Fair Value Accounting

Years ago, accounting standard setters jettisoned an age-old accounting rule – historical cost accounting. In an attempt to report values that are presumably more relevant, standard setters set about fair value accounting. Historical cost is fact; fair value is an estimate and therefore, bound to be based on the assumptions that underlie the estimate. If fair value is market value, then it is necessarily volatile, as markets always are.

We wrote this quite sometime back: It is our strong view that the experiment with value accounting that is going on for last several years will fail, and ultimately, we will come back to historical cost accounting, possibly with a column added containing fair values. On 26th May 2010, the FASB issued an exposure draft of new accounting rules for financial instruments that apparently brings amortized cost accounting back, side by side with fair values. So, the prediction has not taken a long time to come true.

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