Fair value accounting (FVA) is the practice of accounting that prices certain assets and liabilities at their present market value. In theory, FVA intends to capture and report the present value of future cash flows related to an asset or a liability (Campmell, Jackson and Robinson, 2008). FVA means that assets and liabilities are reported on the balance sheet at fair value and any changes in the fair value are recognized as gains or losses in the income statement. When fair value is determined based on market prices, FVA is also called mark-to-market accounting
FVA is also called mark-to-market accounting (Laux and Leuz, 2010), thus it can be said that the FVA is a market-based measure of value (Campmell, Jackson and Robinson, 2008). The impact of the fair value accounting during the crisis period has received considerable critical attention. Because of the inactivity of the markets, the main allegation according to Masoud and Daas (2014) are that FVA contributes to excessive leverage in boom periods and leads to excessive market valuation. According to Laux and Leuz (2010) the write-downs due to falling market prices reduce bank capital and begin a downward spiral as banks are forced to sell assets at “fire sale” prices, which intern can lead to contagion as prices from assets fire sales of one bank become relevant for other banks.
This paper will discuss the previous literature, compare arguments and opinions in order to come with relevant conclusions.
Thus we will attempt to find relevant answer to several questions, mainly has FVA played essential role in deepening the financial crisis? Whether reporting losses, due to assets declining values, under fair value accounting created additional problems? Should financial institutions report financial assets and liabilities on balance sheet at fair value or, as they had traditionally report them, at a historical cost?