Hello I need help with the response to two peers:
In your responses to peers, review the articles they found and discuss whether you would have responded in a similar way. Discuss similarities and differences between the articles chosen by your peers and your own. Do you agree with the thoughts of your peers regarding their preference of fair value accounting or cost accounting?
Peer 1:
In order to discuss the controversy of fair value accounting, I chose the following article, “Charles Lee: Why Fair Value Accounting Isn’t Fair,” written by Edmund L. Andrews and published by Stanford Business on July 2, 2014. Fair value accounting, or mark-to-market accounting, refers to the practice of measuring a business’s assets and liabilities based on their current market value (Chen, 2023). In contrast, historical cost accounting measures the value of an asset based on the original cost of an asset (Chen, 2023).
In the chosen article, Andrews first informs the reader about the effects of valuing financial assets at a historical cost during a crisis and how reformers pushed banks and other companies to employ fair value accounting to deliver transparent financial statements during this time (Andrews, 2014). The author expresses Professor Charles Lee’s opinion against fair value accounting. Charles Lee claims that fair value accounting goes against the fundamental purpose of accounting and creates more uncertainty in financial reporting (Andrews, 2014). Personally, I believe that, although both methods of accounting have their advantages and drawbacks, reporting a company’s assets at fair value provides stakeholders with a more accurate and reliable current valuation that helps them make well-informed decisions.
Based on this article, companies should embrace historical cost accounting and not rely on the subjectivity of fair value accounting when reporting financial statements. The central claim in favor of this practice is to give shareholders the tools they need to make their forecasts instead of making those forecasts for them (Andrews, 2014). Nevertheless, as a user of financial statements, I prefer to see fair value accounting as long as it is congruent with the measures and updates settled by FASB. Moreover, if fair value accounting is employed, a company should be required to present documentation to support their valuation techniques and explain how the fair value of assets and liabilities was estimated according to current market conditions. In case of a financial crisis, a company should stay consistent with this method of accounting or provide both fair values and historical costs to assist investors and stakeholders in their decision-making process.
Peer 2:
According to the article “Why Fair Value Is the Rule,” fair value accounting will likely be defended as the preferred accounting standard in this piece. It suggests that the author can highlight the merits and benefits of using fair value accounting in financial reporting.
Here are potential views the author might express, based on the title:
- Relevance and Timeliness: By reflecting current market conditions, fair value accounting is probably perceived as giving stakeholders more pertinent and timely information. This may facilitate making decisions more quickly and accurately.
- Transparency: By valuing assets and liabilities at their current market values and giving a clearer picture of an entity’s financial status, fair value accounting may be perceived as fostering transparency.
- Investor Confidence: The author can contend that by offering a more realistic depiction of the entity’s financial status in changing markets, fair value accounting helps increase investor trust.
Implications for Companies:
According to the article, businesses should think about implementing fair value accounting to increase transparency and give investors more current information. This could have an impact on financial reporting procedures and urge businesses to weigh the advantages and disadvantages of fair value accounting in their situations.
Preference for Fair Value vs. Cost Accounting:
The choice between fair value and cost accounting frequently depends on the demands and circumstances of the individual. It’s essential for anyone using financial statements to comprehend both viewpoints:
- Fair Value Accounting: I Fair value accounting might be preferred if you’re concerned with short-term market situations and require real-time insights into asset prices. In markets that are moving quickly, it might be useful for investing decisions because it provides a current view.
- Cost Accounting: On the other hand, lean toward cost accounting if you’re more concerned with a company’s long-term financial stability and want to evaluate its past performance and cost structure. It offers a stable representation of assets based on their past cost.
For practical purposes, a balanced strategy that takes into consideration both fair value and cost accounting principles may be the best option, particularly for giving a complete picture of a company’s financial situation and assisting in efficient decision-making.
