Benston criticism on fair value accounting has explored many areas of organizational issues. The comment that “the exit price of raw materials will almost always be less than the price at which they were purchased and the exit value of partially finished goods probably is zero or negative” is not true.
This comment assumes that an in-exchange valuation premise is used. If that were the case then the current selling price of such items may be small. Benston criticism on fair value accounting highlights many key issues which the accountants should think of.
However, where an in-use valuation premise is used, the exit value is determined based on what a market participant would pay for these items assuming the items are used by that participant in conjunction with other assets held by the market participant. The exit price for raw material would then not be significantly different from what the reporting entity paid, assuming no market changes in the short term.
Similarly with the special purpose non-current assets such as a large blast furnace used by a smelting company. This asset may not be able to be removed once placed into the reporting entity’s factory. As such its disposable or in-exchange value would be scrap value only.
However, assuming a market participant had the same combination of other assets and requires a blast furnace to complete the grouping of assets to get a factory into operation, the fair value is not zero. The fair value would be based on the cost of obtaining such a blast furnace for incorporation into the factory’s operations.
Benston criticism on fair value accounting focused many key issues which the accountants should think of. Critics argue that fair value accounting has significantly contributed to the financial crisis and exacerbated its severity for financial institutions in the U.S.