Over the past year, there has been an ongoing debate as to the role that fair value -- or mark-to-market -- accounting has played in exasperating the length and depth of the current credit-market cycle. Critics of fair value accounting claim that enterprises marking financial assets down to fire-sale prices have resulted in the overstatement of loss and the understatement of capital for many financial institutions. This, in turn, has fueled the current credit-market panic. This article presents a synopsis of fair value accounting; an example of how it can be pro-cyclical; recent actions by the Securities and Exchange Commission and the Financial Accounting Standards Board to address the issue; and possible solutions to eliminate the pro-cyclical impact and make it a more useful tool for both preparers and users of financial statements.
The Tail Wagging the Dog Jim Gross Mortgage Banking; Mar 2009; 69, 6; Docstoc pg. 70 Reproduced with permission
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