CPA Debate

The American Institute of Certified Public Accountants (AICPA) publishes a monthly magazine titled The Journal of Accountancy. In their May 2008 issue, they have a point-counterpoint (not as wild as the old Saturday Night Live skits with “Jane, you ignorant sl*t”) on the topic of “fair value” for accounting.

I posted indirectly on the topic of fair value in this post when I noted that quarterly reporting, which is frequently charged with contributing to short-term thinking in the markets, had salutary effects in that CEOs were forced to publish results frequently which led to the ousters of many CEOs in the financial industry who were responsible for disastrous write-offs.

WHAT IS FAIR VALUE?

In a simplified version, the topic of “fair value” relates to whether or not write-downs should be taken on assets on the balance sheet (which reduces profits on the income statement) based upon reductions in market values, even if the assets haven’t been sold. For example, if a company has a bunch of loans on their books for $10B, and based on recent downturns in the market and sales of similar assets to third parties, the CURRENT value is $8B, then that company would reduce the value of the asset by $2B on the balance sheet and show a $2B loss on their income statement.

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