As per the standards relevant to the accounting for financial instruments promulgated by different accounting standard-setting agencies, both at the national and international levels, all categories of financial instruments are valued either on `fair value' basis or on the basis of `fair value plus directly attributable transaction cost'. However, a controversy always persists over whether fair value-based measurement provides more accurate results compared to the conventional ones. Against this backdrop, the present article seeks to critically evaluate the Fair Value Accounting (FVA) system.

For the purpose of communicating information about the financial status of a company to its stakeholders, the financial statements should report the true earnings of the company and its true assets and liabilities. But the financial statements under the conventional accounting system can never satisfy the true objectives of preparing the same. They fail to present the `true and fair' view of the financial state of affairs of the company. Most of the items reported in the conventional financial statements are not properly measured. So, a clear distortion always persists in these statements. Therefore, the interpretative value of these statements is also distorted. For developing alternative accounting systems, several initiatives have been launched by different authorities and accounting experts from time to time. But these attempts have failed to replace the existing historical cost-based accounting practices. One of the major reasons why the conventional system persists, in spite of its shortcomings, is that none of the alternative accounting systems that have so far been developed have succeeded in gaining universal acceptance. Moreover, the cost to be incurred in operating an accounting system is an important consideration in deciding whether that system should at all be adopted or not. In this respect, the historical cost-based conventional accounting system is considered as the least costly system of accounting. But these reasons cannot do away with the inherent limitations of the existing historical cost-based accounting system.

So, the leading AS-setters of the world have already shown interest in FVA by incorporating this concept in the AS and other documents that have been released in the past few years. FVA is a system of accounting under which the monetary value of an item of asset or liability is determined based on not the past transaction amount but on fair value. A growing tendency on the part of the leading AS-setting agencies of the world to move towards the concept of FVA in the recent years has been noticed, although it cannot be called a novel venture. The concept of fair value was used in 1983 by the IASC in its promulgated AS, IAS 22 (Business Combinations). Subsequently, the IASC applied this concept to few more standards issued by it, such as IAS 26 (Accounting and Reporting by Retirement Benefit), IAS 33 (Earnings Per Share), IAS 36 (Impairment of Assets), IAS 38 (Intangible Assets), IAS 39 (Financial Instruments: Recognition & Measurement), IAS 40 (Investment Property), IAS 41 (Agriculture), etc. The Financial Accounting Standards Board (FASB) of the US also used the concept of fair value in its several standards. The Statement of Financial Accounting Standards (SFAS) 141 (Business Combinations), SFAS 142 (Goodwill and Other Intangible Assets), SFAS 144 (Accounting for the Impairment or Disposal of Long-lived Assets) are notable in this context. Moreover, the AS-setting bodies in UK, Australia and the European Union also issued standards requiring recognition of assets and liabilities at fair value. The most significant step regarding implementation of FVA was taken by the FASB in September 2006 by issuing SFAS No. 157 on "Fair Value Measurements" (FAS 157). The principal goal of issuing this standard is to enhance comparability, consistency and reliability of fair value measurements by creating a model that can be broadly applied to financial and non-financial assets and liabilities. All these aforementioned efforts have successfully created a new path towards enhancing the dependence on FVA in measuring different financial and non-financial assets.

According to RN Anthony, fair value is "The highest price at which a property would change hands between a willing buyer and a willing seller when the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts". As per the definition of fair value given by the FASB in its FAS 157, it is "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date". According to the definition of fair value used by the IASC (presently IASB) extensively in its different standards, fair value is "the amount at which an asset could be exchanged, or a liability settled, between knowledgeable and willing parties in an arm's length transaction". The term `exchanged' used in this definition may mean either `exit price' or `entry price'. The ASB of the ICAI has followed a similar definition of fair value while formulating its different AS. However, the FAS 157 has considered only `exit price' in its fair value definition. The objective of a fair value measurement is to estimate an exchange price for the asset or liability being measured in the absence of an actual transaction for that asset or liability (FASB, 2004).

Accounting World Magazine, Financial Instruments Measurements, Fair Value Accounting, Financial Instruments, Conventional Accounting System, Financial Assets, Financial Accounting Standards Board, FASB, Intangible Assets, Financial Statements, Global Financial Status, Measurement Models, Cost Based Acounting.