Fair Value Accounting (FVA): An Overview of Key Issues

Most of the debates of accounting studies focus on the differences between two alternative accounting methods: the approach based on fair value (FVA) and the model based on historical cost (HCA). Both FVA and HCA are in wide use and have their supporters and critics. Proponents of FVA assert it delivers more timely and relevant market information despite the improved use of estimates and judgments, while opponents argue it provides unreliable market information that can misinform investors. Anyway, FVA is considered a good accounting model to assure more reliable financial information, but the reliability of the FVA measurement depends on the availableness of an active market. When markets are severely illiquid, as they are during a credit crunch, FVA implies significant practical difficulties for preparers of financial statements.