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INTRODUCTION
As suggested by many commentators, the Financial Accounting Standards Board (FASB) has been drifting away from the traditional historical cost model and toward fair value accounting. Started with the Statement of Financial Accounting Standards No. 12 (SFAS 12) to the more recent ones such as SFAS 107, SFAS 115, and SFAS 133, the FASB requires recognition or disclosure of fair values for assets and liabilities. In SFAS 133, the FASB stated that it believed that "all financial instruments should be carried in the statement of financial position at fair value when the conceptual and measurement issues are resolved" (FASB 1998, para. 334). Toward this end, the FASB issued a Preliminary Views document "Reporting Financial Instruments and Certain Related Assets and Liabilities at Fair Value" in December 1999. This document proposed full fair value recognition of financial instruments. Similar view was expressed in the draft standard issued by the Financial Instruments Joint Working Group of Standard Setters (JWG) at the end of 2000. The JWG comprises of representatives of accounting standard setters in most of the industrialized countries including the United States, as well as the former International Accounting Standards Committee. These proposals stir up much controversy, with the banking industry leading the charge to oppose fair valuation for all financial instruments. However, as of the end of 2002, no pronouncement has yet been issued. This paper discusses the merits and dismerits of using fair value in accounting for financial instruments and advocates the use of footnote disclosures to deal with this difficult issue.
RELEVANCE
The debate on fair value accounting basically revolves around the issues of relevance and reliability. Before discussing the issues of relevance of fair value, let's look at how fair value and relevance are generally defined. Fair value is defined in the FASB's Preliminary Views document as "an estimate of the price an entity would have realized if it had sold an asset or paid if it had been relieved of a liability on the reporting date in an arm's-length exchange motivated by normal business considerations." Relevance is defined in the glossary to the FASB Statement of Financial Accounting Concepts No. 2 as the "capacity of information to make a difference in a decision by helping users to form predictions about...