The Correlation Test Of Fair Value And Economic Cycle

Since the1980s, the emergence of large numbers of derivative financial instruments made the historical cost measurement model was criticized in society, which lacks relevance and timeliness. At this time fair value accounting gradually appeared in the vision the public, along with its superiority which the historical cost can’t compare with, and became a hot topic of accounting development research in recent years.Though fair value measurement model was controversial at the beginning of its introduction, it just stayed at the level of theoretical thinking and forecasting and most of its participants were the scholars in accounting field. It was indeed pushed into the "cusp" of the public opinion due to the outbreak of the financial crisis in2008. The financial sector began to participate in it and launched a dialogue with the accounting profession. The emergence of the crisis gave the scholars a full "practical support" and excuse, who held a negative attitude towards fair value measurement. Among them, financial institutions with a large number of financial assets have even considered fair value measurement as the booster of the financial crisis. As the "victims" of the fair value accounting, they frequently blamed that it would increase the instability factors of financial markets and appealed to stop using fair value measurement. The international community also paid high attention to this dispute.Among them, most of the critics to fair value focused on its "pro-cyclical effect" character: generally speaking, fair value increased the downturn when the economy was weak, fair value exaggerated the extent of the prosperity when the economy was booming. In fact, whether fair value boosted the economic cycle? In this context, I think that to explore the relevance between fair value and the economic cycle is a necessary precondition for researching the apply of fair value in the economic field. This article intends to study from both theoretical and empirical levels on issues like whether the changes in the profits and losses induced by fair value measurement are consistent with the trend of economic development, whether there is a relevance between them and whether the impact is significant.It can be divided into two levels exactly:1. At the theoretical level, it introduced the basic properties of fair value measurement and the direct cause of the outbreak of the subprime mortgage crisis. And starting from the critics to fair value from the subprime mortgage crisis, it studied whether there is real impact effect between them;2.At the empirical level, it transferred the fair value changes,which can not be quantified, into the directly influenced changes of two financial indicators, earnings per share and net asset value per share, then analyzed its relevance with gross domestic product. The results showed that:fair value measurement is based on the present point and reflects the true financial condition of the body of the report and can better meet the information needs of management. Therefore the disclosed accounting information has a higher relevance and reliability, and the accusation of the financial institutions lacks reasonable basis; related financial indicators of the enterprises that introduce the fair value measurement model won’t have large fluctuations with the economic situation. Then it washed away the injustice of considering the fair value accounting as the scapegoat of subprime mortgage crisis.In addition, as the measurement attributes of the financial instruments, fair value is far beyond the scope of accounting. Its high relevance with the capital market also needs the financial sector to recognize the value and significance of its existence. From this level, it’s sub-prime crisis which spreads the fair value with cross-field character to the financial sector. Meanwhile, this article would take this dispute as an opportunity to make more people fully understand the attributes of fair value measurement through reflection, recognizing the fair value measurement is better to restore the authenticity of the economic development rather than being the culprit who leads to the pro-cyclical effect. Furthermore, it will provide referencial suggestions for rational use of accounting tools to better serve the economic development.