Should We Use Fair-Value Accounting or Historical Cost Accouting? Essay Example
Dear SEC Commissioners,
As a professional accountant for many years now, I have seen how accounting principles have changed, and is currently changing through time. I understand the challenges that are involved, as well as the issues that may arise when making changes. The changes that are made should always be in the best interest of following the US GAAP Conceptual Framework. That is why I always like to get involved and do my share of getting my opinion out there in hopes of making the best decision.
I remember in 1994, there was an issue on how to account for employee stock options. During this debate, I wrote a letter to the SEC Commissioners to state my opinions and reasons on why I thought stock options should be measured as an expense on the income statement. To this day, it is now a rule to do so.
Currently, I am most interested on the hot debate over “fair-value accounting” vs. “historical cost.” This debate causes trouble to the SFAC #2 Qualitative Characteristics of Accounting Information. In fact, this debate is really over “relevance” vs. “reliability”.
Fair-value accounting is argued to be relevant, whereas historical cost accounting is argued to be reliable.
Fair -Value Accounting
Pros: Fair-value accounting provides relevant information, capable of making a difference in a decision. It is relevant because it offers: 1. Predictive Value- Fair-value is more relevant to investors and creditors as it reflects the current prices of assets, thus capturing a better exposure to the future. 2. Feedback Value- Relevant information allows the firm to conform or rethink their decisions. 3. Timeliness- Decision making is based on all the information available to investors and creditors. Fair-value accounting reports changes in value and components of that change to date, so all the information needed will be readily available, in time to make the right
As a professional accountant for many years now, I have seen how accounting principles have changed, and is currently changing through time. I understand the challenges that are involved, as well as the issues that may arise when making changes. The changes that are made should always be in the best interest of following the US GAAP Conceptual Framework. That is why I always like to get involved and do my share of getting my opinion out there in hopes of making the best decision.
I remember in 1994, there was an issue on how to account for employee stock options. During this debate, I wrote a letter to the SEC Commissioners to state my opinions and reasons on why I thought stock options should be measured as an expense on the income statement. To this day, it is now a rule to do so.
Currently, I am most interested on the hot debate over “fair-value accounting” vs. “historical cost.” This debate causes trouble to the SFAC #2 Qualitative Characteristics of Accounting Information. In fact, this debate is really over “relevance” vs. “reliability”.
Fair-value accounting is argued to be relevant, whereas historical cost accounting is argued to be reliable.
Fair -Value Accounting
Pros: Fair-value accounting provides relevant information, capable of making a difference in a decision. It is relevant because it offers: 1. Predictive Value- Fair-value is more relevant to investors and creditors as it reflects the current prices of assets, thus capturing a better exposure to the future. 2. Feedback Value- Relevant information allows the firm to conform or rethink their decisions. 3. Timeliness- Decision making is based on all the information available to investors and creditors. Fair-value accounting reports changes in value and components of that change to date, so all the information needed will be readily available, in time to make the right