Accounting and Financial Crisis
June 2010, Vol.6, No.6 (Serial No.61)
Journal of Modern Accounting and Auditing, ISSN 1548-6583, USA
Fair value accounting under financial crisis
HE Cai-xia1, ZHANG Chi2
(1. School of Accounting, Zhongnan University of Economics and Law, Wuhan 430073, China; 2. School of Management, Huazhong University of Science and Technology, Wuhan 430073, China)
Abstract: 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 three 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. Key words: fair value accounting; historical cost accounting; financial crisis
1. Introduction
The recent financial crisis has turned the spotlight on fair-value accounting (FVA) and led to a major policy debate involving among others the U.S. Congress, the European Commission as well banking and accounting regulators around the world. Critics argue that FVA, often are also called mark-to-market accounting (MTM), has significantly contributed to the financial crisis and exacerbated its severity for financial institutions in the U.S. and around the world. On the other extreme, proponents of FVA argue that it merely played the role of the proverbial messenger that is now being shot. In our view, there are problems with both positions. FVA is neither responsible for the crisis nor is
Journal of Modern Accounting and Auditing, ISSN 1548-6583, USA
Fair value accounting under financial crisis
HE Cai-xia1, ZHANG Chi2
(1. School of Accounting, Zhongnan University of Economics and Law, Wuhan 430073, China; 2. School of Management, Huazhong University of Science and Technology, Wuhan 430073, China)
Abstract: 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 three 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. Key words: fair value accounting; historical cost accounting; financial crisis
1. Introduction
The recent financial crisis has turned the spotlight on fair-value accounting (FVA) and led to a major policy debate involving among others the U.S. Congress, the European Commission as well banking and accounting regulators around the world. Critics argue that FVA, often are also called mark-to-market accounting (MTM), has significantly contributed to the financial crisis and exacerbated its severity for financial institutions in the U.S. and around the world. On the other extreme, proponents of FVA argue that it merely played the role of the proverbial messenger that is now being shot. In our view, there are problems with both positions. FVA is neither responsible for the crisis nor is
References: Allen, F & Carletti, E.. (2008). The role of liquidity in financial crises. Wharton Financial Institutions Center, University of Pennsylvania. Plantin, G., Sapra, H. & Shin, S.. (2008a). Fair value accounting and financial stability. Banque de France Financial Stability Review, 85-94. Plantin, G., Sapra,H. & Shin, S.. (2008b). Marking-to-market: Panacea or pandora’s box. Journal of Accounting Research, 46(2), 435-460. Persaud. (2008). Why bank risk models failed? The first global financial crisis of the 21st century. MPRA Paper No.11862, 11-13. (Edited by Linda and Mary) 62