What principle requires companies to regularly evaluate their asset values?

The fair value principle is pivotal in financial reporting because it mandates that companies assess and report their assets at their current market value, as opposed to relying solely on historical cost. This approach requires companies to regularly evaluate the values of their assets to ensure they are accurately reflected in their financial statements. By doing so, financial statements provide a more accurate representation of the company’s financial position, giving users of the financial statements insight into the current worth of the assets.

This principle is particularly important for assets that can fluctuate in value, such as investments or certain types of property. By adhering to the fair value principle, companies must consider market conditions and other factors that could affect the value of their assets over time, promoting transparency and relevance in financial reporting. This stands in contrast to the cost principle, which maintains that assets should be recorded at their historical cost and not adjusted for value changes. Therefore, the fair value principle emphasizes regular re-evaluation of asset values to reflect their true market positioning.