EXPERT Insight
Why It's Not Fair to Blame Fair Value 
Financial Reporting Debate
Barth, Mary E.
Date: Fourth Quarter 2010
Tags: financial reporting, accounting standard, fair value, historical cost, estimation error
The debate surrounding the financial reporting measurement approach known as fair value was already in full swing by the time the recent economic crisis hit. That event only served to add fuel to the fire, as some critics charged that fair value measures of heavily discounted assets during an exceptional period of distress sales actually made the situation worse. The author questions this analysis. Far from being the culprit, she argues, fair value is a rather robust measurement approach, which embodies several core principles underpinning the accounting framework. As well as highlighting the relative merits of fair value, the author responds to the chief concerns put forward by the critics, showing that whether one holds up estimation error, holding gains and losses, earnings volatility, stewardship or diligence, fair value proves its worth. In many cases, the old favorite of historical cost-based measures leaves much to be desired. Until the International Accounting Standards Board (IASB) and the United States’ Financial Accounting Standards Board (FASB) finalize their joint conceptual framework project, this article helps to clarify some of the contentious issues that continue to dog the profession. Rather than battling against it, accounting experts would be better off devoting their energies toward making sure that fair value is used in the most effective way possible.
Examples Cited:
Examines the situation of mortgage defaults and asset sales by banks, which precipitated the financial crisis.
Research Basis:
The author sifts through the large body of research that exists on the subject of fair value, and draws upon her own award-winning research on financial accounting and reporting topics.
About the Author:
Mary E. Barth is the Joan E. Horngren Professor of Accounting at Stanford University’s Graduate School of Business.
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