Can Fair value and true and fair go together?

Convergence with IFRS would require adopting fair value accounting by the Indian Companies. Fair value accounting would call for “marking to market” which would mean historical cost convention would be done away with and unrealized losses and gains would be recognized and will be through Profit and Loss Account. This is against the age old prudence concept wherein unrealized gains will not be accounted for, till they are recognized. To get a better understanding pros and cons of Cost based accounting and Fair value accounting are analysed

Cost based accounting:

Advantages:

1) Cost of an item can be computed with reasonable certainty
2) It represents the outgo of resources or present obligation of outflow of resources
3) It can be verified to a large extent and the fairness of it can be commented upon

Disadvantages:

1) It does not reflect the changing values
2) They do not portray the strength or weakness of the organization


Fair value accounting:

Advantages

1) They reflect the changing values
2) They clearly portray the financial position
3) More useful to users

Disadvantages

1) Its hard to arrive at fair values for illiquid assets
2) Lots of subjectivity involved and offers scope for manipulation
3) Its very difficult to conclude on the fairness of the values

Subjectivity hardly instills investor confidence. Ascertaining the fair value requires looking into the future and making a lot of assumptions. The introduction of accrual basis of accounting itself has brought in a certain amount of subjectivity.

Hence fair value accounting though it might satisfy a set of readers might still give rise to far significant issues. Those accounts still have to be certified as true and fair.

Hence a call needs to be taken whether we want relevant financial statements (Fair value accounting) or reliable financial statements (Cost based accounting).