Question

The rise of Fair Value Accounting (FVA) has been characterised as one of the most significant developments in the international accounting standards-setting arena in recent years.

Required:

Outline the primary nature and scale of the shift from historic cost to fair value accounting by reference to particular international accounting standards that promote FVA. Also, provide a critical assessment of Perry and Nolke’s claim (in their 2006 article entitled “The Political Economy of International Accounting Standards”) that the rise of FVA reflects a growing authority of transnational private interests, especially those of the financial services sector.

Answer 1

The logic of fair value accounting is that it makes accounting information more relevant. However, historical cost accounting is considered more conservative and reliable. Fair value accounting was blamed for some questionable practices in the period leading up to the 1929 Wall Street crash, and was virtually banned by the US Securities and Exchange Commission from the 1970s to the 1930s. The 2008 financial crisis set it on fire again. Some scholars and practitioners have linked its proliferation in accounting-based performance metrics to the actions of bankers and other managers during times of crisis. Specifically, as asset prices increased during 2008, fair value gains on certain securities assets held by financial institutions were recognized as net income, and thus sometimes by calculating executive bonuses. Used to be. And as asset prices began to fall, many financial executives blamed fair price markdowns for accelerating the decline.

Yet generally accepted accounting principles in the United States and international financial reporting standards, adopted by nearly 100 countries worldwide, continue to use fair value on a large scale - for example, derivatives and hedges, employee stocks Examination of accounts related to options, financial assets and goodwill impairment.

The major explanation for the rise of fair value accounting is that finance theory - in particular, the idea that financial markets are efficient and their prevailing values ​​are reliable measures of value - allowed academic accounting research in the 1980s and 1990s, thus Opinions are changing on relative historical cost and fair value properties.