fair value accounting
Fair Value Accounting means recording an asset or liability at what it would actually fetch today, not what you originally paid for it.
In plain English
Ask anyone who bought a plot of land in Lekki fifteen years ago what it is worth now, and they will not tell you the price on the old receipt. They will tell you what a buyer would pay for it this afternoon. That instinct, valuing things by what they are worth today rather than what they cost back then, is exactly what fair value accounting does inside a company's books.
Ordinarily, accountants love the safety of the original cost. You bought a machine for ₦8,000,000, it stays on the books at ₦8,000,000 minus depreciation, full stop, no arguments, no drama. Fair value accounting throws that comfort out and asks a harder question every reporting period. If we sold this asset today, in the market as it actually is, what would someone pay for it?
A Nigerian bank holding government bonds or shares in another listed company cannot simply lock in the price from when it bought them. Under fair value rules, it must restate those investments at current market prices at each reporting date, so if the naira moves or interest rates shift, the value on the balance sheet moves too, sometimes up, sometimes uncomfortably down.
In the United Kingdom, this shows up constantly in pension funds and insurance companies, where investment portfolios are marked to market so that shareholders see real exposure, not a frozen photograph from years ago. A diaspora relative who owns shares through a UK investment platform will notice the value quoted daily reflects fair value, not what they originally invested.
The catch is that fair value depends on having a real market to check against. Property, unlisted shares, and specialised equipment do not trade every day, so the number often comes from estimates, models, and a fair bit of judgement, which is exactly where the arguments between auditors and finance teams tend to start.
A company bought office shares for ₦2,000,000 three years ago. Today those shares trade at ₦3,500,000 on the exchange. Under fair value accounting, the balance sheet shows ₦3,500,000, not the original ₦2,000,000, and the ₦1,500,000 gain is recognised in the accounts.
Questions people ask
Is fair value accounting the same as market value?
They are close cousins. Market value is the actual price in an active market, while fair value is the best estimate of that price, used even when no ready market exists, based on models, comparable sales, or professional judgement.
Why do some companies dislike fair value accounting?
Because profits can swing with market moods rather than actual business performance, so a company doing nothing differently can still report a loss or gain simply because asset prices moved.
Where does fair value accounting apply in everyday Nigerian business?
It shows up most in banks valuing investment securities, companies holding shares in other firms, and property companies revaluing land and buildings for their financial statements.
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