From the Special Issue Editors: Fair Value Measurements and Reporting Developments, and the Continued Movement toward International Financial Reporting Standards

Article excerpt

Introduction

This issue of the Review of Business provides informative articles on the two most important financial accounting and reporting topics affecting the accounting profession in recent history. The first deals with the growing use of fair value measurements for assets and liabilities reported in financial statements, especially during the recent credit crisis and current economic environment. The second deals with the continued convergence of U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), including the Security and Exchange Commission's (SEC's) proposed roadmap for the potential mandatory use of IFRS in financial statements prepared by U.S. issuers.

These two topics are inherently linked. Elements of fair value accounting have been used for decades in U.S. GAAP. Although the growth of fair value accounting has been incremental, its use has accelerated in recent years as a means of enhancing financial statement quality, transparency and relevance. This trend aligns with global accounting convergence, because the use of fair value measurement is equally, if not more, prevalent in IFRS, developed by the International Accounting Standards Board (IASB).

The primary U.S. GAAP rules for measuring the fair value of assets and liabilities reported in financial statements resides in the Financial Accounting Standards Board's Accounting Standards Codification 820 (ASC 820), Fair Value Measurements and Disclosures, which was originally published as FASB Statement 157, Fair Value Measurements, in September 2006. Among other things, this guidance defines fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements.

Supporters of fair value accounting have argued that its application allows users to see the underlying economic reality in a changing environment, while carrying assets at their original costs masks the declining values. However, there have been many complaints about the application of fair value accounting's increased subjectivity and uncertain valuation estimates, which have called into question the reliability of such information. During the recent credit crisis, these complaints escalated significantly, and additional assertions have been made that these rules may have led to investment values reported in financial statements that were significantly underestimated for certain entities (i.e., financial institutions).

Many constituents have also expressed their concerns for the need to correct the unintended consequences of fair value accounting, especially related to determining valuations for illiquid assets in unstable markets, and the need for enhanced transparency in the form of more meaningful disclosures. A major area of concern relates to inherent subjectivity and complexity in fair value valuation techniques and assumptions used when determining the fair values of assets and liabilities that are not traded in active and orderly financial markets, and that rely on valuation inputs that are not observable in the market.

As a result of recommendations made by the SEC, the FASB's Valuation Resource Group, Congressional House Subcommittee hearings, and the European Commission, among others, both the FASB and IASB have worked (and continue to work) arduously on improving fair value accounting and reporting guidance. Furthermore, the FASB and IASB have a joint project, Fair Value Measurement and Disclosure--Joint Project of the IASB and FASB, to develop converged fair value measurement guidance and improve the consistency and transparency of financial statements on a global basis. The fair value project forms part of a long-term program by the FASB and IASB to achieve convergence of U.S. GAAP and IFRS.

Several of the articles presented in this Special Issue of the Review of Business describe the challenges recently experienced in applying fair value accounting rules in the current economic environment, the possible role that fair value accounting played in the recent credit crisis the procedures and complexities involved in auditing fair value measurements, and ethical considerations related to fair value accounting. …