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2009, vol. 57, iss. 7-8, pp. 308-326
Fair value accounting and volatility of financial statements in conditions of financial crisis
University of Belgrade, Faculty of Economy
Abstract
It is not possible to develop perfect reporting concept in non-perfect conditions. Implementation of fair value accounting serves primarily information needs of investors. Thereby, basic concept is that balance sheet should reflect economic reality, meaning that assets, liability and capital should be expressed at fair values, which reflect market prices best in conditions of active and liquid markets. Thereby, income statement accepts the effects of fair value, by which result measurement becomes the effect of capital measurement. Implementation of fair value is not followed by more serious problems in conditions of stable prices and efficient markets. Then, the valuation of assets and liability is done at actual market prices, i.e. using so-called mark-to-market approach. Problems arise in conditions of inactive and illiquid markets when determining fair value demands implementation of various evaluation techniques, i.e. use of so-called mark-to-market approach. Use of this approach enables determining fair values, but at the same time it represents potential source of inaccuracy. Other problem going along with implementation of fair value in conditions of financial crisis is related to its procyclical effects. In this sense, it is often emphasized that implementation of fair value in conditions financial market boom and growing prices incites buying securities at higher prices, thus contributing to creation of speculative bubbles. In conditions of financial crisis and price fall, implementation of fair value can incite sales of assets at lower prices, thus deepening the existent crisis. Eventually, the third problem discussed in this paper is related to volatility of financial statements which arises as a consequence of market instability, inaccuracy in field of fair value measurement, procyclicality and combined use of fair values and historical costs.
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article language: Serbian
document type: Original Scientific Paper
published in SCIndeks: 16/02/2010