Using Fair Value Accounting for Financial Instruments

As suggested by many commentators, the Financial Accounting Standards Board (FASB) has been drifting away from the traditional historical cost model and toward fair value accounting. Started with the Statement of Financial Accounting Standards No. 12 (SFAS 12) to the more recent ones such as SFAS 107, SFAS 115, and SFAS 133, the FASB requires recognition or disclosure of fair values for assets and liabilities. This document proposed full fair value recognition of financial instruments. Similar view was expressed in the draft standard issued by the Financial Instruments Joint Working Group of Standard Setters (JWG) at the end of 2000. The JWG comprises of representatives of accounting standard setters in most of the industrialized countries including the United States, as well as the former International Accounting Standards Committee. These proposals stir up much controversy, with the banking industry leading the charge to oppose fair valuation for all financial instruments. However, as of the end of 2002, no pronouncement has yet been issued. This paper discusses the merits and dismerits of using fair value in accounting for financial instruments and advocates the use of footnote disclosures to deal with this difficult issue