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Both Sides Make Good Points

The role of fair value accounting in the subprime mortgage meltdown.

May 2008
by Michael Young/Journal of Accountancy

How often do we get to have a raging national debate on an accounting standard? Well, we’re in one now.

As the credit markets froze this winter and stocks gyrated, investors and pundits naturally looked for someone, or some thing, to blame. Fair value accounting quickly emerged as an oft-cited problem. But is fair value really a cause of the crisis or is it just a scapegoat? And might it have actually prevented an even worse calamity?

While the standard at issue — FASB Statement no. 157, Fair Value Measurements — is fairly new, the underlying substance of the debate goes back for decades: Should you record your assets at their original cost or at their fair (meaning market) value?

This issue goes to the very heart of accountancy and stirs passions like few others in financial reporting. Why? Two good reasons. First, each side of the debate has excellent points to make. Second, each side genuinely believes its argument.

So let’s step back, take a deep breath, and think about fair value issue with all of the objectivity we can muster. The good news is that the events of the last several months involving subprime-related financial instruments give us an opportunity to evaluate the extent to which fair value accounting has, or has not, served the financial community. Indeed, some might point out that the experience has been all too vivid.

This article has been excerpted from the Journal of Accountancy. Read the full article here.