Fair Value Accounting and Stewardship*

AbstractCurrent standards define fair value as the market price at which an asset could be sold or a liability could be settled in the normal course of business. Setting aside measurement issues, assessing the relevance of exit values has intensified in recent years as fair value becomes a pervasive component of accounting regulation. The current debate about accounting measurement is framed in terms of making a choice between fair value and historical cost. In this article I argue that this is not a correct framing of the issues; knowledge of fair value alone cannot help investors to evaluate stewardship, because they would not know how much resources the management had sacrificed to obtain that fair value. To properly evaluate stewardship, investors need both types of information, historical cost and fair value.Using this information, a rate‐of‐return‐like index of stewardship quality is proposed. This commentary concludes with a statement about three significant drawbacks of relying solely on fair value accounting.