【正文】 Electronic copy available at: Working Paper No. 33 The Crisis of Fair Value Accounting: Making Sense of the Recent Debate Christian Laux GoetheUniversity Frankfurt Christian Leuz The University of Chicago Booth School of Business amp。 NBER Initiative on Global Markets The University of Chicago, Booth School of Business “Providing thought leadership on financial markets, international business and public policy” Electronic copy available at: The Crisis of Fair Value Accounting: Making Sense of the Recent Debate* Christian Laux GoetheUniversity Frankfurt and Christian Leuz The University of Chicago Booth School of Business amp。 NBER April 2020 (Forthing in Accounting, Organizations and Society) Abstract The recent financial crisis has led to a vigorous debate about the pros and cons of fairvalue accounting (FVA). This debate presents a major challenge for FVA going forward and standard setters’ push to extend FVA into other areas. In this article, we highlight four important issues as an attempt to make sense of the debate. First, much of the controversy results from confusion about what is new and different about FVA. Second, while there are legitimate concerns about marking to market (or pure FVA) in times of financial crisis, it is less clear that these problems apply to FVA as stipulated by the accounting standards, be it IFRS or . GAAP. Third, historical cost accounting (HCA) is unlikely to be the remedy. There are a number of concerns about HCA as well and these problems could be larger than those with FVA. Fourth, although it is difficult to fault the FVA standards per se, implementation issues are a potential concern, especially with respect to litigation. Finally, we identify several avenues for future research. JEL classification: G14, G15, G30, K22, M41, M42 Key Words: Marktomarket, Fair value accounting, Financial institutions, Liquidity, Financial crisis, Banks, Procyclicality * We appreciate helpful ments from G252。nther Gebhardt, Claudia Lambert, Haresh Sapra, Hyun Shin, and Marco Trombetta. We thank Dominik Sch246。neberger and Ashish Shenoy for their excellent research assistance. Christian Leuz gratefully acknowledges research funding provided by the Initiative on Global Markets (IGM) at the University of Chicago Booth School of Business. Christian Laux gratefully acknowledges research funding provided by the Center for Financial Studies (CFS) at the GoetheUniversity Frankfurt. Electronic copy available at: 11. Introduction The recent financial crisis has turned the spotlight on fairvalue accounting (FVA) and led to a major policy debate involving among others the . Congress, the European Commission as well banking and accounting regulators around the world. Critics argue that FVA, often also called marktomarket accounting (MTM),1 has significantly contributed to the financial crisis and exacerbated its severity for financial institutions in the . and around the world.2 On the other extreme, proponents of FVA argue that it merely played the role of the proverbial messenger that is now being shot (., Turner, 2020。 Veron, 2020).3 In our view, there are problems with both positions. FVA is neither responsible for the crisis nor is it merely a measurement system that reports asset values without having economic effects of its own. In this article, we attempt to make sense of the current fairvalue debate and discuss whether many of the arguments in this debate hold up to further scrutiny. We e to the following four conclusions. First, 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. In our view, the debate about FVA takes us back to several old accounting issues, like the tradeoff between relevance and reliability, which have been debated for decades. Except in rare circumstances, standard setters will always face these issues and tradeoffs。 FVA is just another example. This insight is helpful to better understand some of the arguments brought forward in the debate. 1 Strictly speaking, FVA is broader than MTM accounting, as the latter is only one way of determining the fair value. We therefore use the term FVA throughout unless we specifically mean marking to a market price. 2 For example, the American Bankers Association in its letter to the SEC in September 2020 states: “The problems that exist in today’s financial markets can be traced to many different factors. One factor that is recognized as having exacerbated these problems is fair value accounting.” Similar concerns are also shared by the US Congress, which put a strong pressure on FASB to change the accounting rules. See also, ., Wallison (2020a, 2020b), Whalen (2020), and Forbes (2020). 3 A related but different argument is that FVA provides important messages that should not be ignored (Ball, 2020). 2Second, there are legitimate concerns about marking asset values to market prices in times of financial crisis once we recognize that there are ties to contracts and regulation or that managers and investors may care about market reactions over the short term. However, it is not obvious that these problems are best addressed with changes to the accounting system. These problems could also (and perhaps more appropriately) be addressed by adjusting contracts and regulation. Moreover, the concern about the downward spiral is most pronounced for FVA in its pure form but it does not apply in the same way to FVA as stipulated by . GAAP or IFRS. Both standards allow for deviations from market prices under certain circumstances (., prices from fire s