FAIR VALUE VERSUS HISTORICAL COST IN FORECAST OF INCOME FOR BANKING COMPANIES

Nicolae Traian Cristin () and Pepi Miticã ()
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Nicolae Traian Cristin: Faculty Of Economic Sciences, University Ovidius of Constantza
Pepi Miticã: Faculty Of Economic Sciences, University Ovidius of Constantza

Annals of Faculty of Economics, 2013, vol. 1, issue 2, 550-558

Abstract: The financial crisis began on 2008 has led to a debate about the pluses and minuses of fair-value accounting (FVA). This debate presents a new start for fair-value accounting going forward and standard setters’ push to extend fair-value accounting into other areas. In our research, we found four important issues as an attempt to make sense of the controversies. First, much of the controversies results from confusions about the issues of fair-value accounting . Second, while there are legitimate concerns about implementations of fair-value accounting , it is less clear that these problems apply to the stipulations of fair-value accounting in the accounting regulations. Third, historical cost accounting (HCA) is not the remedy. Fourth, although it is difficult to avoid the fair-value accounting standards per se, implementation issues are a potential concern, especially with respect to litigations. Fair value accounting is used when reliable fair value estimates are available at a low cost and when they convey information about operating performance. The costs of constructing reliable fair value estimates are expected to be a key cross-sectional determinant of the choice between the two accounting practices - HCA and FVA . By shining a bright light into dark corners of a firm's accounts, fair value accounting precludes the dubious practices of managers in hiding the reality of accounts. Proponents of fair-value accounting argue that the market value of an asset or liability is more relevant than the historical cost at which it was purchased or incurred because the market value reflects the amount at which that asset or liability could be bought or sold in a current transaction between willing parties. A measurement system that reflects the transactions prices would therefore lead to better insights into the risk profile of firms currently in place so that investors could exercise better market In conclusion, we highlight several ways for future researches.

Keywords: Fair value accounting; Banks; IFRS; Earnings; Financial reporting. (search for similar items in EconPapers)
JEL-codes: G30 M41 (search for similar items in EconPapers)
Date: 2013
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