Financial Crisis and Fair Value Accounting (FVA)

Abstract

The global financial crisis (GFC) has drawn attention to the role of financial reporting and to the implications for accounting in times of financial downturn. Many critics attribute blame to the fair value measurement approach, especially for reporting financial instruments in the balance sheets of financial institutions. The focus of the intense debate on fair value accounting (FVA) is whether it is or is not the cause of the financial crisis and whether its pro-cyclical effects towards the economy have played an active role in the financial crisis. The application of FVA would have caused a pro-cyclical consequence on firm’s balance sheet and on profitability, intensifying downturns and decreasing financial stability during the financial crisis.