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Fair Values Good, Historical Costs Bad - Essay Example

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Fair Values Good, Historical Costs Bad

Accountants, not known for devising convenient mnemonics beyond “Debit Left, Credit Right”, have in the last two years or so found a reason to devise a new one as in our title. Why so? Are accountants finally rising up in arms against the wave of bad publicity generated by the recent scandals of the profession? Have the bean-counters tired of numbers? What in the balance sheet’s name is happening? The simple reason for the new mantra is that the accounting profession has decided on a new set of standards for the valuation of assets. Perhaps never before in accounting history has an issue generated such controversy as the debate between fair value and historical cost, which is reaching mythic proportions as a battle between good and evil. The accounting profession is one of the pillars of capitalism, a great invention of the modern era because it allows for transparency, fairness, and trust in the conduct of business (Johnson, 1975). Without accounting standards, it would have been impossible for the world of business to have gone as far as it has, simply because we would not have many of the aspects of business that we now take for granted. Valuation of corporate shares, borrowing and lending of funds, capitalisation of assets, and even pricing of products and services would have been problematic, as it was in the early days of business when the words caveat emptor (Buyer Beware!) was the norm. In addition, it is easier to calculate profit and loss and to price risk because accountants have agreed on generally accepted accounting practice.
Investors are better informed, owners of corporations can sleep better at night, and millions of workers can get instant feedback on their collective performance thanks to the accounting standards that help establish share prices, cash flows, and liquidity, giving each stakeholder a clearer picture of its position.
Accounting reports have come a long way in the last hundred years as to report the true position of a company's accounts, but as recent events have made clear, notably the scandals associated with formerly high-flying companies Enron and WorldCom in the U.S., accounting standards need to be continuously and carefully defined and updated to temper every company's considerable discretion in calculating profits and deciding what to show on the balance sheet (Brealey and Myers, 1998, p. 776).
Two organisations have been instrumental in performing the painstaking work of coordinating the development of accounting standards that apply to most companies doing business all over the world: the Financial Accounting Standards Board (FASB) of the U.S. and the International Accounting Standards Board (IASB) of the U.K. Their missions are similar, which is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information (FASB, 2006).
Since 1984, the IASB has been working on the issue of valuation of financial instruments such as options and derivatives, but it was only in 2001, shortly after the collapse of some companies and the dot-com crash, when a new accounting standard called IAS 39 was approved, subsequently adopted by FASB, and became part of the International Financial Reporting Standards (IFRS) for implementation in January 2005 (Deloitte, 2006).
Dawn of a New Era
Traditionally, companies measure their assets and liabilities at historical cost, depreciating or amortising them over their useful lives. The historical cost is the amount paid when the asset was purchased or the liability incurred. Accountants would estimate the useful life of the asset and ...Show more

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The accounting profession is one of the pillars of capitalism, a great invention of the modern era because it allows for transparency, fairness, and trust in the conduct of business (Johnson, 1975)…
Author : champlinboris
Fair Values Good, Historical Costs Bad essay example
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