Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties.1 For liabilities, fair value is defined as the amount that would be paid to transfer the liability to a new debtor. Under fair value accounting (FVA), assets and liabilities are categorized according to the level of judgment (subjectivity) associated with the inputs to measure their fair value, with three (3) levels being considered. At level 1, financial instruments are measured and reported on a firm’s balance sheet and income statement at their market value, which typically reflects the quoted prices for identical assets or 大学生消费问卷调查表
1Financial Accounting Standards Board. 2006. Financial Accounting Standard 157 - Fair Value Measurements. Norwalk, CT.
liabilities in active markets. It is assumed that the quoted price for an identical asset or liability in an active market provides the most reliable fair value measurement because it is directly observable to the market (« mark-to-market »). However, if valuation inputs are observable, either directly or indirectly, but do not qualify as Level 1 inputs, the Level 2 fair value assessment of a financial instrument will reflect a) quoted prices for similar financial instruments in active markets, b) quoted prices for identical or similar financial instruments in markets that are not active, c) inputs other than quoted prices but which are observable (e.g., yield curve) facebook cover http://www.facebookcover4u.com/ or d) correlated prices. Finally, certain financial instruments which, for example, are customized or have no market, will be valued by a reporting entity on the basis of assumptions that presumably reflect market participants’ views and assessments (e.g., private placement investments, unique derivative products, etc.). Such valuation is deemed to be derived from Level 3 inputs and is commonly referred as “mark-to- model” since it is often the outcome of a mathematical modelling exercise with various assumptions about economic, market or firm-specific conditions. 2 In all cases, any unrealized gain (or loss) on financial instruments held by an institution translates into an increase (decrease) in its stockholders’ equity and, consequently, an improvement (deterioration) in its capitalization ratios. 3
Detractors, among them David Dodge, the former Governor of the Bank of Canada, argue vehemently that FVA has accelerated and amplified the current financial crisis.4 Their argument can be summarized as follows. Starting in 2007, the drop in the price of many types of financial instruments led financial institutions to mark down the asset values reported on their balance sheets, thus weakening their capitalization ratios (let’s think about the first write-offs following the start of the subprime crisis). To improve their financial profile and to enhance their safety zone with respect to regulatory capital requirements, these institutions started to sell securities or close down positions on some financial instruments in markets that were increasingly shallow as a result of the emergence of a liquidity crisis. These sales magnified the downdraft in quoted prices, thus bringing additional devaluations, etc. Along these lines, William Isaac, former Chairman of the U.S. Federal Deposit Insurance Corporation, argues that “mark-to-market accounting has been extremely and needlessly destructive of bank capital in the past year and is a major cause of the current credit crisis and economic downturn”.5