5. What do you think fundamental value in accounting have on balance should be?

Refer to the debate regarding value in use and value in exchange outlined in this chapter when answering this question? A value in use approach uses an external investor or a production oriented entity as the relevant benchmark. Such as investor ( firm ) rarely focuses on current liquidation values but is interested in the prospects for future cash flows, which more accurately predicted by operating earnings rather than current cash flow. So what is required is a measure of income that matches the current costs of asset inputs against outputs. This is approach concentrates on obtaining the most efficient results from asset in use and doesnt consider adaptability as an option. Value in use (of an asset): The present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. This is the definition in the IASB Glossary, from IAS 36.5. Other standard setters and accounting literature generally use this term and define it essentially as above. This definition does not state whose expectations should be the basis for determining value in use. Based on its use in standards and practice, it seems generally to be presumed that the objective is to reflect the reporting entity managements best estimates of future cash flows. However, the value in use measurement basis seems often to be interpreted in terms of discounting these management estimates using rates that reflect current market assessments of the time value of money and risks commensurate with those of the asset. Value in use has been conceived in authoritative literature only in the context of assets. However, some have suggested that the liability equivalent is the present value of estimated cash flows expected by the reporting entitys management to be paid to satisfy a liability. One author has described this as the cost of performance measure of a liability. Exit prices as a value in exchange approach takes the viewpoint of an internal manager or creditor who has to make decisions related to the liquidity of the firm and current spending power: that is , short term performance of the firm is more important. This is approach is particularly important for firms with liquidity problems ( high debt firms) , or firms engaged in trade able goods and which are able to quickly adapt their operation to the market conditions ( such as mutual funds that investin trade able bonds or shares ).