Fair Value Measurement: Practical Guidance and Implementation, 2nd Edition

CHAPTER ONE

The History and Evolution of Fair Value Accounting

Fair value accounting has changed the way financial information is presented. Where once financial statements were based primarily on historical costs, now under certain circumstances, fair value is often the basis of measurement for reporting for both financial and nonfinancial assets and liabilities. Measuring fair value often requires experience and judgment. A trend toward increasing the amount of financial statement information presented or disclosed at fair value persists under U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). The trend away from historical costs, which has been the bedrock of traditional accounting, toward fair value accounting has been challenging for preparers, auditors, standards setters, and regulators.

Fair value accounting is a financial reporting approach that requires or permits entities to measure and report assets at the price assets would sell and liabilities at the estimated price that a holder would have to pay in order to discharge the liability. The term fair value accounting not only refers to the initial measurement but can also refer to subsequent changes in fair value from period to period and the treatment of unrealized gains and losses in the financial statements. Therefore, fair value accounting affects the reported amounts for assets and liabilities in the balance sheet and affects the reported amounts for unrealized ...