Hi, everyone, I hope you are having a good week. My week is going
well so far, with my family taking a short vacation. I am having to
plan for my study time a little more strategically, as my kids are
making it difficult in our single room hotel, but it has been fun.
For this week’s discussion on Fair Value Accounting, I found a couple
of articles. The first is from UWorld 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 of the every day 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.
