Fair value accounting provides increased transparency to financial reporting by demonstrating an asset’s or a liability’s current value, thereby enhancing investor confidence in the capital markets. The goal of fair value accounting is to estimate as best as possible the prices at which positions held would change hands in orderly transactions based on current information and conditions. History of Fair Value Accounting Fair value accounting – also referred to as “mark-to-market” accounting – has played an important role in U.S. generally accepted accounting principles (GAAP) for more than 50 years 1 . The recent standard-setting history of fair value accounting under U.S. GAAP began with guidance issued by the Financial Accounting Standards Board (FASB) in 1975 that requires that marketable securities be recorded at lower of cost or fair value. 2 FASB complemented that original fair value standard in 1991, when it issued guidance requiring the fair value of financial instruments be disclosed in a company’s financial statements. 3 In 1993, FASB expanded the fair value recognition requirements by issuing a standard that required debt and equity securities that were held for trading or held for sale to be carried at fair value in the balance sheet and required changes in fair value to be recognized in the income statement or in a category of equity referred to as other comprehensive income 4 . This was augmented in 1998, when FASB standards were adopted that required derivatives to be measured at fair value. 5 In 2006 6 , FASB issued a new standard, FAS No. 157, Fair Value Measurements, which provided a single, consistent definition of fair value, established a common framework for developing fair value estimates, and required expanded disclosures about those estimates. FASB issued FAS 157 to address the complexities caused by differing definitions of fair value. Stated differently, FAS 157 itself does not prescribe any particular... [continues]
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