirements alone, because the limitation is located in the relationship between the standard's own provisions rather than in how those provisions are applied. Standard-setters considering revisions to IFRS 13 or the Conceptual Framework are directed toward specific provisions (IFRS 13, paras. 2, 21 and 89) and the positioning of verifiability (CF 2.30), as these are the sites where Epistemic Fragility is structurally generated and reproduced. The analysis makes four contributions to existing literature. First, it builds Power's (2010) account of verification by examining how the repositioning of verifiability as an enhancing qualitative characteristic (CF 2.30) helps sustain Epistemic Fragility of Level 3 fair value under IFRS 13. Second, it responds to the explanatory gap opened by Barker and Schulte’s (2017) analysis of the market-participant perspective by examining how IFRS 13 continues to operate with institutional stability despite the logical tensions created by Level 3 measurement. Third, it distinguishes the instability identified in this thesis from the broader semiotic detachment discussed by Macintosh et al. (2000), by locating the problem within the internal logic of IFRS 13 rather than in a general breakdown of accounting representation. Fourth, it distinguishes the argument from MacKenzie’s (2006) account of performativity by showing that, in the case of IFRS 13 Level 3, the absence of observable market grounding is already inscribed within the standard’s own measurement structure, rather than arising primarily from feedback effects between valuation models and markets.

• author: Tada, Hiroaki and Wang, Ting
• supervisor: Liesel Klemcke
• organization: Department of Business Administration
• course: BUSN79 20261
• year: 2026
• type: H1 - Master's Degree (One Year)
• subject: Business and Economics
• keywords: Epistemic Fragility, Level 3 fair value measurement, IFRS 13, verifiability, decision usefulness
• language: English
• id: 9235237
• date added to LUP: 2026-07-01 12:54:38
• date last changed: 2026-07-01 12:54:38