Why "Fair Value" matters
Posted by Sjoerd-Jaap Westra
The act of accounting based on fair value seems a bit of a no-brainer: Measure assets and liabilities based on estimates of their current value. What's so wrong with that? It hasn't always been so clean and neat. You will still find plenty of debate in and around fair value accounting and its more recognizable counterpart, historical accounting, where you value something based on the cost of purchase, no matter how old.
What Researchers Say
According to the American Institute of Certified Public Accountants, SFAS 157 (Statement of Financial Accounting Standards No. 157) is the basis of fair value measurements originally issued in 2006. But it remains a main point of controversy within the industry almost a decade later.
Another study, by researchers at the Haas School of Business at the University of California, Berkeley, found that the split has settled somewhat in some corners with this: "Fair value accounting is used when reliable fair value estimates are available at a low cost and when they convey information about operating performance." Then, at the same time, the study found that firms' managers generally "commit to historical cost accounting for plant and equipment."
So how has this played out across workspaces near to you? For that, it's good to understand even more of the backstory.
"Fair value" advocates prefer this over other methods and are willing to stick to their guns. Fair value can get captured on assets and liabilities based on estimates of their current value, experts say. Researchers are somewhat OK with the debate but recognize that it was made worse by the financial crisis. One key way accountants can stay in the loop is to remain focused on continuing their education and staying on top of information, no matter what. They also need to ask seriously probing questions like, How other companies handle the issue within their own products and design? In all, the debate is highly unlikely to be solved any time soon, so the best that advocates can do on both sides is state their case, train their staff, and measure the results.
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