Fair value accounting has long been argued in the financial
community whether it should be used or not. Fair value accounting is
essentially what price can be put on an asset based around what the
current economic market is like at that time. For example a bank
could buy a home during a really low costing housing market time.
That bank could then hold onto that asset and wait for the market to
rise dramatically and then sell at an absolute high. Investors will see
these profits being made and not realize the bank made this
transaction when prices were set very low and make potentially bad
investment decisions. The more traditional way is known as cost
accounting. This keeps prices more at historic rates and shows what
price the asset was bought at and what price it was sold for. This is a
more clear view to an investor of what these deals look like and
helps them decide if it is smart to invest. It is speculated that
companies using fair value accounting were taking these large profits
and using some of it as bonuses to themselves or the company and is
also linked to the economic crash in 2008. It is very valuable to
investors to see what price things were bought at and how
successful a company can really be while being transparent. All of
this must be considered before deciding to invest in a company.
https://hbr.org/2013/03/why-fair-value-is-the-rule
