Fair Value Accounting
What is fair value accounting?
Fair value accounting continually captures changes in asset and liability values over time.
This is a controversial approach that aims to reflect the current value of assets and liabilities more accurately, but can aggravate market swings.
Where have you heard about fair value accounting?
Following the 2008 financial crisis, fair value accounting was blamed for being a contributing factor in making the crisis worse. This lead to debates over whether fair value accounting should be suspended.
The Harvard Business Review's analysis and conclusions can be read here.
What you need to know about fair value accounting.
By continually measuring the value of assets and liabilities, fair value accounting gives balance sheets more accuracy as the value of assets and liabilities is more up to date. This type of accounting is mainly used for financial assets and liabilities as their market prices are easily accessed.
However, by continually measuring, the value will be continually changing, which creates more instability in the market.
Fair value accounting is not always relevant for example with securities that are held for a long time. It can also be affected by unreliable estimates, issues with liquidity and market inefficiency.
The International Accounting Standards Board follows the International Financial Reporting Standard (IFRS) 13, which advises how to measure fair value.