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Research Note: Revisiting Fair Value Accounting––Measuring Commercial Banks’ Liabilities

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  • Robert P. Gray

Abstract

IAS 39, Financial Instruments: Recognition and Measurement (IASB, 2000), requires assets to be marked to fair value if held‐for‐trading, available‐for‐sale purposes, or if they are derivatives; held‐to‐maturity securities, originated loans and originated securities are measured at amortized cost, providing they are not held‐for‐trading. Financial liabilities are measured at amortized cost except those that are held‐for‐trading or derivatives. A proposed amendment would accommodate improved fair value measurement of financial instruments. Commercial banks are greatly affected by any accounting standard concerning the recognition and measurement of financial instruments, whether related to assets or liabilities. This article demonstrates that the existing and proposed standards perpetuate the mismeasurement of interest rate risk for commercial banks. Under IAS 39 banks that have a balanced position, that is, no interest rate risk, counterfactually could show large changes in income through interest rate changes. An alternative accounting treatment, full fair value reporting of financial assets and liabilities, including all loans and deposits, is offered. Presently fair value data are mandated as footnote disclosure.

Suggested Citation

  • Robert P. Gray, 2003. "Research Note: Revisiting Fair Value Accounting––Measuring Commercial Banks’ Liabilities," Abacus, Accounting Foundation, University of Sydney, vol. 39(2), pages 250-261, June.
    • Handle: RePEc:bla:abacus:v:39:y:2003:i:2:p:250-261
    DOI: 10.1111/1467-6281.t01-1-00129
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    References listed on IDEAS

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    1. Baxter, Wt, 1967. "Accounting Values - Sale Price Versus Replacement Cost," Journal of Accounting Research, Wiley Blackwell, vol. 5(2), pages 208-214.
    2. Michael E. Bradbury, 2000. "Issues in the Drive to Measure Liabilities at Fair Value," Australian Accounting Review, CPA Australia, vol. 10(21), pages 19-25, July.
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    Cited by:

    1. R. G. Walker & Stewart Jones, 2003. "Measurement: A Way Forward," Abacus, Accounting Foundation, University of Sydney, vol. 39(3), pages 356-374, October.
    2. Robert P. Gray & Frank L. Clarke, 2004. "A Methodology for Calculating the Allowance for Loan Losses in Commercial Banks," Abacus, Accounting Foundation, University of Sydney, vol. 40(3), pages 321-341, October.
    3. Stewart Jones & Alison D. Higgins, 2006. "Australia's switch to international financial reporting standards: a perspective from account preparers," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(4), pages 629-652, December.

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