To define fair value, "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).
Fair value is great for some companies but in general, it isn't an ideal
method to calculate the value of a company's assets and liabilities
when the market is always changing. Since Covid-19 hit, many
companies have taken a HUGE hit to the value of their assets and
liabilities. For example, the housing market. Houses are being
appraised WAY over what people originally purchased their homes at
with little to no improvements made. When the bank grants a loan to
someone for 30k over what the home sold for a year ago with no
updates, eventually the market will go back down and the home will
lose value and the homeowners will be upside down on their loans if
they go to sell. This is happening with other industries as well right
now. Lumber is WAY more than it was two years ago.
"Political and business leaders in Europe and the United States say
fair value, or market to market, accounting has made matters worse
by forcing banks and other businesses to asses the value of assets at
current market rates, which have plummeted in the past year"
(McCollum, 2008). When the market is not stable, people lose or gain
value. It isn't sustainable or accurate of what the value of the asset or
liability really is.
Information that would be most valuable to management, lenders,
and investors is the most accurate and up to date information about
the assets or liabilites. What are they truly valued at given what they
were acquired for and what life is left in the asset or has been used
up.
Cooper, K. (2021, October 5). What is fair value accounting? The
Balance. Retrieved April 19, 2022,
from https://www.thebalance.com/what-is-fair-value-accounting-
5204601
McCollum, T. (2008). Fair Value Under Fire. Internal Auditor, 65(6),
13–14.
