An article by Charles Lee, “Why Fair Value Accounting Isn’t Fair.” Lee argues that fair value
accounting goes against the fundamental purpose of accounting. It would inject more
uncertainty into financial reporting and make life harder for shareholders. It might even create
new opportunities for companies to cook their books. (Lee, 2014)
The article provided the example of implications of companies in the article. It described how
the Apple Company’s shares plunged during 2013 even though the stock market was surging
steadily. The Apple Company CEO reported that the company had the highest sales ever for
2013. The investors where not happy with the company’s future and resulted in the share
price falling.
As a user of financial statements, I agree with the author that Market Value is not the true
value of the assets and liabilities. I prefer to have values based of the historic cost.
on Fair Value Accounting, I found a couple of articles. The first is from World Roger CPA
Review found here: https://accounting.uworld.com/blog/cpa-review/fair-value-under-fire/
gives a brief overview of what is currently happening in fair value accounting in the law. It
mentions bailouts and what they are, then why people are against it. The gist of it is, subprime
mortgages changed the game. When the housing market collapsed, people were left holding
billions of dollars’ worth of assets that no longer held value. These assets were then liquidated
when there was no basis for a fair market value and investors lost confidence quickly. A quote
from it reads: “if our option is essentially ignoring current market conditions and claiming
irrelevant value on our assets, doesn’t that essentially amount to negligence and/or fraud?
Shouldn’t our failing institutions simply own up to their over-leveraging and learn a lesson
about consequences?” It concludes that this does sound a bit idealistic, but “perhaps some
ideals are in order.”
I agree with this author’s assessment. The implications are that companies must take
responsibility for their actions, not let the debt be settled by people who have no ability within
the market to value their assets the same way the larger companies can. I think that Fair Value
Accounting has good points, but when there is no market, cost accounting is the only way to
decide value with any accuracy. These measures take less pressure off the everyday investor
with their 401K and college funds, and holds the larger corporations accountable if they make
a bad trade.
The second article is Bloomberg Tax, written in March of 2020, found here:
https://news.bloombergtax.com/financial-accounting/business-group-calls-for-halting-fair-
value-accounting-as-virus-spreads. This is basically just a news article about certain
businesses calling for a halt on Fair Value Accounting and what all they had done to do so.
They wrote in their letter that “it is simply not possible to properly value assets in illiquid and
non-functioning markets.” This is a fair assessment, and one of the reasons that the first
article also mentions, maintaining that it is better to use a different way to value assets if it
would help keep the average investor from being left holding the ticket when things go wrong.
Overall, I think it is a good idea to consider other options. If there is no market, there is
nothing to compare the value of assets to, and thus there should be another way to value the
asset. Perhaps when this is the case, cost accounting procedures would be the best option.
the controversy surrounding fair value accounting is relatively justified, though I see both
sides of the argument. I chose Charles Lee: Why Fair-Value Accounting Isn’t Fair, where the
author, Edmund L. Andrews, discusses the reliability and potential issues faced by using fair
value accounting. It is essentially stated that fair value accounting makes financial reporting
more uncertain due to the lack of economic history provided. I agree with the idea that this
method creates value fluctuations and makes it difficult to report correctly, because using a
current market value of an asset does not necessarily reflect the actual value of said thing. In
times of economic distress, such as the current housing market, homes are "valued" at far
more than they are actually worth and were purchased for in years prior.
Based on this article, it is shown that companies can relatively easily manipulate this method
for their benefit. Enron previously used the "Level 3" approach to fair value accounting,
which essentially grants a market value to something there is no market for. They may use
internal assumptions to create a value for an asset, and they can very easily inflate the value to
their benefit. This method makes it extremely easy for companies to act unethically.
As a user of financial statements, I would prefer to see cost accounting. Cost accounting is an
asset's original cost, whereas fair value accounting is based on the current market value. Fair
value can be over or under-inflated, but cost accounting seems to be a more accurate
depiction of the actual value.
Charles Lee argues, "fair value accounting goes against the fundamental purpose of
accounting. It would actually inject more uncertainty into financial reports and make life
harder for shareholders. It might even create new opportunities for companies to cook their
books" (Andrews, 2021).
Under GAAP, accounting is to report on the financial information of the company's
performance and financial position accurately and transparently. Charles Lee goes on to
explain how it is not the accountants' job to predict the future or forecast anything but rather
present the facts of the financials accurately and truthfully. "Lee isn’t disparaging market
valuations. In fact, he argues that the most important component of a company’s market value
lies in shareholder expectations about its future earnings. But the purpose of accounting isn’t
to make those forecasts, he insists. The purpose is to give shareholders the tools they need to
make their own forecasts" (Andrews, 2021).
I agree with his views. The implication for companies based on this article is that they are not
getting accurate information. During a crisis, the fair value is not going to be accurate given
the economic state and will not fairly reflect what something's value is. As an accountant, I
would rather see cost accounting vs fair value accounting. I believe cost accounting captures
the true value of an asset. d
The Lawyer, FRA Partner Rob Mason, and Director Gordon MacLeod. They talk about the
misuse of Fair value and the controversies it has created. As more disputes are brought up
from the uncertain economy, experts are brought are called on in fair value accounting
standards. The main topic is to differentiate between appropriate application and misuse of
fair value. There is a fine line between judgment and manipulation. There’s little judgement
needed for fair valued assets where there are similar assets with visible market prices.
However, when it comes to a unique asset it opens opportunities for manipulation. Invalid
techniques they mention include “Valuing the asset from the perspective of the company
owning the asset; Using ‘Quoted Prices’ where there is no intention and/or ability to transact
at the ‘Quoted Price;’ Discounting forecast profits, without regard to whether the asset could
be sold at the resulting value;”.
After reading the article, it seems it is not quite reasonable when prices are quoted as fair
value since the prices could be drastically different the following month or year. The practice
is set as a standard and Fair Value is an estimate not an exact number. We cannot predict the
future and value of assets. Cost accounting has more of a stand as it reports assets and
liabilities at the initial price they were exchanged for at the time of the transaction.
FAIR VALUE OR FRAUDULENT MISREPRESENTATION?
https://sfmagazine.com/wp-content/uploads/sfarchive/2012/11/FINANCIAL-REPORTING-
Another-Fair-Value-Controversy.pdf
https://www.gsb.stanford.edu/insights/charles-lee-why-fair-value-accounting-isnt-fair
Andrews, E. L. (2021, March 23). Charles Lee: Why Fair-Value Accounting Is Not Fair.
Stanford Graduate School of Business. Retrieved March 24, 2022, from
https://www.gsb.stanford.edu/insights/charles-lee-why-fair-value-accounting-isnt-fair
Andrews, E. L. (2014, July 2). Charles Lee: Why fair-value accounting is not Fair. Insights by
Stanford Business. Retrieved March 20, 2022, from
https://www.gsb.stanford.edu/insights/charles-lee-why-fair-value-accounting-isnt-fair
Andrews, E. L. (2014, July2). Charles Lee: Why Fair-Value Accounting Isn't Fair. Insights by
Stanford Business. Retrieved from https://www.gsb.stanford.edu/insight/charles-lee-why-fair-
value-accounting-isnt-fair
