Leading view
Users do not favor replacing the current historical-cost-based accounting model to a market value accounting model. They would retain the current mix of measurement attributes used under the existing model.
* Users want to retain the current historical-cost-based accounting model because:
* The current historical-cost-based model provides users with a stable and consistent benchmark [p. 3, 8, 13, 22, 34, 38, 42, 51, 71, 84-85, 87, 100, 128] which they can rely upon to establish historical trends [p. 8, 31, 42, 51, 66-67, 122]
* Although a mixed attribute model, it is predominantly a transaction-based model and, therefore, most of the reported values are reliable [p. 1, 5, 11, 87-88, 120-121, 125-126].
* Users oppose a market value accounting model because:
* Estimates of fair or market value may be subjectively determined by management [p. 13, 17, 23-25, 27, 43, 51, 61-62, 66-68, 70, 74-75, 82, 92, 112, 117] or based on thin markets or models of hypothetical markets and, thus, they lack sufficient reliability to replace historical costs [p. 1-2, 4, 11, 14, 23-24, 27, 34, 37, 43, 51, 70-71, 120, 124]
* Fair or market values would introduce an unacceptable level of volatility or noise in the income statement and/or in stockholders' equity which is not useful to users in assessing a company's future performance and prospects [p. 7-9, 11-12, 16, 29, 34, 43, 51, 65-66, 70-71, 75, 84-86, 97, 121-122, 142- 143]
* There is a lack of agreement on the appropriate definition of fair or market value, adding to the subjectivity of value information and reflecting different uses of value information [p. 13, 24, 30, 61, 87-88, 95-98, 100, 111]. Creditors are generally interested in liquidation values (perhaps in distress situations) [p. 33-35, 83, 108-109, 111] while investors are more interested in going concern values [p. 12, 51, 61, 75, 86]
* A market value accounting model does not reflect the nature of the ongoing business of an entity (this point was particularly made in the context of financial institutions) [p. 38, 60, 67-68, 71, 73-75, 85- 87]. It could potentially lead to a negative change in management's economic behavior [p. 61-62, 67, 71, 81-82, 112, 144]
* It is not the purpose of the balance sheet to provide an estimate of a company's economic or market worth [p. 10, 57]
* Timeliness is a problem; the information would be stale by the time it is released [p. 5, 38, 43, 52, 64, 71, 76-77]
* Users are not convinced that the cost of determining the fair value where market value is not readily available is justified by the benefits [p. 7, 41, 43, 68, 91, 93, 132, 141]
* It is the analyst's job to estimate value rather than management's job [p. 10, 14, 19, 22, 84, 115]. Analysts believe accountants should provide consistent, objective information which analysts can use in conjunction with fair values, if appropriate [p. 10, 14, 19, 21, 22, 44, 84, 115]. There also is an implicit lack of trust in management in the area of value information [p. 23, 43, 51, 90, 101, 112, 115, 130]. Users believe that it would be preferable to provide more information about the characteristics of assets and liabilities in external reports so that they can make their own assessment of value [p. 37, 62, 76, 80, 92-94].
Fair or market values, if disclosed, should be in the notes to the financial statements or in accompanying schedules. Detailed assumptions underlying the estimates should also be a required part of the disclosure in order to permit the user to adjust the disclosed amounts.
* Fair or market value information is useful when combined with and compared to historical cost information [p. 1-5, 10-11, 16, 19, 22, 24, 33, 35-36, 44, 50, 61- 62, 66-71, 73-75, 81-82, 90, 92-93, 101, 104, 121-122, 125, 127, 129, 138-140, 143, 145]
* Users are willing to accept less reliability in the context of supplementary disclosures than in the context of measurement in the balance sheet or the income statement [p. 78-79]
* Some users would prefer that the information be included in the notes to the financial statements or be audited [p. 39, 65] while others do not attach much importance to the location of the information or to the need for it to be audited [p. 39-40, 65]
* Users need to know the assumptions underlying the fair or market values disclosed in order to make their own assessment as to the validity of the disclosures and consistency of the basis of determination period-to- period [p. 37, 62, 70, 80, 93-94, 112-113]
* Fair values are not necessarily market values in all cases because of the size of the asset/liability, the business component in which it resides, and inefficiencies in the market that inconsistently impound future expectations in the current valuation [p. 20, 23, 30, 37-38, 43, 58-59, 86, 94, 96-98, 112].
Users view fair value disclosures, as opposed to measurements, as useful for particular types of assets and liabilities and in certain types of industries.
* Users are interested in the fair value of certain assets. Users would not replace historical cost with a fair value creating a gain prior to completing a transaction because of skepticism of management's estimate, but knowing management's expectations and assumptions is useful [p. 17, 21, 36, 46, 103, 109, 128]. Some of the types of assets and liabilities mentioned include:
* Non-operating assets [p. 21, 46, 53, 120, 128, 136]
* Financial assets [p. 6, 13, 16, 21, 46, 53, 76, 83]
* Assets and liabilities intended to be sold, settled, or disposed of, as opposed to being part of the ongoing business [p. 26, 46, 53, 104, 128, 131]
* Assets for which market prices from active secondary markets are available [p. 46, 53]
* Users view fair value as conceptually more applicable to financial industry activities than manufacturing activities, although they question fair value disclosures that fail to reflect "matching" of financial assets and liabilities [p. 5, 7, 13]
* Users do not view fair value reporting as a useful means of adjusting accounting information for inflation; instead, many use price-volume analyses [p. 14, 40, 48, 49].
Alternative view
More market or fair value measurements should be included in the body of financial statements in certain limited circumstances. In other words, users would favor including more fair value measurements in the current mix of measurement attributes under the existing model.
* Some of the circumstances most often mentioned are:
* For non-operating assets [p. 21, 46, 53, 120, 128, 136]
* For financial assets [p. 6, 13, 16, 21, 46, 53, 76, 83]
* For assets and liabilities intended to be sold, settled, or disposed of, as opposed to being part of the ongoing business [p. 26, 46, 53, 104, 128, 131]
* For liquidating or distressed companies [p. 47, 54, 74]
* For assets for which market prices from active secondary markets are available [p. 46, 53]
* Users believe that in some circumstances, the increase in relevance of fair value measurements compensates for their relatively lower reliability [p. 4, 21, 83, 120, 128, 131] or, in the case of assets for which market prices are readily available, that their reliability is adequate [p. 6, 16]
* Some users believe that the changes in fair or market values arising from the suggested measurements should be recognized in the income statement [p. 123] while others would prefer to avoid the income volatility and recognize the changes directly in stockholders' equity [p. 14]; presentation of the changes in comprehensive income was also suggested [p. 9].