Fair Presentation---an Ethical Perspective on Fair Value Accounting Pursuant to the Sec Study on Mark-to-Market Accounting

6363 Words Apr 21st, 2012 26 Pages
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FAIR PRESENTATION---AN ETHICAL PERSPECTIVE ON FAIR VALUE ACCOUNTING PURSUANT TO THE SEC STUDY ON MARK-TO-MARKET ACCOUNTING
Sharon S. Seay, Macon State College Wilhelmina H. Ford, Macon State College
ABSTRACT Fair value accounting has received a significant amount of blame as the cause of the current financial crisis. Fair value accounting does not cause illiquidity or volatility in financial markets. Banks, rather than accounting, caused the existing crisis, ultimately through bad lending decisions and inadequate risk management. Accounting rules are designed to reveal the full extent of losses and future risks. This transparency would enable banks, regulators, and government to identify specific sources of the crisis and take
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SFAC No. 2 states that the two primary qualitative characteristics that provide decision-utility are relevance and reliability, with secondary qualities of comparability and consistency. Financial information is also used in prudential oversight. According to the Basel Committee on Banking Supervision, prudential oversight is to foster safety, soundness, and financial stability. Under current U.S. GAAP, items on the balance sheet are measured using a mixed-attribute model. This model calls for carrying some assets and liabilities at historical cost, some at fair value, and some at other bases, such as lower-of-cost-or-fair-value. GAAP rules governing appropriate measurement attributes for specific accounts hark back to conceptual framework theory relating choice of measurement attribute to promoting relevance, reliability, and comparability so as to maximize decision utility. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands fair value measurement disclosures. One objective of SFAS No. 157 is to improve consistency and comparability of fair value measurements. Fair value is defined 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” [SFAS No. 157]. Thus, fair value is an exchange price, an exit price. FASB concluded that

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