Fair Value Accounting (FVA) introduced formally in 1993 by the Financial Accounting Standards Board (FASB) was intended to make monetary statements easier to compare and balance sheets more reflective of real values.
However, the upstart crisis has led to a major debate about whether FVA has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this report, this argument will be evaluated and some major criticism against FVA will be discussed. I will similarly assess how these factors may or may have contributed to the financial crisis.
2.0Fair Value Accounting and its Objectives
In it pure form, Fair Value Accounting (FVA) involves reporting assets and liabilities on the balance sheet at fair value and recognizing changes in fair value as gains and losses in the income statement. It is also called mark-to-market accounting (Laux & Leuz, 2010)
The key objective is to give a monetary value to an asset or liability, without necessarily initiating a transaction. In essence then, FVA focuses on providing an objective valuation of an asset or liability without undue influence from the concerned parties, without considering historical cost and basing the value of an asset on mark-to-market accounting (Landsman, 2006).
3.
0FVA: Criticisms
Despite the main intention to make financial statements easier to compare and balance sheet more reflective of real values, FVA has been criticized by many - or soly financial institutions. Some criticisms includes: , subjectivity which leads to unreliable information, pro-cyclability and causes volatility.
3.1Subjectivity
FVA is claimed to be actually subjective (Penman, 2007). This conclusion is perhaps derived from the fact that in most instances, the up-to-the-minute cost to be used is not establish on actual transactions. It is difficult to determine the exact current value, for example if a second-hand market does not exist and it cannot be replaced with an identical...If you want to get a full essay, order it on our website: Ordercustompaper.com
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