The Role of Fair Value and Transaction Based Accounting Measures in Providing Information on Firm Value

James Cataldo & Morris McInnes  

This paper examines the choice between Fair Value and transaction based accounting measures in the context of firm valuation.The paper argues that Fair Value cannot directly measure the economic value of the firm as a simple difference between assets and liabilities.Instead,it is necessary to use financial models to estimate equity values.Net income from the traditional revenue - expense model is an essential input to these models.A problem arises when Fair value reporting of balance sheet amounts within the revenue—expense accounting model conflicts with the measurement of net income.This reduces the usefulness of financial reporting for equity investors in particular because it interferes with the application of equity valuation models.Our analysis suggests that Fair Value information is most useful to investors when it is presented in disclosures, separately from the traditional system of income statement and balance sheet financial reports.However,there are no simple answers to the measurement challenges presented by the traditional financial statements of the revenue - expense model.Recent history,including FASB responses to the US financial crisis,(FAS157 -4 and FSP FAS115 and FAS 124 -2) shows a continuing process of adjustment and compromise between different measurement approaches.We conclude that the benefits of different accounting measurements depend not on their individual characteristics,but on how they contribute to the objectives of the accounting system.

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【CateGory Index】： F233

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