Academic journal article International Journal of Marketing Studies

Fair-Value Accounting's Role in the Global Financial Crisis?: Lessons for the Future

Academic journal article International Journal of Marketing Studies

Fair-Value Accounting's Role in the Global Financial Crisis?: Lessons for the Future

Article excerpt

Abstract

This paper debates how fair-value accounting (FVA) that were deeply affected by the global financial crisis. The global financial crisis started in advanced economies spreading to emerging markets and low-income countries. Thus, it has been affected in the middle of 2007 and into 2009, which have examined the role of FVA in the financial crisis. This paper is used the value-relevance of fair-value reported under FAS 157 that estimates assets and liabilities in terms of a simple theoretical and empirical analysis literature framework. This empirical study proposed is a global crisis that not a normal cyclical crisis of capitalism. Also, it requires a change in the management policy to be tackled with new regulatory frameworks for financial institutions in order to stimulate economic activities. In other words, FVA may have amplified the crisis. Future research is needed to meet up-to-date information regarding the nature of capital markets and financial institutions. This requires a new theory of economics; for instance, a change from equilibrium theory to reflexivity theory which requires a change in the underlying model of the economic activity framework. Therefore, this study has concluded a new theory of the change of equilibrium to reflexivity that led to develop the model in the framework of the economic activity.

Keywords: global financial crisis, fair-value accounting, FAS 157, valuation, financial regulation, financial assets and liabilities

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Fair-value Accounting (FVA) is defined in IAS 39 as the price at which an asset could be exchanged in a current transaction between knowledgeable and willing parties (FASB, 2006); often also called mark-to-market accounting (MTM) is the practice of banks and other financial institutions updating the valuation of assets or securities on a regular basis. For liabilities, FVA is defined as the amount that would be paid to transfer the liability to a new debtor. Likewise, FAS 157 defines FVA as: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (FASB, 2008).

Therefore, the FVA constitutes a hypothetical market price under idealised conditions (Hitz, 2005a). This definition indicates that the FVA is a market-based measure of value (Hitz, 2005b). Hence, for accounts arguing that FVA played a substantial role in deepening the financial crisis (e.g., Wallison, 2008; Whalen, 2008; Forbes, 2009). Consequently, FVA has been blamed for the latest credit crisis, being often considered as "the scapegoat" and exacerbated its severity for financial institutions in the US during 2007/2008 which quickly transformed to a Global Financial Crisis (GFC) and around the world. Eventually, the subprime mortgage crisis became a global issue, either directly due to the poor lending practices in countries such as England, Ireland, and Spain, or because of unsustainable growth in countries such as India and China.

Due to the inactivity of the markets, the key claims are that FVA contributes to excessive leverage in boom periods and leads to excessive impossible to perform a reliable market valuation. The valuation issue increased depreciation due to the posed an even greater problem. The problem with this arises when the market for an asset that a company values at fair value becomes illiquid (Penman, 2007; Benston, 2008). In addition, earlier in 2008 and mid of 2009, key FASB and other standard setters issued additional guidance regarding how to account for securities in illiquid, distressed, or disrupted markets. Others did not properly evaluate the estimates that management used to value the assets and liabilities.

The objective of this paper is to provide a comprehensive literature review and identifying the main methodologies and research techniques that have been used of the relationship between the global financial crisis and the role of fair-value accounting. …

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