The Subprime Lending Crisis and Reliable Reporting

Limitations to the Use of Fair Value in Unstable Markets

Benjamin P. Foster, CPA, CMA, and Trimbak Shastri, CA, CMA, CIA

A question facing the accounting profession, particularly in light of the recent mortgage meltdown, is whether to use fair value or historical cost for the reporting of assets and liabilities. To be useful for decision making, accounting information should embody the two primary qualities of relevance and reliability. Neither fair value nor historical cost accounting on its own is likely to achieve both characteristics, and an integration of the two may be necessary. Both FASB and the International Accounting Standards Board (IASB) support the use of fair value and are moving away from historical cost and toward fair value in their financial reporting standards. Consequently, we are unlikely to return to the use of strictly traditional historical cost-based accounting despite criticisms of fair value accounting.