Abstract
Recent deliberations by both the International Accounting Standards Board (IASB) and the Financial Accounting Standard Board (FASB) in the United States have focused on how fair values of assets and liabilities should be measured. The issue of when, rather than how, fair value measurement should be applied is still far from resolved, however. Fair values have been mandated for some assets and liabilities under both IASB and FASB standards, but it is fair to say that principles governing the applicability of fair values have yet to be articulated: when is fair value accounting appropriate and when is it not? Or, in terms of my charge for this paper, under what circumstances is fair value a plus or a minus? To prepare for my task, I made a survey of public statements made for and against fair value accounting by a variety of standard setters, regulators, analysts, and preparers. The stated ‘minuses’ typically point to the dangers of fair value estimates from marking to model rather than marking to market, concerns about introducing ‘excess volatility’ into earnings, and feedback effects (on banks’ lending practices, for example) that could damage a business and, indeed, heighten systematic risk. A few antagonists question whether fair values (for bank assets and liabilities, for example) really capture the economics of a business (in fostering core deposits and making loans). In counterpoint, the proponents of fair value argue that fair value is a superior economic measure to historical cost. Consider the following arguments, often advanced as ‘pluses’:
Published Version
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