The Role of Fair Value Measurement in the Recent Financial Crunch

Prague Economic Papers, Vol. 20, No. 1, pp. 71-88, 2011

18 Pages Posted: 16 Sep 2011

Date Written: September 14, 2011

Abstract

Fair value measurement became pervasive to financial reporting over last 20 years. Under fair value accounting, entities are obliged or permitted to measure particular assets and liabilities at their fair values as at the reporting dates. Fair value is a current market-based hypothetical value. This market value is not always directly observable. The debate on usefulness of fair value accounting has arisen in connection with the financial crunch and economic crisis in years 2007-2009. The opponents of fair value accounting insist on that financial reporting based on fair value measurement has accelerated the financial crisis and significantly worsened the impact on affected companies. On the other hand, there are several important opinions in favour of fair value accounting. The paper aim is to contribute to the actual debate whether fair value accounting played the role of a messenger or a mover in the recent financial crunch and subsequent economic recession and to analyse the characteristics of fair value accounting from the economic point of view.

Keywords: Accounting Income, Economic Income, Fair Value, Measurement

JEL Classification: M41

Suggested Citation

Prochazka, David Anthony, The Role of Fair Value Measurement in the Recent Financial Crunch (September 14, 2011). Prague Economic Papers, Vol. 20, No. 1, pp. 71-88, 2011, Available at SSRN: https://ssrn.com/abstract=1927587

David Anthony Prochazka (Contact Author)

University of Economics, Prague ( email )

Nam. W. Churchilla 4
Prague 3, 130 67
Czech Republic

HOME PAGE: http://webhosting.vse.cz/prochazd/

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