Current Issues Financial Accounting

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Critical analysis

Article descriptions

The journal article named “The crisis of fair-value accounting: Making sense of the recent debate” is written by Christian Laux and Christian Leuz in Accounting and Organisations and Society journal (2009). Mr Laux works as a professor of finance at the Goethe University in Frankurt and his research has been published in many journals. Mr Leuz works as a professor of International Economics at University of Chicago Booth School of Business. He has done a lot of research and published his findings in several journals while acquiring many several grants and honours. Both authors have an immense amount of experience and qualifications in the area of accounting. The accounting topics that are covered in this article are financial instruments and recognition, relevance, reliability and measurement.

Objective of the article

The recent financial crisis has led to a vigorous debate about the pro and cons of fair value accounting (FVA), and this debate presents a major challenge for FVA going forward, Christian Laux and Christian Leuz has written ‘The crisis of air value accounting: Making sense of the recent debate.” The authors have evaluated the critics’ arguments that FVA has considerably contributed to the financial crisis and intensified its severity for financial institutions around the world. Also proponent’s views that FVA merely played the role of the proverbial messenger.

This article’s objectives are to make sense of the current fair value debate and discuss whether many of the arguments in this debate hold up to further scrutiny.

The authors have achieved their objectives by explaining what FVA is and discussing the key arguments for and against FVA. It also considers what’s new and what’s different about FVA as the authors believes confusion about this adds to the debate and non use of FVA. They further discuss the pros and cons of historical cost accounting as an alternative to FVA and discuss potential implementation problems and speciality the banks’ position on FVA. The authors have examined the concerns that FVA contributes to contagion and procyclicality. It analyses which accounting practices can help to alleviate these problems and discuss the relationship between FVA and accounting standards such as IFRS, US GAAP.

The authors give a thorough and logical view of both sides of the debate referencing other studies undertaken on this subject. They conclude the article with several suggestions for future research.

Research Design

The authors have gathered in-depth data and research from others sources to logically write this article. They have used an interpretive analysis aiming to give a better understanding for the readers. The article has been structurally put together in a clear and concise way to discover deeper meanings for the readers.

Main findings

The authors concludes that much of the controversy about FVA results from confusion about what is new and different about FVA as well as different views about the purpose of FVA. The authors also recognise trade off of FVA in certain situations acknowledges that standard setters will always face these issues and tradeoffs and site the trade off between relevance and reliability which have been debated for decades.

The authors also finds that although there are legitimate concerns about marking assets values to market prices in times of financial crisis they conclude that these problem may not be best addressed with changes to the accounting system but more appropriately be addressed by adjusting contracts and regulation. And although the downward spiral is most pronounced for FVA in its pure form both US GAAP and IFRS allow for deviations from market prices under certain circumstances thus they conclude that the standards themselves may not be the source of the problem.

The article concludes that there could be implementation problems in practice as accounting rules...
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