Measuring monetary value in accounting

You would imagine that in the world of accounting, putting a monetary value on an asset is simple. All that is needed is a unit of measurement i.e. a Pound, Dollar or Euro. Measuring things in the natural sciences is easy as units of measurement have been defined and are totally static e.g. a mile, a metre or a kilogram. When is comes to measuring using money values though, things can get messy. A article in The Economist (July 18, 2009) provides a useful example, which is receiving a lot of attention as a result of the recent financial and economic downturn.

Financial institutions like banks and insurance firms have always had problems valuing items like loans, securities and other financial assets. The debate is hot divided between those who want to ‘mark-to-market’ value and those who want to use the historical cost of such assets. The latter is the easy solution as the value can be readily determined. Using mark-to-market is problematic in that first, a market value can be difficult to determine, and second can cause huge swings in the balance sheet figures. Large changes in the balance sheets are not looked on well by shareholders as comparisons with prior years become difficult. To make matters worse, some firms have used a mixture of both mark-to-market and historic cost to value assets making comparisons even more difficult. Finally, some commentators argue that mark-to-market values actually add to the woes of financial institutions as falling values drives shareholders away.

The International Accounting Standards Board (IASB) is trying to come up with a solution. The IASB sets accounting rules for Europe and most of Asia and is likely to have authority in the USA in the future. There task is not easy. They need to balance maintain comparability between accounts of financial institutions, but also prevent accounting for exacerbating any economic downturn. This may help investors place more trust in accounts in the future.