Although many opponents of value-based accounting claim to have conceptual arguments against it, most of the criticism focuses on implementation issues involving measurement technology and its present limitations (some real and most others imaginary).

Because fair value measurement hasn't been widely audited, no one should be surprised that unanswered questions will create some speed bumps when this system is more broadly implemented. For some critics, today's challenges in measuring assets' fair value serve as convenient fatal flaws that mandate erecting a "road closed" sign before the fair value journey even begins.

We certainly acknowledge that fair value measurement technology needs to improve. However, we see the current brouhaha as nothing more than another instance of a looming technological change that promises to disrupt the status quo, thwarting those who have achieved fame, fortune and personal security in the world as it now exists. It's only natural that they would find all sorts of reasons to object to progress down a path that renders their expertise obsolete.

On the other hand, and as we've prognosticated many times, those who comprehend the multiple advantages of fair value accounting will find ways to overcome the obstacles and receive substantial rewards from the markets for their efforts.

We find it ironic that managers who are willing to expend money and effort developing new products or services are so unwilling to lift a finger to provide market value information in financial statements and reports. Somehow they have missed the huge point that meeting the capital markets' demand for useful information is just as important for their long-term success as meeting customers' demand for products and services.


The fact is that all managers must make pivotal capital expenditure decisions before all facts and figures are known for sure and before all the technology problems are identified, much less worked out, when they launch a new product development process. Thus, it's ludicrous for managers (and auditors) to insist that all practical measurement issues be fully resolved before the Financial Accounting Standards Board and the International Accounting Standards Board proceed toward greater use of values.

We liken this sort of criticism of fair value accounting to chastising children for being immature. In each case, time and careful attention will naturally take care of the root causes of the obstacles. Just as children mature with age, fair value measurement problems will be completely solved once reporting requirements kick in because information entrepreneurs will earn handsome rewards by figuring them out.


We're reminded of an honors thesis that was written by Owen Ashton, an undergraduate student at the University of Utah in the 1970s, about the time that the Securities and Exchange Commission's ASR 190 began requiring the country's largest public companies to provide footnote disclosure of their assets' replacement cost.

With management's eager cooperation, Owen studied the process used by Utah Power & Light in order to measure the cost of complying. To everyone's surprise, and the managers' total disbelief, he placed the amount at about $125, which was overtime compensation paid to the computer operator to run the property insurance database update about six weeks earlier than normal.

To be perfectly clear, Ashton uncovered the fact that sufficiently reliable estimated replacement costs were already in management's hands for deciding how much insurance to buy. The chief financial officer was especially upset because he wanted to complain to the SEC that it was once again creating a compliance burden. Furthermore, this result would have been personally embarrassing for him if - as we suspect - he had previously provided his boss with a sky-high forecast.

What this anecdote shows is that sufficiently useful estimated fair values are probably already available and auditable. If so, there is no good rationale for saying that requiring their use would necessarily involve burdensome compliance costs. The only exceptions would be those unwise managers who have ignored value-based information for their own decision-support purposes.


So, what's our main point? We see early signs that the accounting profession as a whole is now beginning to acknowledge that fair value reporting is essentially inevitable. FASB continues to increase value disclosure requirements and persists in talking about the need for more fair values on the balance sheet, too. As a result, we are seeing significant steps toward addressing the implementation issues. One example is a recent article ("Ghosts and Zombies") in the May 2009 issue of Strategic Finance by our old friend Al King, a valuation expert with a lifetime of experience in estimating what assets are worth.

The long and short of Al's article is that it provides wonderful advice to managers about what they need to do to get their property records ready to support fair value accounting. Al identifies two general problems that he amusingly calls ghost and zombie assets. Ghost assets are on the books but can't be found in the physical sense. Zombies, on the other hand, physically exist but can't be found on the books.

We won't steal Al's thunder by talking about how these situations arise or how to alleviate them. Instead, we recommend that interested readers take a look at his article at


What we find helpful about ghosts and zombies is that they illustrate a point we have been making about an important benefit of fair value. In particular, we like to point out that you manage what you measure and you don't manage what you don't measure. Any managers with more than just a few ghosts and zombies on their books can't be doing a bang-up job in managing their assets.

We're absolutely certain that asset management will improve under fair value accounting for two reasons. First, reporting reliable fair values for assets will force managers to review their property records more often to confirm and adjust the recorded amounts. That activity alone makes it more likely that they will pay more attention to the assets and how well they're being deployed.

Second, we believe that the fair values of many assets exceed their generally accepted accounting principles book values primarily because systematic depreciation only writes them down without paying attention to real economic facts, and because GAAP reporting completely ignores what inflation does to the measuring unit.

Applying fair value will thus cause the larger denominator of the ROA ratio to drive the rate lower. Of course, the numerator is incomplete if it doesn't include the change in the asset's value as well. Further, changes in fair values are less predictable than changes in book values, which makes the ratio more variable than under historical costs, providing managers with another powerful incentive to pay close attention to these assets and their current uses.

Granted, a business's brick-and-mortar assets may not be what managers should think of first when they arrive at the office every morning, but then again, they shouldn't neglect this stuff to the point that they're no longer effectively used or safeguarded by the internal control system. If ghosts and zombies are as common as Al suggests, controls for property assets have substantial room for improvement.


Under fair value accounting, managers will have incentives to effectively manage all assets on the balance sheet. (They'll also be facing the fact that they have more assets to account for when all leases are capitalized.) When they have to report changes in asset values year after year for all to see and have to justify their decisions to keep their jobs, the ROA metric and others like it will provide much more useful feedback on how well they're doing. To repeat our point, this change is a largely unsung beauty of fair value accounting that is overlooked in heated arguments over feasibility, reliability and volatility.

So, thanks to Al for his insightful guidance to those who will implement fair value accounting. As near as we can tell, there's nothing to lose but bad information and obsolete experts, and everything to gain in terms of more useful information, more efficient capital markets, more effective internal control systems, and more attentive asset management policies.

With all that at stake, who can really think that fair value accounting is a bad deal? There's nothing to be afraid of, not even ghosts and zombies.

Paul B. W. Miller is a professor at the University of Colorado at Colorado Springs and Paul R. Bahnson is a professor at Boise State University. The authors' views are not necessarily those of their institutions. Reach them at paulandpaul

(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.

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