Professional Documents
Culture Documents
By
Evan Pathiratne
Postgraduate and Midcareer Development Unit Faculty of Management and Finance University of Colombo
CHAPTER 7 FAIR VALUE IN CONTEXT - IS IT FAIR TO BLAME FAIR VALUE ACCOUNTING FOR THE FINANCIAL CRISIS?
7.1 INTRODUCTION
When looking into the concept of Fair Value in the emerging economy, the connection and correlation it has with a financial meltdown is also a controversial topic that is worth discussing. The Economist magazine on a article published in 2009 on the topic of The crisis and fair-value accounting made the following comments the fair-value revolution is incomplete. Regulators may need to abandon the traditional, mechanistic link between accounting and capital adequacy rules if they really want to try to fight a banking crisis. That is no bad thing either. Investors and regulators should be able to share a market-based language to describe financial problems, even if they disagree about what needs to be done. (The Economist, 2009) An article on the topic of Is It Fair to Blame Fair Value accounting for the Financial Crisis? was published under the 2009 November issue of Harvard Business Review magazine (written by Robert C. Pozen is the chairman of MFS Investment Management, a global money management, and a senior lecturer at Harvard Business School). It provides a critical evaluation on the concept of fair value and tries to debunk the preconceived notions had on fair value and its disadvantages. Below is stated some of the key points of discussion in the article.
Removing the cash flow from the income statement is practice used by securities analysts to better understand a companys financial state. Investors can understand the percentage of a banks net income came from operating earnings and what percentage came from securities markets movements Bank executives can now logically understand and elaborate how their banks were earning profits from operations, regardless of periodic price fluctuations in securities holdings if any.
Figure 1 : Proposed New Format for a Financial Statement , to reduce misinterpretation of Banking assets
Even with such proposed amendments with the current advent of the EU economy the banks in the sector is having problems with fair value. Royal Bank of Scotland made a big net loss in the first quarter of the year. But most of that was down to a 2.46 billion charge for the fair value of the lenders own debt. Its an absolute mess, said Mike Trippitt at Oriel Securities. At the moment we are seeing fair value gone mad with swings of 2 billion per quarter. (The Wall street Journal,2012)
REFERENCES
(2008) How Fair Is Fair-Value [WWW] Available from:
1. Forbes
Accounting?
http://www.forbes.com/2008/06/24/accounting-banking-sec-biz-cx_lm_0625sec.html [Accessed 2012/05/22]. 2. Lanka Business Online (2009) Sri Lanka says move to fair value accounting difficult
[WWW] Available from: http://www.lankabusinessonline.com/fullstory.php?nid=1029881417 [Accessed 2012/05/19]. 3. Pozen R.C (2009) It Fair to Blame Fair Value accounting for the Financial Crisis? Harvard Business Review, November 2009 , p. 85-92 . 4. The Economist Newspaper Limited (2009) The crisis and fair-value accounting [WWW] Available from: www.economist.com/node/12274096 [Accessed 2012/05/22]. 5. The Wall Street Journal (2012) Fair Value Accounting Haunts Banking Sector [WWW] Available from:http://blogs.wsj.com/source/2012/05/04/fair-value-accounting-haunts-banking-