Fair value accounting is considered an extremely controversial approach in the accounting
world. The valuation of assets based on current market value not only creates uncertainty,
since the market is ever changing, but it also leaves a large window open for fraud.
Management, Lenders, and Investors are not presented with as clear of a picture when using
Fair value accounting, because they may see fluctuations in their balance sheet related to
current market values, making it difficult to make important business decisions, due to lack of
accurate economic history, and concrete figures. d If the market value plummets, under the fair
market value approach, the existing assets on the books would sell for much less than they are
currently booked for, creating a false sense of financial stability. Especially with all of the
things going on in the world today, I can't personally see where opting to utilize fair value
accounting would be beneficial for a business.
I think that fair value accounting will always be under fire because it is quite controversial. It
may be perfectly acceptable for one company to use, but highly unacceptable for another
company to use, depending on the nature of their business and the assets they own. There are
constant changes in the market, as we are seeing with the over-inflated values of homes and
used cars right now. I feel this could be a bad thing when the market stabilizes again.
Hopefully, it's not as bad as the 2008 financial crisis was.
For a company to have to change their books to account for changes in the market is also not
beneficial. "Obtaining reliable information relevant to fair value is one of the biggest
challenges organizations and auditors face in the current market. The lack of information
increases estimation uncertainty and raises material misstatement risk" (McCollum, 2008). I
agree with the author that one uniform method should be used by all, so management and
investors feel confident in the information that is being presented within the values reported
in the financial statements.
In the article, the author states the objectives for a uniform method should be presented in a
manner that:
Portrays a cohesive financial picture
Disaggregates information so that it is useful in predicting cash flows in the future
Helps users assess liquidity and financial flexibility
I am just not sure that fair value has a place in this uniform method. Financial accounting
portrays the business in a better manner in my opinion. In an ever-changing market, it is hard
to guarantee the reliability of the financials when assets are constantly changing in value,
which may or may not really help the business that uses fair value accounting methods.
Whereas, financial accounting is straight-forward and more reliable in the number’s aspect.
GAAP standards state that financial information should be reliable and relevant which cannot
be said using the fair value method. The most emphasized point in the article, “Fair Value
Under Fire,” was that fair value increases estimation uncertainty because of the lack of
relevant information that is needed. If we just stopped using fair value our company would be
more affected, so we should determine any patterns of fluctuations between assets and
liabilities. Using previous financial statements, we would be able to make predictions to
lessen the impact of the estimation uncertainty.
The present market and the intent or purpose should be considered when it comes to fair value
accounting for a company. In a previous article I read by The Lawyer, FRA Partner Rob
Mason, and Director Gordon MacLeod. It talks about the misuse of Fair Value and the
disagreements it can create. They talk about the misuse of fair value as there is a very fine line
between judgement and manipulation. When there are visible market prices for similar assets,
very little judgement is needed. There are always opportunities for manipulation and intent
fair value when it comes to certain assets.
Information that would be most valuable to management, lenders, and investors would be
their financial reports and if they have most up to date information regarding the market and
fair value knowledge. The future market is unknown, and companies face many challenges as
they must have full confidence in their decisions.
Fair Value Accounting some thought and here is what I have come to. I am sure as I learn
more information, I will be able to form more opinions, but here is what I believe now: Fair
Value is great in theory, to ensure that if the value of an asset or investment goes up or down,
that is shown in the accounting process. I think that if done properly, it could be a good way
of doing things, however, I believe that the way that these numbers are recorded opens a lot of
room for error or corruption.
There are many things to be considered regarding fair value accounting, namely, how do the
accounting records need to be recorded? Is the method what is useful in the company and
what they do? The best decision for a company is how they can ensure the most straight-
forward, concise way to relay the financial information, for management, as well as, for
investors.
The most valuable thing for management, lenders, and investors as it relates to fair value is
the knowledge that the info is current, up to date, and accurate. In fair value, having
something in the market to compare to ensure an actual “fair value” estimate. The fear is that
the system will be taken advantage of and used to maximize profits while not showing the
current information that would lead to inaccurate reporting of information.
It could work and would be a valuable resource for valuing assets and investments, however it
is a complicated process that could lead to some major problems.
Fair value accounting is the method that offers accurate asset as well as liability valuation on
a continuous basis to the users of an organization. In the financial context, fair value is of
paramount importance since it can help companies to measure and report specific assets and
liabilities based on the estimated or actual fair market price. Some of the elements that must
be taken into consideration in fair value accounting include payments made in cash, as well as
deferred cash. However, the chief consideration is that the current value asset must be used
while making the calculations and computations. A company must adopt the fair value
accounting method while consolidating a subsidiary entity’s statements with that of the parent
organization.
The most valuable information for the management, lenders, and investors in relation to the
fair value concept is the value of assets and the overall accounting information and financial
figures that have been captured by following the specific concept. Since the current value is
taken into consideration, the information that is ultimately made available to diverse
stakeholders is accurate and relevant. According to Werbin, the fair value accounting method
must be adopted while working on the financial reporting aspects since it can help in
addressing the deficiencies that exist relating to the conventional accounting method (Wang
& Werbin, 2018, p. 7). Fair value is of high relevance for the executive and management team
of an organization since it can aid in the decision-making process (McCollum, 2008). By
adopting the fair value method in the reporting approach, it is possible to present a cohesive
and integrated financial picture of an organization and help users such as investors to evaluate
the liquidity and the financial flexibility of the business entity. The rich insight can be of high
value since it can help to make important decisions in the organizational context.
