Fair Value versus Historical Cost: Which is actually more “Fair”?

Fair Value Accounting has been regarded by significant portion of academics and practitioners as a revolutionary approach to aid investors’ decision making abilities since it presents the current value of financial assets. Though proponents have long praised for the relevance strength, opponents of fair value have underlined the significant lack of reliability; therefore praised for historical cost accounting as a sound system constructed on robust pillars of prudence. With the more balanced structure of the Financial Accounting Standards Board on conservative versus fair value accounting issues, especially with the developments under FAS 155, FAS, and 157 to promote the use of mark-to-market, the financial world has shifted towards a more ‘subjective’ accounting. Even with the Enron case, having applied fair value has been linked with fraud. This paper discusses the ambiguous nature of fair value accounting and stresses the importance of historical cost accounting to avoid any potential future crisis.