Fair Value: Is It Fair Game for Critics?
Fair Value: Is It Fair Game For Critics?
The Financial Accounting Standards Board (FASB), the accounting standard setters, issued Statement of Financial Accounting Standards No. 157 Fair Value Measurements that has set off a wave of controversy. Advocates, such as investors, support the idea of financial statements showing true value of a company’s assets and liabilities. Critics, on the other hand, think this pronouncement has caused volatile results in the current inactive market, blaming it for the current financial crisis. Also, fair value measurement has relevance, but another criticism is how much reliability the relevant information can provide. The purpose of Statement of Financial Accounting Standards No. 157 Fair Value Measurements (SFAS No. 157) is to provide guidance about how entities should determine fair value estimations for financial reporting purposes. SFAS No. 157 was issued to help investors and other decision-makers understand the accuracy of the estimates of a company’s assets. Supporters of fair value accounting suggest it will offer users a clear picture of the real economic state of a company, but the change is not as simple as it sounds and there are disadvantages as well. Fair value, under Statement No. 157, is the current amount that an asset can be bought or sold, or a liability settled, between parties in a current transaction, assuming there is an active market. SFAS No. 157 clarifies the definition of fair value as: “…the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” [1]
Although there are no new requirements for using fair value, the new definition does introduce certain differences. Assets are now based on the price at which it would be sold, the exit price, instead of the price at which it would be bought. Also, SFAS No. 157 puts emphasis on fair value being market-based which could cause
The Financial Accounting Standards Board (FASB), the accounting standard setters, issued Statement of Financial Accounting Standards No. 157 Fair Value Measurements that has set off a wave of controversy. Advocates, such as investors, support the idea of financial statements showing true value of a company’s assets and liabilities. Critics, on the other hand, think this pronouncement has caused volatile results in the current inactive market, blaming it for the current financial crisis. Also, fair value measurement has relevance, but another criticism is how much reliability the relevant information can provide. The purpose of Statement of Financial Accounting Standards No. 157 Fair Value Measurements (SFAS No. 157) is to provide guidance about how entities should determine fair value estimations for financial reporting purposes. SFAS No. 157 was issued to help investors and other decision-makers understand the accuracy of the estimates of a company’s assets. Supporters of fair value accounting suggest it will offer users a clear picture of the real economic state of a company, but the change is not as simple as it sounds and there are disadvantages as well. Fair value, under Statement No. 157, is the current amount that an asset can be bought or sold, or a liability settled, between parties in a current transaction, assuming there is an active market. SFAS No. 157 clarifies the definition of fair value as: “…the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” [1]
Although there are no new requirements for using fair value, the new definition does introduce certain differences. Assets are now based on the price at which it would be sold, the exit price, instead of the price at which it would be bought. Also, SFAS No. 157 puts emphasis on fair value being market-based which could cause
References: “Fair Value Measurements,” Statement of Financial Accounting Standards No. 157 (Norwalk, Conn.: FASB, 2006) “Press Release: SEC Commences Work on Congressionally Mandated Study on Accounting Standards.” http://www.sec.gov/news/press/2008/2008-242.htm