【正文】 1 FAIR VALUE ACCOUNTING AND SUBPRIME Michael r. Young INTRODUCTION A proposition creeping its way into the discussion about the financial market dislocations arising from subprime loans is that it’s really our accounting system that is to blame. 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 and calling 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 mortgagebacked instruments and acpanying 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. BEHIND THE SCENES: FAS 157 For those inclined to blame the accounting, the real culprit in the subprime mess is a fairly new standard, ―Statement of Financial Accounting Standards No. 157‖ or ―FAS 157.‖ Issued in September 2020 and scheduled to take effect this past November, GAS 157 speaks to the valuation of certain kinds of assets, namely assets that should be recorded at fair value. Applicable to, among other things, financial instruments of the sort relevant to subprime loans, the standard specifies that such assets are to be recorded at the price for which they could be sold, that is, ―the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.‖ Among accountants, this concept is referred to in shorthand as the ―exit price.‖ In speaking to the proper valuation of assets, FAS 157 is the latest contribution to one of the oldest debates in accounting. That is whether assets are better recorded at ―cost‖ or at their ―fair‖（ or market）value. The issue is one that has been vigorously debated for years, one of the reasons being that each side has had excellent arguments to support its position. Advocates of the ―cost‖ approach assert that cost is the best, most reliable, and most objective indication of ―fair value‖ at the time a transaction takes place. The existence of an invoice or a contract typically makes the evidence supporting the asset value all but irrefutable. Making the valuation even more reliable, such concrete evidence can be independently examined by an outside auditor of the financial statements. Accordingly, under the cost approach, there is paratively little need for judgment and, therefore, little opportunity for blunders or the manipulation of financial results. But that is only one side of the argument. The other is that historical cost, while objectively reliable at the moment a transaction takes place, can bee outdated fairly quickly. That is particularly so for assets 2 that are traded in active markets – such as financial instruments. What is the logic, the fair value adherents assert, of keeping a share of stock on the books at its purchase price when the price has increased or decreased in market trading thereafter? More broadly, insistence upon cost as the ultimate measure of asset value can lead to reported results that make no sense. A FASB member made the point at one meeting through the example of an office building. Under GAAP, the building would be recorded at cost and then, over the succeeding quarters and years, depreciated. The result would be that, for financial reporting purposes, its reported value would go down. At the same time, the economic reality may be that its value was actually increasing. Hence, the ―cost‖ approach would have two results. The first is that the information would be objectively reliable. The second is that it would be pletely wrong. The present d233。tente in this debate is an approach to accounting that seeks to acknowledge the good points made by each side. The approach is to require certain assets to be recorded at fair value and other assets generally to be recorded at cost. Among those assets to be recorded at fair value are certain kinds of financial instruments, the thinking being that financial instruments are often traded in active markets with an observable price. It is hardly an insurmountable challenge, the logic goes, to look up the price each time the financial statements are updated. While that may be true in many or most cases, though, it is not true all the time, and then things start to get a little tricky. FAS 157 acknowledges that there may be instances in which assets will have to be recorded at fair value but in which an observable market price in an active market does not exist. FAS 157 deals with this through the adoption of an approach that focuses attention on the methods used to estimate fair value. Basically, FAS 157 puts in place a ―fair value hierarchy‖ that prioritizes the inputs to valuation techniques according to their objectivity and observability. At the top are ―Level 1 inputs,‖ which are defined as ―quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.‖ Next down in the hierarchy are ―Level 2 inputs,‖ which are inputs ―other than quoted prices included within Level 1 that are observable for the asset or liability‖ such as quoted prices for similar assets or liabilities in markets that are not active. Lowest o