Fair value accounting is highly controversial in the accounting world, and for good reason.
Many believe it to be a contributing factor to the global financial crisis, and it is made worse
by banks being forced to value assets at current, rapidly decreasing market values. Fair value
accounting lacks information, which increases uncertainty and increases the risk of material
misstatement. This creates issues during financial reporting. I agree with the article, where it
was stated that there are too many varying methods of financial reporting; to ensure
consistency, there should be a uniform method.
When determining whether fair value accounting is the right choice for a company, the
current market should be considered first. Assets can be grossly misvalued if the economic
state is out of whack; the current housing market is a great example of that. It would be useful
for management, lenders, and investors for the historical value of an asset. This provides a
more accurate, well-rounded picture of an asset’s worth since its acquisition.
the article it states that one of the biggest challenges faced by Fair Value is obtaining relevant
information. And that this lack of information increases estimation uncertainty. I believe that
if there was a more uniformed way to gather this information that challenge would dimmish.
GAAP states that the financial information provided to its users should be relevant, reliable,
and useful but with all the guessing/estimation that goes with fair value users are left unsure
of the correct position to take. Abruptly taking away or stopping the use of fair value would
do more harm than good like the article describes and I get that the accounting world would
like to bridge the gap between the way the US and the rest of the world approaches
accounting but to lessen the impact purposeful and measured steps needs to be taken. For
example, finding a balance between using cost accounting and fair value accounting while
also working to find an approach that incorporates a mix of both methods that is used across
the board.
For managers, lenders, and investors to make important decisions about a company, its value
and whether it's worth investing in they must be able to trust and have full confidence in the
financial statements they review. But how can they when one company that uses fair value
assess that an asset with a value that is not known is worth a certain amount and another
company values the same asset at a different amount? In this I agree with the article that a
new way of presenting the financial statement would be most beneficial. Having one common
high-quality standard for providing this information would increase the comparability of
companies and would allow its users to be more confident in information they are given as it
would be clear, concise, and consistent.
Fair value accounting is defined as “the practice of calculating the value of a company’s
assets and liabilities based on the current market value” (Cooper, 2021). There are many
controversies with this method of accounting though. While it does offer a value that is at the
highest price in the current market value, this does not help businesses when the market is
continuously fluctuating.
As explained in the Fair Market Value Under Fire article by McCollum, during 2008 there
was a global financial crisis, and this forced banks and other businesses to assess assets at a
value that had severely decreased during the current market value. However, there were many
that argued that this was indeed a beneficial accounting method because it provided a realistic
assessment of assets value.
This makes it hard for businesses though with products that fluctuate multiple times a year
though. It gives irrational data pertaining to long-term and short-term gains or losses (Gaille,
2015). The argument though is that this shows a realistic picture to investors and lenders. It
gives them an accurate picture of how these businesses fluctuate in value. However, you
never know when aspects in the economy will change because it happens all the time. I
believe it is important for businesses, lenders, investors etc. to be aware of the fluctuations
that are going on with the assets that a company holds.
The possible motives for individuals from financial services to support fair value accounting
are complex and numerous. First, investment banks and asset managers are accustomed to
using the fair value in their day-to-day business to prepare in-house balance sheets for risk-
management purposes. This familiarity with the method may have shaped their preferences in
public financial reporting standards. Second, GAAP profits defined on a fair value basis
rather than a historical cost basis accelerate the recognition of gains, particularly in periods of
rising asset prices. To the extent that managerial bonuses are based on GAAP profit numbers,
financial services executives reap richer rewards in a fair value regime. Third, the use of fair
value to determine impairment of goodwill from M&A activity (instead of the historical cost
approach of amortizing goodwill) imposes, on average, less drag on earnings, thus potentially
boosting M&A activity—a major revenue source for investment banks. We should consider
in fair value accounting：
References:
Cooper, K. (2021, October 5). What is fair value accounting? The Balance. Retrieved April
21, 2022, from https://www.thebalance.com/what-is-fair-value-accounting-5204601
Gaille, B. (2015, June 9). 8 Fair Value Accounting Pros and Cons. BrandonGaille.com.
Retrieved April 21, 2022, from https://brandongaille.com/8-fair-value-accounting-pros-and-
cons/
McCollum, T. (2008). Fair Value Under Fire. Internal Auditor, 65(6), 13–14.
Mccollum, T. (2008). Fair value under fire: new objectives for presenting financial statements
management overlooks HR risks changing priorities for financial firms incentive cutbacks
raise audit concerns. Internal Auditor, 65(6), 13-15.
Wang, H., & Werbin, E. M. (2018). The compensation of CEOs and the relevance of fair
value accounting. Contaduría y administración, 63(SPE2), 1014-1032.
FAIR VALUE OR FRAUDULENT MISREPRESENTATION?
McCollum, T. Internal Auditor. Dec2008, Vol. 65 Issue 6, p13-14. 2p. , Database: Business
Source Complete
02, J., | by Edmund L. Andrews, & Andrews, E. L. (2014, July 2). Charles Lee: Why fair-
value accounting isn't Fair. Stanford Graduate School of Business. Retrieved from
https://www.gsb.stanford.edu/insights/charles-lee-why-fair-value-accounting-isnt-fair
