Fair Value Accounting Controversial for Industrial Companies
Fair value accounting requires a company to adjust the value of assets on its financial statements in response to documented marketplace indications of a change in the assets' value. CFO magazine says, "Indeed, since the SEC and U.S. and international accounting standard-setters have pushed for the expanded use of fair value accounting - an effort codified by the release last year of FAS 157 Fair Value Measurement - critics have complained that the methodology is not suitable for the non-financial assets. The reason: For assets and liabilities that are not based around short-term trading, or are held to maturity - such as loans, deposits, and receivables - fair-value measurement leads to income statement volatility, such as understatements and overstatements." FAS 157 is already applied by most U.S. financial organizations, but their financial assets often are publicly traded, making a determination that their value has changed much easier than for the physical and other assets of industrial companies. A Financial Week article describes an analysis of how using fair value accounting on industrial company pension assets would have affected past years' financial statements. The article says, "In the study, the professor [Mulford] looked at how actual pension expenses based on the fair value of liabilities and pension asset performance would have altered the earnings of 24 large industrial companies from 2002-06. The results? ... Average operating earnings would have been ... lower in 2002. In 2006, those earnings would have been ... higher." A debate on the risks versus value of fair-value accounting continues in both the U.S. and European Union.

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