A friend who had a bookkeeping course in high school and who is currently a business major says, “I thought that assets were always reported at their historical cost on a company’s balance sheet. Recently, however, I heard several accounting majors discussing why a company is required (or elects) to report the fair value of an asset. I know that historical cost is the exchange price paid for an asset, so I can’t understand why a company would report any other ‘value’ for the asset, or how that value could be measured.”
Write a short memo that briefly explains why sometimes a company is required (or elects) to report the fair value of an asset. Then define fair value and explain how it is measured.