The convergence of Accounting Standards (AS) across the globe is gaining momentum. The Institute of Chartered Accountants of India (ICAI), the accounting standards making body of India has announced the strategy of one point convergence to International Financing Reporting Standards (IFRS) from April 1, 2011. The Government of India also has supported the move of the ICAI. But, there are many issues, challenges, and conceptual differences, which need to be addressed for a successful convergence to take place. One of the major issues that has created a hue and cry among the various stakeholders is use of Fair Value Measurement (FVM) in financial statements in certain cases. This article discusses the relevance of the adoption of Fair Value (FV) accounting and the various issues in its implementation.

Accounting standard-setters across the globe have adopted an approach that focuses on the balance sheet, rather than on profit and loss account. This approach is often termed as asset-liability management approach. Earlier, the focus was on income statement, and consequently on the matching principle.

Matching principle involves the simultaneous and combined recognition of revenues and expenses that result directly and jointly from the same transaction or events. Thus, strict application of the matching principle requires establishing the cause and effect relationship between expenses and revenue recognized in the profit and loss account for a particular period.

Under the balance sheet approach, even in the absence of a cause and effect relationship between revenues recognized in the profit and loss account, certain items of expenditure are charged as an expense in the account. These items of expenditure are recognized as an expense, independent of the recognition of particular revenues. They are deducted from particular revenues by being recognized in the same period. They arise from systematic and rational allocation of expenditure such as depreciation. They also arise from the immediate recognition of expenditure as expense, which occurs if no asset can be recognized from the same. An asset cannot be recognized because either it is not probable that the expenditure will result in future economic benefits, or the cost or value of the asset cannot be measured reliably. Similarly, the recognition of a liability such as obligations for sales warranty without recognition of a corresponding asset also results in the recognition of expense.

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