Fair Value Accounting

What is Fair Value? Definition.

Fair Value (FV) is an accounting term, originally defined by the SEC.

Under GAAP, the FV of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties, other than in a liquidation. On the other side of the balance sheet, the FV  of a liability is the amount at which that liability could be incurred or settled in a current transaction between willing parties, other than in a liquidation.
If available, a quoted market price in an active market is the best evidence of FV and should be used as the basis for the measurement. If a quoted market price is not available, preparers should make an estimate of FV using the best information available in the circumstances. In many circumstances, quoted market prices are unavailable. As a result, difficulties occur when making estimates of fair value.
 

Why Fair Value accounting? Relevance.

In today's dynamic and volatile markets, whether it is to buy or sell, what people want to know is what an asset is worth today.

Accounting research supports that assertion. The FASB, after extensive discussions, has concluded that FV is the most relevant measure for financial instruments. In its deliberations of Statement 133, the FASB revisited that issue and again renewed its commitment to eventually measuring all financial instruments at fair value.

Fair value accounting provides more transparency than historical cost based measurements. Maybe, if companies in the United States and Asia had measured all financial instruments at fair value, regulators, depositors, and investors could have achieved greater regulatory and market discipline and avoided some of the losses that investors and taxpayers have had to pay during previous downturns in the economy.

Compare also: Economic Value Added  |  EBITDA  |  Earnings per Share  |  FAQ: Accounting relevant for VBM?  |  Economic Margin

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