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F. Relevant Standards of the FASB
1. The FASB and GAAP
The Financial Accounting Standards Board (FASB) is the
professional organization primarily responsible for establishing
financial reporting standards in the United States. The FASB’s
standards are known as Generally Accepted Accounting Principles
(GAAP).
2. Initial Role of Market Values in GAAP
Under GAAP, market values initially played a limited role in
shareholder reporting. GAAP uses predominantly transaction-based
valuation; i.e., valuation established in an actual transaction
by the reporting entity. The primary advantage of
transaction-based valuation is reliability; accountants view
values established in arm’s-length transactions as less
subjective and more easily verified than values produced without
such transactions. The primary disadvantage of transaction-based
valuation is that values can become outdated, thus rendering the
information less relevant to investors. If a company issued a
bond at par, for example, transaction-based valuation would
report the bond on the company’s financial statements at its
issue price. If interest rates fell, the market value of the
bond, and thus the market value of the company’s liability, would
rise. This rise in value would not be recognized in the
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