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The shortcomings of fair-value accounting described in SFAS 157

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  • Benston, George J.
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    Abstract

    Analysis of the examples given by the FASB to show how fair values, defined as exit prices, should be determined in specified circumstances is revealing. Such prices require determining what hypothetical companies might pay for assets, a costly procedure at best. Even though SFAS 157 specifies exit values, several examples employ values in use and entrance values. Although transaction costs must be excluded, they often are not. Fair valuation of non-financial assets, required in certain circumstances (e.g., business combinations), is particularly difficult to apply. Furthermore, exit values of such assets as work-in-process inventories and special-purpose machines, as defined by SFAS 157, often are zero or negative. Importantly, assets and liabilities restated at exit prices yield balance sheets and income statements that are of little, if any, value to investors in ongoing firms. Further, the examples presented show that fair values could be readily manipulated. Implementation of SFAS 157, therefore, is likely to be costly to investors and independent public accountants.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Accounting and Public Policy.

    Volume (Year): 27 (2008)
    Issue (Month): 2 ()
    Pages: 101-114

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    Handle: RePEc:eee:jappol:v:27:y:2008:i:2:p:101-114

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    Web page: http://www.elsevier.com/locate/jaccpubpol

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    Cited by:
    1. Ulf Mohrmann & Jan Riepe & Ulrike Stefani, 2013. "Are Extensive Audits 'Good News'? Market Perceptions of Abnormal Audit Fees and Fair Value Disclosures," Working Paper Series of the Department of Economics, University of Konstanz 2013-08, Department of Economics, University of Konstanz.
    2. William L. Smith & David M. Boje & Kevin D. Melendrez, 2010. "The financial crisis and mark-to-market accounting: An analysis of cascading media rhetoric and storytelling," Qualitative Research in Accounting & Management, Emerald Group Publishing, vol. 7(3), pages 281-303, August.
    3. Yuan Ding & Thomas Jeanjean & Cédric Lesage & Hervé Stolowy, 2009. "An Experiment in the Economic Consequences of Additional Disclosure: The Case of the Fair Value of Unlisted Equity Investments," Post-Print halshs-00458950, HAL.
    4. Laux, Christian & Leuz, Christian, 2009. "The crisis of fair-value accounting: Making sense of the recent debate," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 826-834, August.
    5. Mary E. Barth & Javier Gomez-Biscarri & Ron Kasznik & Germán López-Espinosa, 2012. "Fair Value Accounting, Earnings Management and the use of Available-for-Sale Instruments by Bank Managers," Faculty Working Papers 05/12, School of Economics and Business Administration, University of Navarra.
    6. Vighneswara Swamy & Vijayalakshmi, 2012. "Fair value accounting in banking - issues in convergence to IFRS," African Journal of Accounting, Auditing and Finance, Inderscience Enterprises Ltd, vol. 1(3), pages 270-280.
    7. Palea, Vera, 2013. "Fair Value Accounting and Its Usefulness to Financial Statement Users," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201327, University of Turin.
    8. Masaki Kusano, 2012. "Does the Balance Sheet Approach Improve the Usefulness of Accounting Information?," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 2, pages 139-152, December.
    9. Gin Chong & Henry Huang & Yi Zhang, 2012. "Do US commercial banks use FAS 157 to manage earnings?," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 20(1), pages 78-93.

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