A Study On The Application Of Fair Value In The Banking Industry

The international accounting profession has studied on the fair value for a long period and the focus of discussion has changed from "use fair value or not" to "how to use".Since 1990s,the boom of financial derivative instruments accompanying with kinds of financial risks made FASB and IASB believe that fair value was the most appropriate measurement attribute for financial instruments,and tried their best to boost the application of fair value in the accounting standards.However,banks and banking supervision suspected on the reliability of fair value and worried about the volatility of financial position and operating performance arising on the use of fair value would threat the stability of financial system.In 2007,subprime crisis highlighted the fair value again.Financial institutions criticized the fair value was a villain,exacerbating the economic turmoil.As a result,an argument about fair value broke out between the financial institutions and the accounting profession. Considering that the financial crisis firstly influenced the financial industry and caused the bank failures on a large scale,the people pay more attention on the application of fair value on the banking industry.Based on the above setting,this paper firstly discusses the background,evolution of the concept,intrinsical attribute,measurement technique of fair value,and reviews on prior empirical researches and then classifies them into three categories according to a special consecution,including the studies on the value-relevance,reliability and economic behaviors.The above discusses are the theoretical basis of this paper. Secondly,based on U.S.GAAP and IFRS,this paper takes the consideration of the arguments of fair value arising on subprime crisis and banking statistic data from SEC's investigation reporting,and analyses six universal problems on the application of fair value in the banking industry,including the problems on fair value measurement of financial liability,reliability,measurement models,taxation and profit distribution,performance valuation and setting the indicators of banking supervision.Further more,the paper explores the impacts of fair value measurement on the quality of financial information and market behaviors.Finally,some suggestions are provided for fair value measurement in Chinese banking industry.New Chinese accounting standards brought into the fair value and provided four accounting standards for financial instruments similar to IFRS,which would make significant impacts on Chinese banking industry.So at last,based on the situation in China,this paper describes chinece banking how to use the fair value at present,and then up to system level,provides some suggestions on the internal control system,development of accounting standards,risk-oriented auditing and banking supervision.