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Fair Value Accounting And The Gfc

1821 words - 8 pages

With the Global Financial Crisis came the search for answers as to what led to the meltdown in the United States mortgage market and ultimately the rest of the world economy. Speculation was rife that accounting standards, in particular, fair value accounting was the prime reason for this significant meltdown. “This sparked a fierce debate with some experts believing that fair value accounting was primary cause of the crisis whilst others considered that it exacerbated it. On the other side of the debate were those commentators that believed that fair value accounting was successful in acting as an early warning system and effectively prevented more calamitous consequences.” ...view middle of the document...

Other analysts claimed that fair-value accounting methods exaggerated the crisis. The Accountancy Age reported that Abernathy, a former assistant treasury secretary in the Bush administration, “likened the financial crisis to a house fire - mark-to-market rules may not have been the root cause, but it helped to spread to the upper floors. It is an accelerant, it didn’t light the fire, but it made it of huge consequences” (Berman, 2008) “by forcing banks and other firms to value assets at a market rate even when little or no market exists. The subsequent write-downs have blown up balance sheets, forcing banks to sell more assets to raise capital and scared off potential buyers” (Berman, 2008) A study completed by Seay & Ford (2010) found that the critics who agreed with this notion were primarily concerned with four areas. “the lack of reliability in accounting standards, increased income statement volatility from fair value write-up/write-downs, inconsistency of valuing some assets and liabilities at an exit price and assuming a going concern doctrine for others and that fair value accounting understates the underlying economic value of financial instruments in depressed markets”(p. 56-57).
Although there was negative commentary regarding fair-value accounting, an even greater number of commentators supported the retention of fair-value accounting, with the majority giving praise to the transparency that it provided to banks, regulators and government. It was widely expressed by the supporters that it enabled the “banks, regulators and governments to identify specific sources of the crisis and take steps towards recovery and future prevention.” (Seay & Ford, 2009, p. 49) Therefore, concluding that fair-value accounting was a part of the solution that would assist in the recovery and was not the actual cause of problem.
In response to the crisis and the growing suggestion that accounting standards were the cause, the Security Exchange Commission (SEC) commissioned an emergency study to determine what impact accounting standards had on the crisis. The SEC determined that fair-value accounting was not to blame and should not be suspended (United States Securities and Exchange Commission, 2008). They suggested that “the key issue underlying the credit crisis is the lack of information and transparency about complex financial instruments. The solution to this is clearer disclosure, not less disclosure” (Marcy, 2009, p. 73). The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) also acted promptly and set up a global advisory group comprising regulators, preparers, auditors, investors and other users of financial statements to attempt to address the issues being raised.

Following this SEC report, IASB and FASB set about introducing changes to the accounting standards to clarify the application of fair value measurement in unstable markets. “IASB issued urgent amendments to IAS 7...

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