Although recent market events have cast doubt on marking values to market, fair value has its place in financial reporting. It’s widely acknowledged that, despite its challenges, reporting fair value for most financial instruments, particularly assets, provides investors with meaningful information to assess a company’s future cash flows and management’s performance. But projecting the challenges of fair value reporting onto the majority of both
(1) nonfinancial assets and (2) liabilities calls into question whether the capital markets are ready for more fair value. It’s time to pause, reflect on lessons learned from the credit crisis, and evaluate whether it makes sense to expand fair value beyond where it is used today.
Highlights
- The credit crisis has highlighted the benefits of reporting fair value for financial instruments—and exposed limitations.
- Reporting fair value, although imperfect, remains the best available method for most financial instruments.
- The challenges of developing and reporting fair value become even more prominent when applied to many nonfinancial assets and liabilities.
- The desire to expand the use of fair value needs to be tempered until the method’s limitations are fully understood.
For more in-depth information on the issue of fair value, we have developed a companion white paper, entitled Fair value: clarifying the issues.
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