Fair Value Accounting Essay

Custom Student Mr. Teacher ENG 1001-04 7 August 2016

Fair Value Accounting

This paper attempts to answer the question: “Is it reasonable to blame fair value accounting for any of the Wall Street mess? ” This paper in effect settle whether the use of fair value accounting by listed companies in the major stock exchanges in the US, particularly those found in Wall Street, which the caused fall in prices of the stocks of these companies, was required of companies without justification; hence, it should be blamed for the mess. 2. Analysis and Discussion

Any mess in the Wall Street is defined for this paper as one causing the stock prices of companies list in major stock exchanges of the US to fall and that it resulted to losses to investors. To have reasonable basis to blame fair value accounting for any Wall Street mess, does not simply mean that fair value accounting was the necessary cause of fall in the prices of corporate stocks but that the requirement of fair value accounting must not be fair. The question that must be decided therefore is whether fair value accounting is fair as basis of valuing corporate assets, liabilities and equity.

A situation or condition is fair if it gives what is due to a person. If the concept of fair value is used in the context of an asset purchased or liability assumed in business, fair value implies that said asset or liability must neither be overpriced nor underpriced whether perceived or otherwise. The law of economics would have fair value as one representing that market price or that equilibrium price of a product or service (Samuelson and Nordhaus, 1992) which is also the value of something from a seller that is not forced to sell or from a buyer that is not forced to buy.

Investors, creditors, and other persons expect to be treated fairly as they enter into transactions in terms of value that they will give in exchange to what they will receive. To illustrate, a person or company planning to invest in stocks will appreciate what is fair if the said person or company will earn sufficient return above cost of capital in exchange for the risks being faced by such person or company (Brigham, 2002).

To have what is fair, the investors must know the accurate and reliable information about of the company to guide them about their chances of gaining or losing money. These users deserve to have the opportunity to have the true or accurate value of asset, liability or equity being dealt with in a business transaction as basis for valuing the stocks that they will invest with. Financial reports prepared companies, as guided by Financial Accounting Standards Board (FASB) accounting standard under fair value accounting, will provide these users the opportunity.

Specifically, fair value accounting was made pursuant to FAS 157 as issued by US FASB for companies to reflect the accounting information on the real values of assets, liabilities and equity in the balance sheet as contrasted with presenting the information using the historical cost accounting (Meigs and Meigs, 1995). A group of analysts and portfolio managers actually formed part of those who influenced the passage of the fair value accounting for more relevant information in decision making (Chasan, 2008).

Under FAS 157 defines fair value is defined as the price that would be received “to sell an asset or paid to transfer a liability in an orderly transaction between market participants in a measurement date” (Sortur, 2007). If companies have restated their financial statements from historical cost accounting to fair value accounting, the purpose was laudable since in simple terms, the intention is to make the information more relevant, more accurate and more reliable for decision makers.

If stockholders got affected in terms of lower price of stocks as a result of restatement of financial statements, the error was when they were made the purchase of their investments under the historical cost accounting. Since fair value accounting may also increase the value of the stocks if fair value is higher than cost, it could not be asserted that it should be blamed for the fall of prices but not praised for increased in price increase of stock prices. 3. Conclusion

It can be concluded that it is not reasonable to blame fair value accounting for any of the Wall Street mess since fair value accounting is only bringing out what is fair to investors who deserved to know accurate and reliable information for making decisions. Fair value accounting is an accounting standard made by FASB that was made as a requirement from the corporation which must present truthful and reliable information for investors. As an alternative to historical value of accounting, fair value is expected to have present company more reliable information about their assets and liabilities in accordance with market prices.

Its implementation may have caused companies to present their financial information and if the information presented were more truthful, the consequence of causing problems to companies should only be secondary to the purpose of providing objective and more reliable financial information. Any fall in stock prices from Wall Street may in fact have been caused by companies having to restate their financial statement pursuant to fair value accounting but the intention was to reflect to truer value of assets and liabilities of the corporations whose stocks got affected.

Losers should not blame fair value accounting since the latter is just a guide to have more truthful information and they would have a change also of higher stock prices under fair value if warranted by market forces. If there was no basis for such more truthful information, then restatements of financial information using fair value would not have been made in the first place. If buyers and sellers are not being compelled to complete their transaction, fair value accounting must be held as fair and cannot be blamed for the mess.

In fact, fair value accounting should have been introduced years ago for it could have saved some abuse and a lot of problems (Rees-Mogg, 2007). References: Brigham and Houston (2002), Introduction to Financial Management, Thomson-South Western, USA, 2002 Chasan, Emily (2008), Is fair value accounting really fair? {www document} URL, http://www. reuters. com/article/reutersEdge/idUSN1546484120080226, Accessed November 21, 2008 Meigs and Meigs (1995), Financial Accounting, McGraw-Hill, Inc, London, UK

Rees-Mogg (2007), Why FAS 157 strikes dread into bankers, {www document} URL http://www. timesonline. co. uk/tol/comment/columnists/william_rees_mogg/article2852547. ece, Accessed November 21, 2008. Samuelson and Nordhaus (1992), Economics, McGraw-Hill, Inc, London, UK Sortur (2007) Fair Value Measurement, The Chartered Accountant {www document} URL, http://icai. org/resource_file/96471564-1574. pdf, Accessed November 21, 2008

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