I quoted these two paragraphs from
Shyam Sunder. 2009. “IFRS and the Accounting Consensus,” Accounting Horizons,Vol 23, No. 1 (March), pp. 101-111.
"Market valuation is a principle, as is historical cost valuation. In contrast, fairness is an ex post judgment about a particular instance of valuation in the eyes of preparers and users. Alternatively, it could be thought of as their ex ante judgment about the outcomes expected from a given method of valuation. How can a standard specify the numbers arrived at by the application of a particular method to be “fair” by definition?
Financial Accounting Standard 157 (FASB 2006) specified three unrelated valuation methods (mark-to-market, mark-to-model, and mark-to-judgment) to be used in different circumstances and declared their combination to be “fair.” Note that the last of these three options allows firms to value assets as they deem fit when market values or model parameters cannot be objectively estimated. Warren Buffet pointed out that the third level of “fair” risks becoming mark-to-myth. In mid-October 2008, in response to political pressures, the IASB (2008) proposed to allow special dispensation for application of fair values to financial instruments. In what sense can this proposal be called a principle, and not the beginning of the slide down the proverbial slippery slope of clarifications and guidance that land the general principles in a morass of complex rules under pressure from money and power?"
Before I got a closer view at FAS 157, I thought that fair value means market value, that is the price which other people are willing to pay.
Now I know that FAS 157 provides three levels of inputs. But for the mark-to-model and mark-to-judgment, how can you verify the reliability of those figures? Aren't they just numbers based on estimates?
Just like a man predicts: there is 50% chance that tomorrow will rain. We cannot say he is wrong no matter tomorrow rains or not. We also cannot say the estimates provided by managements are WRONG, for things are changing, they might be right at the time of estimation, and they might also just make up those numbers. Who knows.
As Fama said, if people can know the fundamental value of stock, they will all be rich men. We always talk about fundamental value or true value, but we really do not know what fundamental value is.
wow, you are fast, team-mate =] i was just gonna post the abstraction and saw you've already did that. it's a good thought that it's hard to verify tier2&3 measurement. i just want to clarify that the use of tier 2&3 is at the exhaustion of tier1 measurement. in another word,"it's better to have something than nothing". besides, management still need to come up with sort of verification to their mark-to-judgement, for example, data of a similar company in an either active or inactive market. besides, the valuations are also subject to external audit. therefore, there is a change for management to manipulate fair value accounting, check&balance still exists to ensure manipulation stay low.
ReplyDeleteit's true that vair-value accounting mi,ght compromise reliability, but it enhances information relevence. as Sunder pointed out in his paper, there is no absolute optimal standard, but standard that strikes the best balance between different needs and interests. and i believe compare to historical cost accounting, fair value accounting is a better choice.