This paper attempts to reply the inquiries: Is Fair Value Fair? In so replying the inquiry there is a demand to find whether the usage of just value accurately portray the value underlying fiscal and economic minutess ; to find whether there is footing to hold one cosmopolitan criterion of valuing the assets and duties of all houses ; to happen out whether accounting criterions would let for both historical and just value and still bring forth meaningful information for determination devising ; and set up one is more of import between relevance and dependability and whether one’s the importance each depend upon the fiscal user.

2. Analysis and Discussion 2. 1 What is meant by being just? To be just agencies giving what is due to a individual. If applied to an plus purchased or liability assumed in concern. just value would merely intend that said plus or liability is neither overpriced nor underpriced as a affair of perceptual experience. Under the jurisprudence of economic sciences. just value would mention to that market monetary value which is approximated by the equilibrium monetary value of a thing or good. which is the value of the something from a marketer that is non forced to sell or from a purchaser that is non forced to purchase.

In a concern dealing there are ever are investors. creditors. and other individuals who must acquire their due in minutess that they will come in into. An investor will cognize what is just if the individual or entity will gain merely plenty return above cost of capital and in exchange for the hazard that such individual or entity is taking. The same must be true with a creditor that the individual must besides acquire paid on clip on his recognition plus a sufficient return for the hazard in signifier of involvement and punishments.

In footings of sing the corporation as a concern entity. what is just to it is what will let it to hold a sufficient return for the hazard that it is taking above its cost of making concern or cost of capital. To get at what is just the investors and creditors who are called users of fiscal information. these users must cognize the true or accurate information about of the company so that they will cognize whether they are traveling to gain or lose and do the necessary determination whether they will sell. purchase or keep to their investings.

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In other words. to hold the opportunity of being treated reasonably from a dealing. one must hold the chance to hold the true or accurate value of plus or liability being dealt with in a concern dealing. The chance is therefore usually supplied by fiscal studies prepared by companies and which are made public.

It is in these fiscal studies where values whether carnival or historical are reported in conformity with prescribed accounting criterions that may come from the Financial Accounting Standards Board ( FASB ) in the instance of US companies and IFRS in instance of companies runing in the European Union and in other states which have adopted the IAS or IFRS. Fair value accounting was made pursuant to FAS 157 as issued by US FASB for companies to reflect the accounting information on how much are the existent values of assets. liabilities and equity in the balance sheet as contrasted with showing the information utilizing the historical cost accounting.

The intent of FAS 157 so was built on a model whereby fiscal users are given the opportunity about the true province or just value of assets. liabilities and equity for determination doing under the feeling that things will be just to users of fiscal information about a company. Incidentally. FAS 157 defines just value about really closely to what was discussed and analyzed so far. It is the monetary value that would be received “to sell an plus or paid to reassign a liability in an orderly dealing between market participants in a measuring date” ( Sortur. 2007 ) . 2.

2 Does the usage of just value accurately portray the value underlying fiscal and economic minutess? To the extent that just value construct is discussed so far. there is the presumed proposition that the usage of just value will accurately portray the value underlying the fiscal economic dealing. As to whether this is true. this subdivision will hold to measure the subsequent consequence on what happened upon the application of 157. In the instance of Bankss. there are those who have to compose down the value of assets because of their perceptual experience that values have declined due to bing market conditions ( Chasan. 2008: Rees-Mogg. 2007 ) .

The economic effects nevertheless were non favourable to affected interested parties since this action of the Bankss has produced a recoil. Investors of these Bankss have lost values of their investings. As a consequence. the Bankss have become more hazardous and depositors lost their trust excessively in the banking system. If so the Bankss were merely reflecting the true values of the assets. how come the reaction of these Bankss as affair of following with the demands of the FAS I57 was non good for many of the affected parties? Would it proper so to infer that the application of FAS 157 is non just or that FAS 157 just value is non just?

If the replies to both of these inquiries are in the affirmative. so this would hold the intension that what is unfavourable to others is non just. But how if the values being reflected in the write down are so the true values. would the fact that users of financially information acquire adversely affected make the FAS 157 non just any more? It would look that it would be non right to state just value accounting or the usage of just value will non be just if users get affected or have the perceptual experience of non acquiring what they feel or perceive to merit even if the information is so accurate.

Otherwise. just value accounting would be equated with certain net incomes which could ne’er be within the contemplation of the usage of information in determination devising. Being just hence must foremost and first be characterized to stand for the true and accurate information and effect would be justified by such quality of information. To reply forthrightly whether the usage of just value accurately portray the value underlying fiscal and economic minutess. this paper would hold to reply in the affirmative.

Based on predating analysis the FAS 157 purposes to reflect the values what would come close the market monetary value since it is “the monetary value to sell an plus or paid to reassign a liability in an orderly dealing between market participants in a measuring date” ( Sortur. 2007 ) . FAS 157 just value is therefore the consequence of the concern dealing utilizing the issue monetary value ( Sortur. 2007 ) and is determined by the purchasers and Sellerss in the market. It is hence non the occupation of FAS 157 to make what is unjust but would hold merely to reflect the true values of assets or liabilities that would hold to be reported.

