Moving towards Fair Value Accounting
In the past, historical cost measures were mainly used for reporting as they are reliable. However, historical cost is only relevant upon acquiring the asset and becomes irrelevant as time passes. On the other hand, fair value-based reporting, which accounts for changes in fair values, can produce balance sheet figures that provide a better reflection of the company’s value. This is also why accounting bodies are moving towards fair value accounting (FVA).
One of the evident standards is the FASB Standard (SFAS) 157, ‘Fair Value Measurements’, to establish clear, consistent guidelines for fair values measurements and disclosures. SFAS No. 133, ‘Accounting for Derivative Instruments’ and IAS 39 also require entities to account for changes of fair value of derivatives depending on its use. SFAS No. 159, ‘Fair Value Option for Financial Assets/ Liabilities was adopted on February 07 to allow financial institutions to elect specific HTM and AFS securities to be treated similarly to trading securities, i.e. to adjust to fair value. Impaired assets are also required to be written down to fair value according to IAS 36, SFAS No. 142, ‘Goodwill and Other Intangible Assets” and SFAS No. 144, ‘Accounting for Impairment or Disposal of Long-lived Assets.’ Lastly, just recently on 29 May 08, FASB issued an exposure draft on the conceptual framework for financial reporting to support fair value measurement by placing emphasis on the balance sheet rather than income statement. All these initiatives clearly show the increasing importance of fair value as an accounting measurement attribute.
There are also empirical evidences from research studies to show that FVA is relevant and useful to investors. Most studies aim to show a positive corr ...