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Fair Value Accounting

The Financial Accounting Standards Board (FASB) has been requiring some fair value reporting as it allows for more transparency than reporting using historical costs.

What do you think will be the impact to investors as the FASB requires all assets and liabilities to be presented at fair value?

Will this make financial statements easier or harder to understand? Will it improve comparability across companies?

Please discuss.

Solution Preview

Attached is a few words in a Word Document. Included is a second document with a little more discussion.

Historical costs are static costs that are known, fair value reporting contends that all assets are in fact in a market of some kind and that to truly reflect the value of a company that the assets should be reported at fair value. Investors are interested in what the future earnings of a company will be, not what was spent ten years ago on a piece of machinery. Investors appear to be able to make better decisions if the information they receive is up to date. In the worst case, the investor will have some idea as to what will happen if the company has to be put on the auction block. In the best case the investor will be able to have an idea about the ability of the company to produce a long profit, dividends, and increase in the value of the stock.

The impact of historical costs versus fair values on the financial statements will be somewhat a mixed bag. The assets will probably be revalued either higher or lower. The liabilities will be restated either higher or lower. These restatements will impact the balance sheet either negatively or positively, it will influence decision makers inside and outside the company. It should not make the statements either, harder or easier, only different.

What about comparability? It probably will be only slightly improved. The statements can only report cold hard known facts. The fact that everyone has to report the assets and liabilities at market should improve the ability to take two companies and set them side by side to examine, and make a more rational decision. Rational decision making is what the FASB is attempting with Fair Value reporting.

Fair Value or Historical Value

Is use of historical value outdated? Are accountants more accurate when using Fair Value? Why many argue that historical costs should no longer be used in accounting because they are not relevant? Why others argue that departing from historical cost introduces too much subjectivity into accounting?

Historical costs are useful measures of items that fluctuate in value in a ...

Solution Summary

This solution is a discussion of the impact of Fair Value Accounting prescribed by the Financial Accounting Standards Board on the interpretation of financial statements by the investing community.