The Crisis of Fair Value Accounting: Making Sense of the Recent Debate
Vienna University of Economics and Business Administration
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network
April, 21 2009
Chicago Booth Research Paper No. 33
Accounting, Organizations and Society, Vol. 34, 2009
The recent financial crisis has led to a vigorous debate about the pros and cons of fair-value accounting (FVA). This debate presents a major challenge for FVA going forward and standard setters’ push to extend FVA into other areas. In this article, we highlight four important issues as an attempt to make sense of the debate. First, much of the controversy results from confusion about what is new and different about FVA. Second, while there are legitimate concerns about marking to market (or pure FVA) in times of financial crisis, it is less clear that these problems apply to FVA as stipulated by the accounting standards, be it IFRS or U.S. GAAP. Third, historical cost accounting (HCA) is unlikely to be the remedy. There are a number of concerns about HCA as well and these problems could be larger than those with FVA. Fourth, although it is difficult to fault the FVA standards per se, implementation issues are a potential concern, especially with respect to litigation. Finally, we identify several avenues for future research.
Number of Pages in PDF File: 28
Keywords: Mark-to-market, Fair value accounting, Financial institutions, Liquidity, Financial crisis, Banks, Procyclicality
JEL Classification: G14, G15, G30, K22, M41, M49Accepted Paper Series
Date posted: April 21, 2009
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