Fair Value is the practice of measuring assets and liabilities and estimates of their current value.
This marks a major departure from the centuries-old tradition of keeping books at historical cost.
It also has implications across the world of business, because the accounting basis, with a fair value or historical cost, affects the investment choices and management decisions with consequences for aggregate economic activity.
Criticism on Fair Value
Fair Value Accounting was blamed for some dubious practices in the period leading up to the Wall Street crash of 1929 was virtually banned by the US Securities and Exchange Commission from the 1930s and through the 1970s.
The 2008 financial crisis brought it under fire again. Some scholars and practitioners have connected its proliferation in accounting-based performance metrics for the actions of bankers and other managers during the run-up to the crisis, specifically as asset prices rose through 2008.
The fair value gains all sorts of securitized assets held by financial institutions were recognized as net income, sometimes used to calculate executive bonuses, and after asset prices began falling, many financial executives blamed fair value markdowns for accelerating the decline.
Fair Value
Fair Value is an estimate of a securities' worth on the open market.
There is no one way to calculate the fair value of a security, but calculations typically take into account future growth rates, profit margins, and risk factors, among other items.
What security is really worth?
The question of what security is really worth is one of the basic subjects in investing. By calculating a fair value investors are able to answer this question in some form, although it may not be precise.
Nevertheless, Fair Value estimates are key to any investor's portfolio.
