One Size Does Not Fit All Essay

3044 WordsMay 16, 201313 Pages
Fair Value Option: Adding relevance to decision-makers or manipulation capabilities to management? One of the most hotly debated topics in the accounting field is on the Fair Value Option of Accounting. The Financial Accounting Standards Board (FASB) defines ‘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 (FASB Glossary). This debate has gone on since long before the FASB released a standard on the subject in the early 1990’s. Critics of Fair Value have argued for decades that fair value negatively affects reliability and have even gone as far as blaming the most recent financial crisis and meltdown of banks on Fair Value Accounting. However, proponents of Fair Value Accounting argue that the current system does not take fair value far enough and fair value provides much more transparency to financial statement users, meaning that financial crises of the past few decades may have been recognized earlier and corrective action could have been taken much sooner. This paper looks at both the critics and proponents of Fair Value Accounting and proposes some recommendations for future actions. A Brief History on Fair Value Accounting and the Fair Value Option Fair Value accounting has been talked about since at least 1963 in G. Edward Philips “The Accretion Concept of Accounting,” where he defined accretion income as, “the increase in economic power as measured by changes in the market value of assets,” (Emerson, Karim, Rutledge 2010, 78-79). Emerson et al. believe that “this is fair value accounting, which is also known as value relevance accounting,” (Emerson, Karim, Rutledge 2010, 79). The topic was debated over the course of three decades and finally in 1993 the FASB issued SFAS 115: Accounting for Certain Investments in Debt and

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