Fair-Value Accounting and the Financial Crisis Essay

Market crashes are nearly as old as the invention of money itself. But, as Gillian Tett underlines in Fool’s Gold, â€Å"the latest financial crisis stands out due to its sheer size†. Economists estimate total losses could sum up to $2000 to $4000 billion, a number surprisingly not dissimilar to the British Gross Domestic Product. In its post-mortem, the self-inflicted disaster has commonly brought to light the question: â€Å"Did bankers, regulators and rating agencies fail to see the flaws, or did they fail to care?† Importantly, it has also created a hunt for scapegoats and quick fixes. Many Republicans and industry lobbyists have insisted that the financial meltdown would not have been nearly as bad if not for the deadly Fair-Value Accounting†¦show more content†¦However, during the financial crisis, the application of the accounting standards was very different, and did not demand pure FVA. Firstly, the write-downs were not as apparent as they seemed. Due to the mixed attribute model, firms were allowed to choose the measurement attribute they desired for a position through how they classified the position. During the crisis, banks did indeed utilize these safeguards and discretion built into FVA on their mortgage-based securities. This resulted in the re-classification of many fair-value assets into other categories in which weaker impairment standards were applied. Hence, most bank financial assets were valued at amortized historic costs on their balance sheets. With only trading-type operations reported under fair value principles . This implies that FVA standards would have made little difference in a bank’s balance sheets and regulatory capital ratios. For the same reason, written-down values were also barely understatements. If anything, they were in fact overstatements as banks had the individual discretion in determining fair value. Lastly, FVA standards also allowed the use of valuation models in the calculation of fair values when markets become inactive, and stated that market prices from forced sales should not be used. Hence FVA should have mitigated contagion effects, and actually protected institutions against negative spill-overs from distressed banks respectively. In aShow MoreRelatedFair Value Accounting Within Financial Crisis Essay1284 Words   |  6 Pagesnumber of disputes in the field of financial reporting among different professionals, regulators and theoretitions .most of these disputes are related to the valuation of financial reporting components.the current curve in the progress of valuation is the push for and against the fair value approach.the purpose of this research is to examine the arguments on the use of fair value accounting and to identify the issues related to implementation of fair value accounting standards. 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