The Financial Accounting Standards Board

Better Essays

At the beginning of the 21th century, the Financial Accounting Standards Board (FASB) started to realize the importance of fair value accounting as for a new measurement basis for asset and liability. The FASB believed the primary objective of financial reporting is to provide relevant and useful information about the future cash flow to current and prospective investors and creditors (Whittington, 2008). Since the historical cost accounting usually gives information about past transaction, not information about the future, to existing shareholders or creditors, FASB thought financial statements based on historical cost accounting could not be relevant and useful to prospective investors, which makes them difficult to achieve the main …show more content…

Brain Wesbury, the Chief Economist at First Trust Advisor L.P, also pointed out that the price of mortgages, corporate bonds, and structured debt have fallen below their fundamental value in uncertain and illiquid market, and banks had to write down their asset to this distorted market price in accordance with fair value measurement and record more losses than they had to (Wesbury, 2009). Oher critics make a further argument that this phenomenon has led to the depletion of bank’s regulatory capital and it forced banks to sell off their asset at fire sales prices, which resulted in a contagious downward spiral as fire-sale price from this distressed bank became relevant marks for other banks (Plantin, 2008). Although the contagion effects and asset-fire sales might have been occurred during the financial crisis as critics argue, a careful analysis should be made to find out whether the fair value accounting actually aggravated the severity of the impact of global financial crisis. In fact, according to the research conducted by Laux and Leux (2008), there is little evidence that supports fair-value accounting contributed to the financial crisis. Firstly, most of the financial assets held by banks in the time of crisis were not marked to market. Under fair value accounting, financial executives in banks have to classify their securities and loans into (maximum) three asset categories: Trading securities, Available for Sales (AFS) securities and

Get Access
Get Access