Recent Developments in Fair Value Accounting

Avinash Arya, PhD, MBA, and Alan Reinstein, DBA, CPA

SFAS 157, Fair Value Measurements, which became effective in January 2008, defines fair value and provides comprehensive implementation guidance for applying it to assets and liabilities for measurement under GAAP. Since then, the meltdown of financial markets and a deepening recession have led to a reappraisal of fair value accounting. Critics argue that the fair value accounting, commonly called mark-to-market accounting, has exacerbated the crisis by requiring significant write-down of assets, resulting in sharp decreases in regulatory capital of banks and other financial institutions (see William Isaac, “How to Save the Financial System,” Wall Street Journal, September 19, 2008; John Berlau, “Maybe the Banks Are Just Counting Wrong,” Wall Street Journal, September 20, 2008; Gary Gorton, “The Panic of 2007,” Yale ICF Working Paper No. 08-24, ssrn.com/abstract=1255362). The crisis led to swift and unprecedented actions from the Treasury Department, the Federal Reserve, and Congress, including the $700 billion Troubled Assets Relief Program (TARP) to help financial institutions.