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Fair Value Accounting and the Financial Crisis: Messenger or Contributor?

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  • Michel L. Magnan

Abstract

This commentary discusses how fair value accounting (FVA) affects the nature of financial reporting, especially for financial institutions that were deeply affected by the 2007‐9 financial crisis. Toward that end, I address four questions. First, I review FVA's role in financial reporting, emphasizing its development over time. While the commentary's focus is on the interface between financial instruments and FVA, its reach extends well beyond financial instruments. Thereafter, I discuss the measurement and valuation challenges that arise from the use of FVA in financial reporting. Then, I analyze the evidence, analytical and empirical, on the role that FVA may have played in the financial crisis of 2007‐9. Since, to some extent, the crisis is still unfolding, there is limited yet very insightful empirical evidence on this issue. The evidence does suggest that FVA, in combination with its use by regulators, may have severely undermined the financial condition of some institutions. The effect was amplified for institutions holding assets in markets that saw their liquidity dry up during the crisis. In other words, FVA may have amplified the crisis. Finally, I discuss some implications that we can draw from the crisis about the merits and risks underlying FVA. For instance, I conclude that, in a search for relevance, the use of FVA in financial reporting may accelerate its disconnection from a firm's business reality.

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  • Michel L. Magnan, 2009. "Fair Value Accounting and the Financial Crisis: Messenger or Contributor?," Accounting Perspectives, John Wiley & Sons, vol. 8(3), pages 189-213, August.
    • Handle: RePEc:wly:accper:v:8:y:2009:i:3:p:189-213
    DOI: 10.1506/ap.8.3.1
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    Cited by:

    1. Fawzi A. Al Sawalqa, 2016. "Fair Value Accounting: A Controversial but Promising System," Accounting and Finance Research, Sciedu Press, vol. 5(1), pages 1-88, February.
    2. David Procházka, 2011. "The Role of Fair Value Measurement in the Recent Financial Crunch," Prague Economic Papers, Prague University of Economics and Business, vol. 2011(1), pages 71-88.
    3. Bengtsson, Elias, 2011. "Repoliticalization of accounting standard setting—The IASB, the EU and the global financial crisis," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 22(6), pages 567-580.
    4. Costel Istrate & Bogdan Robu Ioan, 2014. "L'Analyse De L'Influence Des Composants Des Etats Financiers Sur La Capitalisation Boursière Des Entreprises Roumaines, Dans Les Conditions De La Crise," Post-Print hal-01899159, HAL.
    5. Nicoleta Farcane & Delia Deliu & Maria Gheorghian, 2011. "Auditing Fair Values In A Sensitive Socio-Economical Context," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(13), pages 1-19.
    6. Daniel Mügge & Bart Stellinga, 2015. "The unstable core of global finance: Contingent valuation and governance of international accounting standards," Regulation & Governance, John Wiley & Sons, vol. 9(1), pages 47-62, March.
    7. Michel Magnan & Haiping Wang & Yaqi Shi(Sans nom), 2016. "Fair Value Accounting and the Cost of Debt," CIRANO Working Papers 2016s-32, CIRANO.
    8. Cătălina Gorgan & Vasile Gorgan & Valentin Florentin Dumitru & Ileana Cosmina Pitulice, 2012. "The Evolution of the Accounting Practices During the Recent Economic Crisis: Empirical Survey Regarding the Earnings Management," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 14(32), pages 550-562, June.
    9. Ozili, Peterson K, 2021. "Accounting and financial reporting during a pandemic," MPRA Paper 105183, University Library of Munich, Germany.
    10. Michel Magnan & Garen Markarian, 2011. "Accounting, Governance and the Crisis: Is Risk the Missing Link?," European Accounting Review, Taylor & Francis Journals, vol. 20(2), pages 215-231.
    11. Smith-Lacroix, Jean-Hubert & Durocher, Sylvain & Gendron, Yves, 2012. "The erosion of jurisdiction: Auditing in a market value accounting regime," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 23(1), pages 36-53.
    12. Phillip de Jager, 2014. "Liberal Fair Value Accounting in Banks: A South African Case Study," Australian Accounting Review, CPA Australia, vol. 24(2), pages 134-153, June.
    13. Lamia Chourou, 2020. "Does Religiosity Matter to Value Relevance? Evidence from U.S. Banking Firms," Journal of Business Ethics, Springer, vol. 162(3), pages 675-697, March.
    14. Samira Demaria & Sandra Rigot, 2014. "IFRS Standards and Insurance Companies: What Stakes for Long-Term Investment? A French Case Explanatory Analysis," GREDEG Working Papers 2014-04, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    15. Tamás Szücs & József Ulbert, 2017. "Role and Measurement of Fair Valuation in the Hungarian Credit Institution Sector," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 16(3), pages 51-73.
    16. Palea, Vera & Biancone, Paolo Pietro, 2017. "Which Accounting Rules for Economic and Social Sustainable Development? Engaging Critically with IFRS Adoption in the EU," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201733, University of Turin.
    17. Palea, Vera, 2018. "Financial reporting for sustainable development: Critical insights into IFRS implementation in the European Union," Accounting forum, Elsevier, vol. 42(3), pages 248-260.
    18. Yuri Biondi & Pierpaolo Giannoccolo, 2015. "Share price formation, market exuberance and financial stability under alternative accounting regimes," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(2), pages 333-362, October.
    19. Volkova, O., 2018. "Fair Value in Finance: Fifty Shades of Fairness," Journal of the New Economic Association, New Economic Association, vol. 39(3), pages 85-109.
    20. Salvador Carmona, 2010. "Editorial," European Accounting Review, Taylor & Francis Journals, vol. 19(1), pages 1-5.
    21. Tamer Elshandidy & Ahmed Hassanein, 2014. "Do IFRS and board of directors' independence affect accounting conservatism?," Applied Financial Economics, Taylor & Francis Journals, vol. 24(16), pages 1091-1102, August.

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