Fair Value Measurements: Are They Fair?
The accounting industry has been faced with the need to improve the quality of information provided to investors. Separating historical data from fair value measurements is one way to do that.
While the Financial Accounting Standards Board (FASB) has emphasized fair value measurements, they are only hypothetical transaction prices. Since it is difficult to verify many fair value measurements, some feel that the FASB standards have not provided much reliability of accounting.
Companies like Enron were innovative because of the way they reported to investors - through fair value measurements. The subjectivity of Enron's fair value measurements was one way that they misled investors, however. In the wake of Enron, the FASB has not stopped using fair value measurements.
The FASB sees fair value as a means to point to a single correct measurement. If the same line items can include subjective and objective components, how accurate are the numbers? Some say the solution is to separate fair value measurements from historical cost accounting, making it clear which numbers fall in the two categories.
