Fair value is one the tools for financial reporting. It explains the ins and outs of corporate disclosure practices. FASB is changing the rules for the disclosure of assets and liabilities at the Fair value. In the changing scenario of corporate disclosure practices, this article highlights the importance of Fair value in the financial reporting system.

Fair Value (FV) is first defined by Securities Exchange Commission (SEC). Financial Accounting Standards Board (FASB), USA and International Accounting Standards Board (IASB) are the institutions that have been moving towards FV and have been drifting away from age-old cost accounting. Though 100% shift is far away, the trend is towards that only.

What is FV? It means valuing an asset as it is worth today and not on its purchase value and depicting the same in the financial record. Fair value of a liability is incurred and also settled in the current transaction between the selling and buying parties.

Example: A piece of land purchased in the year say 1975 at Rs. 10,000 may have sale (market) value of Rs. 10,0000 in the year 2006. So, while preparing balance sheet for the year 2006, value will be taken as Rs. 10,0000 and the difference of Rs. 90,000 will be shown as income in profit and loss account. Importantly, there need not be actual transactions to validate the FV.

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