I am going to start this discussion off with a quote from one of the
articles that I found concerning this issue. This was said by Charles
Lee, an Accounting professor at Stanford: "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."
Professors Lee's argument, and I agree, is that accounting should give
an accurate representation of what has happened, not force
stakeholders to try to predict what will happen. Fair value accounting
requires forecasts on what the future returns will be. This is great if a
company is coming out of a slump, and seeing a lot of economic
prosperity, but not so great for companies that have surged, and are
now settling into a more realistic cycle. As written in the article, “The
market has come to rely on accountants as the keepers of economic
history,” Lee declares. “As an investor, when I turn to financial
statements, I want a trustworthy and interpretable account of what
took place. As soon as we start to anticipate future exchanges, we
are in a world of speculation. And unfortunately, given dysfunctional
managerial incentives and other moral hazard problems, it is often a
world of fiction.” In other words, this could give companies the
opportunity to "cook the books" and make future forecasts look
much more rosy than that they actually are. This, in turn, can mislead
investors, who rely on financial statements to show an accurate
record of the company's financial stability. Yes, investors are
interested in a company's future potential, but it is up to them to
make those decisions, not up to financial statements to say what
could have been, what may have been, and not what actually is.
https://www.gsb.stanford.edu/insights/charles-lee-why-fair-value-
accounting-isnt-fair
