Here's our conclusion: Modern financial analysis demands reports that enhance investors' searches for intrinsic values. This thought reveals that traditional reporting standards have been oriented on the wrong compass. Instead of trying to compel everyone to adopt the same but often useless practices, policy makers should support investors by granting managers more latitude to produce genuinely useful statements that transparently describe their economic circumstances so users can make better assessments of their securities' intrinsic values.
Before anyone goes ballistic, we're not advocating anarchy in which anything goes. We're confident that our regular readers know we have more aversion than most anyone else toward false information in financial reports. Liars and cheats should be both shunned and prosecuted.
Importantly, this method flows holding gains and losses straight to income statements, whether realized or not. This is serious accounting, and we think it ought to be applied to all assets and liabilities.
Simply because doing so would provide more useful information for comparing the targeted securities' intrinsic and market values. It does so by reducing users' reliance on their own relatively uninformed estimated fair values of the company's assets and liabilities. It also reduces their need to move unrealized gains and losses into reported income out of the equity section where they're dysfunctionally parked while waiting for irrelevant cash transactions.
In addition, it does away with one-sided impairment accounting. Those now deeply engrained but freakishly cautious practices may make auditors feel safe and not hold managers fully accountable for volatility, but they undoubtedly produce income statements that are much less than fully useful. In summary, value-based accounting contributes to genuine comparability because it tells the truth, the whole truth, and nothing but the truth. We're hoping some chief executive and chief financial officers get the point that voluntarily adopting fair value accounting is a great way to improve the quality of their financial reports.
Of course, doing so will give them advantages over other less-enlightened managers who won't do it because they're afraid to trust the capital markets to handle the truth.
By making innovation voluntary, the board encourages progress without compromise or compulsion. We hope this experiment is a success and that it's followed by many more.
Alas, we've checked with people who should know, and they can't say that the value option has been widely adopted. We suspect decisions to not adopt have been made by the same managers who complain that the capital markets are undervaluing their stock. Perhaps it will occur to them, or their successors, that any fault for undervaluation is completely their own for not reporting sufficiently useful information.
Paul B. Bahnson is a professor at Boise State University. The authors' views are not necessarily those of their institutions or Accounting Today. Reach them at paulandpaul qfr. Practice Management. Follow Us In Real Time twitter facebook linkedin. Tags Audits Financial reporting. Quinn Becker is president of Better Books. She has no accounting background. Becker cannot understand why fair value is not used as the basis for all accounting measurement and reporting.
What is the economic entity assumption? Give an example of its violation. Jul 14 PM. Sarmistha P answered on July 16, Answer: Comparability refers to the process of comparing two or more companies based on their status.
In contrast, consistency means the equality in procedure and policies of a company, which enables the users to compare the financial statements of a particular Do you need an answer to a question different from the above? Ask your question! We want to correct this solution. Tell us more. Some common synonyms of stubborn are dogged, mulish, obstinate, and pertinacious.
An inexorable person is hard-headed and cannot be convinced to change their mind, no matter what. Stubborn people are committed to problem solving a situation or else it will bug them for the rest of their life. Plus stubborn people are unwilling to settle for less.
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