Enormous losses reported by financial institutions on
sub-prime assets have led to vigorous debate over the
appropriateness of fair value or mark-to-market accounting. The
banking industry and US lawmakers have pushed to suspend or
ease fair-value accounting rules, believing that revising the
rules could lower the intensity of the credit squeeze. Critics
of the proposed changes argue that any gains from divorcing the
value of assets from their true market price would be illusory
and simply mask huge losses in asset values.
Changes to fair-value accounting under both International
Financial Reporting Standards (IFRS) and US Generally Accepted
Accounting Principles (US Gaap) have been on two fronts. First,
the fair-value hierarchy, which requires financial instruments
to be valued using observable market inputs, where available.
Second, the ability to reclassify financial instruments from
trading to holding in order to avoid the mark-to-market
As a result of these changes, companies will be...