Financial Crisis And Fair Value Measurements

In March 2007,American New Century Financial Corporation filed for bankruptcy protection,which started the US sub prime mortgage crisis.The crisis evolved into a global financial crisis with the trades of financial derivatives in the global capital markets.Both financial and accounting sectors are concerned about Fair Value Accounting Standards in the crisis.Bankers think that Fair Value Accounting has played the role of adding fuel to the flames in the crisis.The stipulate of Fair Value Measurements made too much of the assets of financial institutions by market value writing-down.This could make the market deep into a vicious circle: transaction prices down,then asset write-downs,then panic selling and then transaction prices further down,which finally made financial crisis even more serious. So they call for repealing or suspending of this guideline.However,accounting sectors think that Fair Value Accounting has nothing to do with this financial crisis. They think that fair value played a positive role in this financial crisis.Using the fair value model,the accounting profession exposes the financial asset bubble timely, transparent and open manner,making financial sector,investors and financial regulatory authorities face and defuse financial risks.At the same time,the investors could comprehend the scale and dynamics of crisis more timely and efficient.According to the analyze of American International Group(AIG) and China Eastern Air Holding Company(CEAH),this paper illuminates that this financial crisis is not the Fair Value's fault,and deeply researches the relationship of financial crisis and fair value measurements.The root cause of this financial crisis is not fair value but the inadequate supervision by regulatory bodies,unregulated financial derivatives product innovation,insufficient awareness of risk prevention and management mechanism of Regulators,financial institutions and credit rating agencies.However, Fair Value Accounting magnified the loss of this crisis.In Condition of market price dropping and lack of market functions,the loss under unreasonable market value write-down is much lager than the actual loss. Compared to other measurement attribute,fair value is still a better choice.As the outbreak of the financial crisis is a test of it.There are still some problems in the using of fair value,which need to be further modified perfected.Market and fair value accounting standards influence each other:fair value accounting standards based on the market price;the effectiveness of market impact the market.A more relevant and appropriate accounting standard could promote the development of capital markets more effectively;the friction with it in the process of market could promote the reflection and improvement of standard on the other side.I believe fair value will become an irreplaceable important measurement attributes with improvement in the future.