Therefore. just value accounting or the usage of just value must be upheld to be just if it would reflect or would do the contemplation of what are true values. Indeed. it must be the capital markets or the purchasers and Sellerss who will find the market value or just value and non the accounting criterion. The lone function of the accounting criterion is to do its contemplation in fiscal studies of companies because of the demand to do public their fiscal statement to investors which would reflect the just values of assets and liabilities.

There is statement that the purpose of 157 Accounting regulation FAS 157 is good but one can non forestall people from taking advantage of the new regulation to what could foster their involvement. It is farther argued that in whatever one would wish to look at it. the generic thing about concern is still the desire for net income by which people are motivated with their personal involvement to acquire more wealth ( Brigham and Houston. 2002 ) . In response. the usage of just value does accept to leting people to be taken advantage but can non forestall those who would desire to and those who do non cognize how to treat information for determination devising.

If the Bankss which wrote down plus values are so taking advantage of the usage of just value accounting. it is still the minutess between the old purchaser or marketer that have caused the reaction which started it and the function of accounting criterion is merely to reflect them ( Meigs and Meigs. 1995 ) . If the demand to describe what is go oning is unjust. what will so be fair? Chasan ( 2008 ) narrated about some investors showing their uncertainties on the effectivity or equity of just value accounting method used particularly in the context of vaporizing markets caused by the fiscal crisis.

The writer nevertheless admitted that the usage of FAS 157 as an accounting criterion was made to better transparence to investors. Mentioning large write-offs being made large companies like Citigroup and Merrill Lynch & A ; Co Inc. which has made multibillion-dollar decreases on subprime-related asset-backed securities and other assets described as hard-to-price assets. the issue of whether just value is still just has become a controversial inquiry ( Chasan. 2008 ) . The statement being asserted is about the volatility of being caused the usage of just value. Rephrased merely. can fair value warrant the volatility?

Volatility is a term used in concern which connotes alterations in market monetary values and which causes hazards to investors ( Droms. 1990 ; Helfert. 1994 ) . It is feared that with the desire to make transparence. increased hazard from the usage of just value is coming out as a consequence. To decide the issue. the old reply to the inquiry on whether the usage of just value could warrant large losingss if what is being reflected or reported about company values are still true. would in consequence cover the issue of volatility being blamed on the usage of just value.

Therefore. this paper believes. that just value which stands for what is true must be upheld as argued earlier. There are concerns that because of volatility caused by the usage of just value accounting. the money shapers would merely be profiting hedge financess since they are those to gain from volatility ( Chasan 2008 ) . In reply. it could reason that such is the nature of just value accounting. to let the market forces to travel freely without people being compelled to come in into purchasing and selling minutess.

If there are also-rans. there are besides also-rans and they are portion of the procedure. It is besides argued that those who are kicking about the effects of credits being blamed on the usage of just value accounting are investors or groups of them. who may hold been instrumental in forcing for the displacement to fair value accounting. One of these groups is called the CFA Centre for Financial Market Integrity. with analysts and portfolio directors composing the group ( Chasan 2008 ) . The group and other groups 2007 had their aggressive lobbying to utilize just value more in financials.

These investor groups could non be merely be victors in a market dealing. they could besides be also-rans sometimes ; otherwise the market is non runing expeditiously. 2. 3 Should at that place be one cosmopolitan criterion of valuing the assets and duties of all houses? The issue of whether there should be cosmopolitan criterion for valuing the assets and duty may be really ideal since when one now talks of cosmopolitan just value as a cosmopolitan criterion for illustration. one will hold to see macroeconomic conditions of the different companies in the universe.

Since non all states are likewise situated. at least economically. there is the strong chance that cosmopolitan value could non be implemented. The inquiry is being propounded to assist in puting what is the just value in accounting like the catholicity of human rights. However its impracticality will forestall the attainment of the aim. Accounting values are non human rights. Another thing is the trouble of mensurating the hazards in concern in different states which are factors in finding the cost of capital of making concern.

The difference in hazards depends upon many factors including macroeconomic conditions which are affected by political developments. In reply therefore to the inquiry. it will hold to obviously state that the vision of cosmopolitan criterion is praiseful and this could be a portion of an approximative desire to the internationalisation of accounting in many portion of the universe. There is the program to harmonise all accounting criterions in the universe. The FAS 157 definition was really made portion of the program of IASB which makes IFRS. to follow the former for the usage of those utilizing the IAS or IFRS ( Sortur. 2007 ) .

