【正文】 against FVA. In Section 3, we discuss the concern that FVA contributes to contagion and procyclicality as well as ways to address this concern, including how current accounting practices help to alleviate problems of contagion. We consider potential implementation problems in Section 4 and conclude with suggestions for future research in Section 5. 2. Fairvalue accounting: What is it and what are the key arguments? FVA is a way to measure assets and liabilities that appear on a pany’s balance sheet. FAS 157 defines fair value as “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.” When quoted prices in active markets for identical assets or liabilities are available, they have to be used as the measurement for fair value (Level 1 inputs). If not, Level 2 or Level 3 inputs should be used. Level 2 applies to cases for which there are observable inputs, which includes quoted prices for similar assets or liabilities in active markets, quoted prices from identical or similar assets in 4inactive markets, and other relevant market data. Level 3 inputs are unobservable inputs (., model assumptions). They should be used to derive a fair value if observable inputs are not available, which is monly referred to as a marktomodel approach. Fair value is defined similarly under IFRS as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties, in an arm’s length transaction. In determining fair value, IFRS make similar distinctions among inputs as FAS 157: Quoted prices in active markets must be used as fair value when available. In the absence of such prices, an entity should use valuation techniques and all relevant market information that is available so that valuation techniques maximize the use of observable inputs (IAS 39). It is recognized that an entity might have to make significant adjustments to an observed price in order to arrive at the price at which an orderly transaction would have taken place (., IASB Expert Advisory Panel, 2020). 3. Fairvalue accounting, illiquidity, and financial crises FVA and its application through the business cycle have been subject to considerable debate (., ECB, 2020。 IMF, 2020).16 While this expected feature of secondbest standards is one explanation for the criticism of FVA during the crisis, it is clearly also possible that extant rules and guidance are too restrictive (even from a secondbest perspective) and that we would have been better off giving managers more flexibility in the is in essence the view that the House Financial Services Committee adopted in a hearing on MTM accounting rules on March 12, 2020. As a result of this political pressure, the FASB relaxed the conditions for moving assets into Level 3 in April 2020. Moreover, the financial statements of . banks for fiscal 2020 show that banks have been able to move assets into the Level 3 Category as the financial crisis unfolded, so it was clearly not impossible to move to models (see also IMF, 2020). But it is of course possible that banks did not move enough assets into the Level 3 category to prevent contagion effects. In the end, we need more research on this A second implementation problem may arise from litigation risk. Deviations from market prices under existing FVA standards require substantial judgement by the preparers and the auditors. However, managers, directors and auditors face severe litigation risks as well as substantial legal penalties, including prison terms, which recently have been increased by the SarbanesOxley Act of 2020. In this environment, managers, directors, and auditors are likely to weigh the personal costs and risks associated with deviations from market prices differently than investors. For example, it is conceivable that a manager is reluctant to use an appropriate model based fair value that is higher than an observable price from a very illiquid market, especially when there is substantial downside risk for the economy or the firm, as there typically is in financial crises. From a litigation risk perspective, guidance as to when deviations are appropriate is likely to play an important role, especially in litigious environments and when enforcement is strong. Thus, it is possible that, once we recognize the litigation aspect, improvements in the standards’ implementation were (and perhaps are still) needed. However, as litigation serves as an important enforcement mechanism, there are tradeoffs as we highlighted earlier in this section for SEC enforcement. This second implementation problem also highlights that it is important to evaluate accounting standards within the context of the institutional environment in which they Conclusion and suggestions for future research The preceding sections illustrate that the debate about FVA is full of arguments that do not hold up to further scrutiny and need more economic analysis. Moreover, it is important to recognize that standard setters face tradeoffs, and in this regard FVA is no exception. One example is the tradeoff between relevance and reliability, which is at the heart of the debate of when to deviate from market prices in determining fair values. Another example is that FVA recognizes losses early thereby forcing banks to take appropriate measures early and making it more difficult to hide potential problems that only grow larger and would make crises more severe. But this benefit gives rise to another set of tradeoffs. First, FVA introduces volatility in the financial statement in “normal times” (when prompt action is not needed). Second, full FVA can give rise to contagion effects in times of crisis, which need to be addressed – be it in the accounting system or with prudential reg