Friday, July 18, 2008

Fair Value or Historic Cost?

Over the past few years, this question has been increasingly asked and pondered over. It is constantly debated whether historic cost actually provides the investor with the information required to make good decisions. There are strong views in favour of fair value measurement, proposing that it is a more current view on an asset's or liability's true value on the current transaction date. The fair value of an asset is the amount at which an asset can be purchased or sold between willing parties in a current transaction. The fair value of a liability is the amount at which a liability can be settled between willing parties in a current transaction. Fair value excludes any forced sales or settlements and does not include liquidations.

Is the historic cost of an asset/liability any indication of the value at which it can be sold/settled in the future?

In today's market, it is hard not to agree that an asset's historic cost is no longer relevant.

Janine Pakiry
Asst. Vice President
(Financial Control)
Lehman Brothers

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