The Evolution of Fair Value Accounting and Its Ongoing Reforms Flashcards
How did fair value accounting originate and evolve over time?
Initial Use: Limited application in specialized areas (e.g., investment securities).
Growth Phase: 1980s–90s saw increased acceptance as capital markets expanded and financial economics gained influence.
Codification: FAS 157 (US) and IFRS 13 (international) formalized fair value rules, introducing definitions and hierarchies.
What key developments or changes did IFRS 13 introduce?
Single Framework: Unified guidance for fair value measurement across different IFRS standards.
Fair Value Hierarchy: Clarified three levels of inputs.
Disclosure Emphasis: Required extensive notes on valuation methods, assumptions, and sensitivity analyses.
Why were these changes made?
Consistency: To reduce confusion when different standards used slightly different definitions.
Transparency: Post-crisis, greater emphasis on explaining valuation methods to users.
Market Volatility: Recognize and address concerns about how ‘illiquid’ or ‘distressed’ markets should be treated (especially Level 3 valuations).
Have these changes improved the accounting standards? Provide a balanced view.
Improvements: More consistent methodology, better disclosures, helps users gauge valuation risks.
Lingering Issues: FVA’s susceptibility to pro-cyclical pressures, complexity in model-based (Level 3) valuations, and the ongoing debate about how reliable/subjective fair values can be in volatile markets.
How does Michael Power relate these reforms to the notion of reliability?
He highlights a ‘transformation’ of reliability: from transaction-based verification to trust in market-derived or model-derived prices. The IFRS 13 reforms try to bolster this trust through better disclosures, but subjectivity remains when markets are thin or highly volatile.
Summarize your position on whether the changes genuinely improve FVA.
General Position: The clearer guidance and hierarchy enhance transparency and comparability, thus addressing many pre-crisis criticisms.
Caution: Complex financial instruments and uncertain market conditions mean full ‘improvement’ is an ongoing process, not a final state.
