Fair Value Accounting Rules Not to Blame for Financial Crisis
NERA Economic Consulting’s Thomas Porter says fair-value accounting rules cannot be blamed for causing the credit crisis, mainly because they did not require any new fair-value measurements.
Prior to the recent credit crisis and market meltdown, there had been little complaint about the use of fair value in financial reporting. However, critics now claim that the requirements of SFAS 157 — which most companies were required to adopt right after the markets began to collapse — contributed to the credit crisis and have called for its rescission. Their argument is that heightened liquidity needs could only be satisfied by fire sales at depressed prices, which then led to a further spiraling down of prices, all of which could have been avoided if SFAS 157 had never been issued.
In an article in Complinet’s Informer magazine, Porter argues that SFAS 157 cannot be blamed for causing the credit crisis, mainly because it did not require any new fair-value measurements. One of its main contributions to Generally Accepted Accounting Principles, Dr. Porter notes, is the expanded and standardized disclosure requirements about fair value.
Unfortunately, the uproar caused by the critics was so distracting that users of financial information failed to appreciate that SFAS 157 gave them exactly what they had long been clamoring for- heightened transparency.
Further, because SFAS 157 and its subsequent interpretations accommodate the possibility of imperfect markets, the timing of its release (as the markets were collapsing) was almost perfect. Dr. Porter contends that, as a result of the structured and expanded disclosure requirements of SFAS 157, users now have more and better information about when firms depart from “mark-to-market” accounting when fair value measurements are required.
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