the article The Case for Fair Value Accounting by Edmund L. Andrews. In reviewing the
article, the statement that I kept in mind was What’s the purpose of accounting? Well
according to another article “The purpose of accounting” its purpose is to accumulate and
report on financial information about the performance, financial position, and cash flows of a
business. This information is then used to reach decisions about how to manage the
business, or invest in it, or lend money to it (Bragg, 2022). With that I mind, as I read The
Case for Fair Value Accounting, I could see the point being made., If the purpose of
accounting is to report on financial information and use that information to make decisions
about a business, whether it's to lend money or invest, wouldn’t you want the most up-to-date
information?
The interviewee of this article Mary E. Barth talks about too much focus being put on historical
costs, how misleading this can be, and how tenuous the link to original cost is, so much so
that it’s almost an accident when historical-cost accounting practices correlate with a
company’s underlying value. With one of the biggest objections to fair value accounting
approach is that it's based on estimates, rather than “hard facts,” and those estimates could
easily be erroneous or intentionally manipulated. I would have to agree with Ms. Barth’s
rebuttal to this when she says that anything can be “massaged” and “manipulated” to fit the
direction that management wants to go. So, to me, the argument that fair value doesn’t
present “hard facts” and can easily be misleading doesn’t work. I couldn’t tell you how many
times I read in our book that we use estimates for one situation or the other because there’s
no way of getting the actual figures.
As a user of financial statements, I would have to go with fair value because it’s more
representative of the value of an asset that historical costs. Fair value is tested annually for
impairments, while historical cost is not tested for impairment loss and remains the same
throughout the life of the asset. And if the time value of money tells us anything, it's that the
value of a dollar today is not the same as the value of that dollar 5, 10 or 20 years from now.
Article reference: Edmund L. Andrews, Andrews, E. L., Barth, M. E., & Landsman, W. R.
(2019, May 16).,The case for Fair Value Accounting. Stanford Graduate School of Business.
Retrieved from https://www.gsb.stanford.edu/insights/case-fair-value-accounting
Bragg, S. (2022, March 15).,The purpose of accounting. AccountingTools. Retrieved from
https://www.accountingtools.com/articles/what-is-the-purpose-of-accounting.html
