Mark-to-Market Accounting: "True North" in Financial Reporting

By Colson, Robert H. | The CPA Journal, June 2006 | Go to article overview

Mark-to-Market Accounting: "True North" in Financial Reporting


Colson, Robert H., The CPA Journal


Mark-to-market Accounting: "True North" in Financial Reporting By Walter P. Schuetze, edited by Peter W. Wolnizer Published by Routledge; 2003; ISBN 0-415-29955-1; 348 pages (hardcover); £75

Depending on the audience, "fair value accounting" is either the most controversial aspect of modern accounting or the most highly desired result of FASB's current standards-setting project, which is soon to be converged with international standards. Even with the buzz surrounding fair value accounting, however, it's remarkable how many people have not understood the extent of the change that took place in 1982 when FASB adopted a conceptual framework that shifted the financial accounting paradigm from revenue recognition and expense matching measured at historical cost to asset and liability recognition measured at fair value. College students continue to tell me that they learn revenue recognition and expense matching measured at historical cost in their accounting courses.

This collection of articles, speeches, and letters sheds considerable light on the modern development of fair value concepts. Walter P. Schuetze-a founding member of FASB, a chief accountant at the sec (the first to come from accounting practice), a chief accountant at the sec Division of Enforcement, and an engagement and national office partner at KPMG-presents his case for fair value accounting in a compelling and interesting narrative. Peter W. Wolnizer, dean of the business school at the University of Sydney, Australia, summarizes and provides context for the 47 pieces collected in this volume.

In 1982, few would have anticipated the pervasiveness with which fair value would permeate accounting thought by the start of the 21st century. Most accounting thought-leaders at that time understood the conceptual framework as laying the groundwork for stating financial instruments and marketable assets (real estate), at their current market value, a step seen by many as a responsible reaction to the savings-and-loan crisis. Few would have considered it possible, or even desirable, for goodwill and other nonseparable intangibles to have fair values. Indeed, fair value by appraisal or by model would not have been popular among even the staunchest fair-value proponents.

Schuetze began developing his ideas about fair value in the late 1950s, while working on oil and gas company mergers for the accounting firm of Eaton & Huddle in San Antonio, Texas. Allocating historical cost numbers didn't make sense when what really interested capital suppliers (investors and creditors) was the current market value of oil and gas reserves. The value of the reserves drove the acquisition price, and, because it was a known amount, Schuetze reasoned that it would be preferable for investors and creditors to simply do the accounting on that basis.

There are interesting parallels between Schuetze's ideas and those of the Australian accounting theorist Ray Chambers. The connection between Schuetze and Chambers is also reflected by Schuetze's choice of editor: Wolnizer was Chambers' PhD student at the University of Sydney. Ray Chambers spent several weeks at Ohio State University in the mid-1970s as part of his tour as the American Accounting Association's distinguished lecturer in accounting. Chambers presented and argued his concepts of current cash equivalents (CCE) and continuously contemporary accounting (CoCoA) before audiences generally committed to historical cost as the sole foundation for accounting. Chambers' view of the world was sharper than most, his charm and persuasive abilities were unparalleled, and the correctness of his views was not seriously challenged. Although Chambers was a preeminent accounting theorist, his views on current value accounting, like Schuetze's, arose from practical experience: the responsibility to allocate capital to businesses involved in Australia's war production during World War II.

Both Chambers and Schuetze developed approaches to financial reporting that adopt current market value as the measurement base, but both also held a much narrower view of what counts as an asset or liability in accounting than does FASB, which currently defines them in terms of "probable future benefits or sacrifices. …

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