In other words. attempts are made to come close catholicity of criterion in valuing the assets and duties of all houses but its realisation could merely perchance go when the clip will come for a cosmopolitan authorities. 2. 4 Can accounting criterions allow for both historical and just value and still bring forth meaningful information for determination devising? Accounting criterions are in consequence ushers to users to assist users make informed determinations in concern. Having both historical and just value must strike the balance of acquiring to the extreme of holding one and ignoring the other.

In other words. one needs to cognize what is historical for comparing to what is just value or market value to do an informed judgement. Accounting criterions must so work for the attainment for the creative activity of balance between the two values. As to whether the accounting criterions can let for both historical and just value and still bring forth meaningful information for determination devising. is answered once more in the affirmatory. This can be tackled better by interrupting the given statement into two propositions foremost and so unite them latter.

The first proposition would be declared settled in the fact the accounting criterions can let both historical and just value together. The 2nd proposition is that the usage of both will still bring forth meaningful information. This first proposition is accomplished since the pattern have been done for a long clip already since in the instance of valuing of stock lists. accounting criterions allow the valuing them of lower of cost or market under the IAS 2. ( Deloitte Touche Tohmatsu. 2008 ) .

The fact that stock lists can be valued at cost means the historical cost is maintained but demand of showing the just value of stock list if it has gone down in the market is besides a portion of the criterion which in consequence allows the working of just value construct. There are other IAS constructs which allowed just value accounting and historical value accounting. Thus this subdivision is non much of a job. The 2nd proposition appears to besides to hold been fulfilled by the usage of IAS as illustrated.

More meaningful information is in fact reflected by leting a combination of just value and historical cost in the rating of assets and liabilities of companies. By uniting the proof done is corroborating the application of two proposition. it could be sufficient to strongly reply the inquiry in the affirmatory. 5. Relevance and Dependability: Is one more of import than the other. depending upon the fiscal user? Both relevance and dependability are demands for qualitative features of accounting information.

Coercing one to be is more of import than the other would be inquiring the incorrect inquiry if the aim is merely to find whether fixing fiscal information utilizing their just values is just. In fact to state that an information must be relevant carries the presupposition that the information must besides be dependable. This is on premiss that dependability connotes objectiveness of information which is really much akin to being truth or carnival. Information is relevant or has is relevancy character if it influences one’s determination about a peculiar issue. On the other manus. dependability trades with the objectiveness or truth of the information.

How could a determination shaper see information as relevant when there is no dependability of the information? On the other manus holding dependable information would be of no value if the same is non needed in the determination to be made. The two features must hence travel together. 3. Decision The issue of whether just value accounting or the usage of carnival in accounting for company assets and liabilities is just must be answered in the affirmatory. What is just is non what has caused much damaged to a individual or entity if such harm was a consequence of failure to follow the basic regulations of doing investing.

The consequence of just value should non be used to let one to merely warrant greed while ignoring the rights of others. A also-ran under a just value accounting is comparable to a individual who is taking excessively much hazard therefore the return could besides be high but could be low because of the working of the market. Equally long as purchasers and Sellerss are non being compelled to finish their dealing. just value is still just. Fair value accounting will take to the truth but its value will besides depend on the users of information after they have done their functions in the market.

The user will still necessitate to do a comparing with what is historical and what is the current just value as caused by economic conditions. Present accounting criterions have caused the coverage of both sort of information but users must besides be intelligent in making their portion. Fair value as a construct in accounting criterion was merely made to rectify the evident failure of strictly historical cost accounting. If just value accounting is just. it does non connote that the criterion must travel back to historical accounting but historical information must still be reported and let the user to do a difference in how to treat the information.

Since just value and historical cost could co-exist together. the same must be the better option as it will supply a balance between historical and just value accounting. Mentions: Brigham and Houston. Introduction to Financial Management. Thomson-South Western. USA. 2002 Chasan. Emily ( 2008 ) . Is just value accounting truly just? { www papers } URL. hypertext transfer protocol: //www. reuters. com/article/reutersEdge/idUSN1546484120080226. Accessed October 20. 2008 Deloitte Touche Tohmatsu ( 2008 ) . Summary of IFRS for IAS 2. { www papers } URL hypertext transfer protocol: //www. iasplus. com/standard/ias02. htm. Accessed October 21. 2008.

Droms ( 1990 ) Finance and Accounting for Non Financial Managers. Addison-Wesley Publishing Company. England Helfert. Erich ( 1994 ) . Techniques for Financial Analysis. IRWIN. Sydney. Australia Meigs and Meigs. 1995. Fiscal Accounting. McGraw-Hill. Inc. London. UK Rees-Mogg ( 2007 ) . Why FAS 157 work stoppages dread into bankers. { www papers } URL hypertext transfer protocol: //www. timesonline. co. uk/tol/comment/columnists/william_rees_mogg/article2852547. ece. Accessed October 21. 2008. Sortur ( 2007 ) Fair Value Measurement. The Chartered Accountant { www papers } URL. hypertext transfer protocol: //icai. org/resource_file/96471564-1574. pdf. Accessed October 21. 2008. ]


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