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of the fundamental criticisms on fair value accounting is the perceived lack of reliability of the numbers produced by using it as a measurement base. But same can be said of historical cost approach, when it comes to impairment of certain assets as the preparers have to determine if the asset’s market value has fallen below the historical cost or not. This requirement makes historical cost accounting equally unreliable.

According to Laux and Leuz (2009a), FVA is not responsible for GFC nor should it be looked at as measurement system that values assets but doesn’t have its own economic consequences. Under both US GAAP and IFRS, FVA is mainly used for financial assets, although it is not used for all financial assets as some financial assets are measured using historical cost. Two main criticisms that have been levelled against the FVA include the lack of its application to illiquid assets and its procyclicality. The FVA system is said to have contributed to the financial instability in GFC and its procyclicality is said to have resulted in asset bubbles and aggravate the effects of their collapse (Wallison, 2008).

According to Penman (2007), the demand for FVA arises because of perceived deficiency in historical cost accounting and the valuation and performance evaluation of a firm. One should be able to ascertain the value of a business from its book value from an ideal fair value accounting report and earnings have no role to play in this regard. On the contrary, one should be able to value a firm from its earnings under an ideal historical cost accounting report. He tests these assertions and finds that FVA is a plus, leaving aside the implementation issues. Nevertheless, historical cost accounting can fill in the void if an ideal FVA is not attainable. He then goes on to look at the pluses and minuses of all three levels of fair value measurements. He concludes that FVA is a plus at a theoretical level as it answers all the questions regarding firm valuation on which investment decision is mainly based. But if fair value is implemented as exit price, the minuses start creeping in. Fair value accounting works well where one to one relationship exists between exit prices and fair value to shareholders e.g. investment funds where shareholders trade in and out based on the net asset value of the fund. This condition doesn’t hold where firm has assets whose value come from a business plan rather than volatility in market prices, even where exit prices are taken from an active market.

The banking industry has been and is a very vocal opponent of the push of standard setters towards fair value accounting. The industry argues that banking is a long term business and a short term measure such as fair value fails to take the realities of banking industry into account. Another concern that the industry has is they it would become necessary to use inherently subjective valuation methods to measures a fairly large section of a bank’s books which will substantially affect the reliability of the information (Chisnall, 2001 and Ebling, 2001). It should be noted that banks raised these concerns well before the start of GFC in 2007.

The use of FVA as a measurement tool results in management applying its discretion to the detriment of the users of financial reports. This is not only true of financial assets but non financial a本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。