Nabeel Jiwani

ISM- Period 1

Ramanna, Karthik. "Why Fair Value Is the Rule." Harvard Business Review. Harvard Business
Review, 01 Mar. 2013. Web. 29 Oct. 2015. <https://hbr.org/2013/03/why-fairvalue-is-the-rule>.
Fair value accounting is measuring assets and liabilities at estimates of
their current value.
The accounting basis, fair value or historical cost, affects management
decisions and investment choices, with consequences for aggregate economic
activity.
Fair value accounting was blamed for some practices in the period that led
up to the Wall Street Crash of 1929.
It was also banned by the U.S Securities and Exchange Commission from
the 1930s and up to the 70s.
Yet both Generally Accepted Accounting Principles in the United States
and International Financial Reporting Standards, adopted by nearly 100 countries
worldwide, continue to use fair value extensivelyfor example, in accounts
concerning derivatives and hedges, employee stock options, financial assets,
and goodwill impairment testing.
One theory or explanation of the rise of fair value accounting is the idea
that financial markets are efficient and their prevailing prices are reliable
measures of value.
Before 1993, the FASB had no financial service veterans but now make up
one-fourth of the board.
The link between fair value proposals and a background in financial
services is robust to numerous substantive controls, including other background
factors such as members tenure on the board, their political affiliation, the
backgrounds of contemporaneous members of the SEC, broader market and
macroeconomic conditions, and biases, if any, among the large audit firms.
A possible reasons behind individuals from financial services favoring fair
value accounting are investment banks and asset managers are accustomed to
using fair value accounting in their day-to-day operations such as balance sheets
and general journals.
Another reason could be GAAP profits defined on a fair value basis rather
than a historical cost basis accelerate the recognition of gains.
The growth in the proportion of FASB members who have backgrounds in
financial services may represent the growth in that industryand the growth in its
political clout.
This source was very in depth about the differences between fair value and historical
costs and the impact of each on the economy.