While researching articles to use this week, I saw how controversial
fair value accounting has been in prior years to current.
The article I chose to use for this week's discussion can be found
here: https://accounting.uworld.com/blog/cpa-review/fair-value-
under-fire/
. "Fair-value is a method of accounting for assets, based
on the value of that asset in its current market. This takes the place
of the previously used method known as historic value accounting,
which based the value of an asset on the price it was originally
purchased at." The fair value method just doesn't seem "fair",
especially if there is no market to value certain items to.
When the 2007-2008 financial crisis hit, lenders were loaning money
to people for houses they could not afford based on their income.
The housing prices were inflated as well. When it all came crashing
down, banks and other lending institutions were left with
foreclosures on houses that were nowhere near the value of the loan
they issued, and many people who kept their houses were left owing
more on their mortgage than their house was worth. This made
investors lose confidence and pull their assets out of the market.
"Firms were forced to liquidate these Level 3’s at a time when there
was simply no model to reflect fair market value. The lack of
confidence reached near panic levels as banks and financial
institutions stopped lending funds to one another, after sustaining
staggering losses due to the plummeting value of what many once
thought of as a sure thing." Because of the investors pulling their
assets from the market, many people lost a lot of money in various
investments and the stock market as well. It has taken quite a while
to dig out of that hole, and now we are seeing inflated prices again
on used cars, houses, and gas prices. All things that will take a serious
hit when the market stabilizes again.
I agree with the author's assessment of fair value accounting. The
general public should not be left holding the bag when big
corporations make investing mistakes. The corporations need to be
held accountable and learn from their mistakes, without bailouts
from the government, who in turn, taxes the people who lost money
because of the corporations' failure in the first place. Cost
accounting makes more sense to me, it brings accuracy and stability
to the table. Sure, an item may be worth more or less once it's been
fully depreciated, but at least it's been done properly without the
inaccuracies of fair value accounting where there may or may not be
stability in the current market.
