I feel 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.
Reference List:
Andrews, E. L. (2014, July 2). Charles Lee: Why fair-value accounting
isn't Fair. Insights by Stanford Business. Retrieved March 20, 2022,
from https://www.gsb.stanford.edu/insights/charles-lee-why-fair-
value-accounting-isnt-fair
