Fair Value

Critically evaluate the role of fair values accounting in the contest of the financial crisis.

The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we examine the role of fair-value accounting in the financial crisis. This essay will be structured as followings. Firstly, this essay will discuss the goal, and the main features and the hierarchy fair value view. Following this, the essays will mainly focus on demonstrating the benefits and drawbacks of fair value in the contest of financial crisis.

Ryan (2008) explains that the goal of fair value accounting is for firms to estimate as best as possible the price at which the position they currently hold would change hands in orderly transactions base on current information and conditions. Thus, firms must fully incorporate current information about future cash flows and current risk-adjusted discount rates into their fair value measurements.

The first main feature of fair value view is that accounting information needs ideally to reflect the future, not the past, so past transactions and events are only peripherally relevant. This is to say that cost is an in appropriate measurement basis because it relates to a past event whereas future cash flow will result from future exit, measured by fair value. Then, the second feature states that market prices should give an informed, nonentity specific estimated of cash flow potential, and market are generally sufficiently complete and efficient to provide evidence for representationally faithfully measurement on this basis.

Furthermore, according to SFAS 157, there are three levels of fair value measurement inputs. The level 1 state that inputs are unadjusted quoted market prices in active markets for identical items. Level2...