FASB Chairman is Bullish on Fair Value
Herz argues that company management and investors have different perspectives when it comes to financial reporting. While management tends to focus on budgets and metrics, investors want to know the effect of external events on the enterprise value. Herz thinks that historical cost favors management’s needs and fails to provide investors with the information they require.
Despite Herz’s enthusiasm for fair value, the business community hasn’t been won over yet. Historical cost supporters point out that because fair value can fluctuate widely, it can be difficult to compare financial statements across periods. Historical cost, they argue, is more reliable.
Proponents of fair value counter that their method provides greater relevancy and that historical cost numbers are only reliable the day they are recorded in the books.