Edward Reidl (Harvard University) told NACVA/IBA conference attendees that there is still a “great debate” between fair value and historical cost, even though fair value reporting has historical underpinnings dating back to the 1920’s.
Reidl outlined the pros and cons of fair value:
Fair Value Pros:
- More timely information
- Users want this information
- Best reflection of value
Fair Value Cons:
- Less verifiable / more management bias
- Moves us from actual to hypothetical transaction
- Often inconsistent with firm as a “going concern”
Reidl noted that we have been, and probably will continue to be, under a mixed attribute model, which means we have some fair value and some historical cost. “The appropriate question to ask is not ‘either/or’; it is ‘how much,’” says Reidl.
There has been an increase of fair value in financial reporting, and Reidl believes it will continue to grow. His “bold (and maybe not so bold) predictions for the next 5 years,” are listed in the table below.
|
Prediction |
Probability |
Will FV disappear? |
No |
0% |
Will FV increase? |
Yes |
90% |
Will FV practices converge across U.S. and Internationally? |
Yes |
75% |
Will differences in FV implementation remain within US (and across countries)? |
Yes |
90% |
Will auditors require new training? |
Yes |
75% |
Will demand for independent verification of FV increase? |
Yes |
75% |