Many experts argue in favor of fair value accounting because it allows users of financial statements the
Question:
Many experts argue in favor of fair value accounting because it allows users of financial statements the ability to analyze assets and liabilities at the current exit price (as of the balance sheet date) vs. the historical cost. An opposing argument against fair value accounting is that these valuations may not be indicative of an item's true "value"; especially during times of turmoil such as in 2020 & 2021. In addition, by the time the balance sheet is published the valuation may have had significant fluctuations.
For example, assume James Corporation has equity investments which are shown at fair value in the December 31, 2020 balance sheet. The 12/31/20 balance sheet was published on February 26, 2021 and you are examining the financial statements on May 21, 2021. The following information is available:
Apple, Inc. | Tesla | The Walt Disney Corporation | Exxon Mobil | Kohls | Game Stop | Starbucks | Wal-Mart | |
December 31, 2020 Closing Price | $132.69 | $705.67 | $181.18 | $41.22 | $40.69 | $18.84 | $106.98 | $144.15 |
February 26, 2021 Closing Price | $121.26 | $675.50 | $189.04 | $54.37 | $55.25 | $101.60 | $108.03 | $129.92 |
May 21, 2021 Closing Price | $125.43 | $580.88 | $172.40 | $58.92 | $54.07 | $176.79 | $110.92 | $141.75 |
Do you feel that U.S. GAAP should permit the use of fair value vs. historical cost for assets and liabilities?
Support your opinion with at least 3 reasons
Intermediate accounting
ISBN: 978-0077647094
7th edition
Authors: J. David Spiceland, James Sepe, Mark Nelson