Question

By reading the case of Subprime crisis and Fair-value Accounting by Paul M. Healy, Krishna G. Palepu and George Serafeim, what are the arguments of those supporting fair value accounting ?

Answer 1

The argument is that new accounting rules are requiring writedowns that actually exaggerate losses and that

financial markets are thereby being driven to levels that are artificially low. A consequence, as summarized by The Wall Street Journal, is a “rebellion” by those who are “blaming accounting rules” for exaggerated losses andcalling for new rules that would, in essence, dampen financial market volatility. That is certainly one way of looking at it. And, no doubt, the billions in writedowns of mortgage-backed instruments and accompanying volatility in financial markets since this past summer have been no fun. Still, we should be slow to blame the accountants or new accounting standards for the subprime meltdown. To the contrary, some may be expected to point out that the aftermath of the subprime difficulties has put to the test a financial reporting system that has responded as it should.