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The Role of Fair Value Measurement in the Recent Financial Crunch

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  • David Procházka

Abstract

Fair value measurement became pervasive to financial reporting over last 20 years. Under fair value accounting, entities are obliged or permitted to measure particular assets and liabilities at their fair values as at the reporting dates. Fair value is a current market-based hypothetical value. This market value is not always directly observable. The debate on usefulness of fair value accounting has arisen in connection with the financial crunch and economic crisis in years 2007-2009. The opponents of fair value accounting insist on that financial reporting based on fair value measurement has accelerated the financial crisis and significantly worsened the impact on affected companies. On the other hand, there are several important opinions in favour of fair value accounting. The paper aim is to contribute to the actual debate whether fair value accounting played the role of a messenger or a mover in the recent financial crunch and subsequent economic recession and to analyse the characteristics of fair value accounting from the economic point of view.

Suggested Citation

  • David Procházka, 2011. "The Role of Fair Value Measurement in the Recent Financial Crunch," Prague Economic Papers, University of Economics, Prague, vol. 2011(1), pages 71-88.
  • Handle: RePEc:prg:jnlpep:v:2011:y:2011:i:1:id:388:p:71-88
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    References listed on IDEAS

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    1. Guillaume Plantin & Haresh Sapra & Hyun Song Shin, 2008. "Marking-to-Market: Panacea or Pandora's Box?," Journal of Accounting Research, Wiley Blackwell, vol. 46(2), pages 435-460, May.
    2. Christian Laux & Christian Leuz, 2010. "Did Fair-Value Accounting Contribute to the Financial Crisis?," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 93-118, Winter.
    3. Beatty, Anne & Chamberlain, Sandra & Magliolo, Joseph, 1996. "An empirical analysis of the economic implications of fair value accounting for investment securities," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 43-77, October.
    4. Laux, Christian & Leuz, Christian, 2009. "The crisis of fair-value accounting: Making sense of the recent debate," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 826-834, August.
    5. Michel Magnan, 2009. "Fair Value Accounting and the Financial Crisis: Messenger or Contributor?," CIRANO Working Papers 2009s-27, CIRANO.
    6. Mary Barth & Wayne Landsman, 2010. "How did Financial Reporting Contribute to the Financial Crisis?," European Accounting Review, Taylor & Francis Journals, vol. 19(3), pages 399-423.
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    Citations

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    Cited by:

    1. Krzysztof DRACHAL, 2014. "Is There a Feedback Mechanism in Accounting?," European Financial and Accounting Journal, University of Economics, Prague, vol. 2014(1).

    More about this item

    Keywords

    measurement; fair value; economic income; accounting income;

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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