1 The Case against Fair Value Accounting*

A brief discussion of the current views on fair value accounting is followed by reviewing the concerns raised by the critics. These concerns are related to (a) reliability and verifiability of the underlying assumptions in the case of mark to model, and (b) the recognition of large losses when prices decline. My concerns about fair value accounting rest on three different issues: (1) the potential for redistribution of capital as dividends when cash dividends exceed realized earnings; (2) reporting failure as success, and success as a failure when increasing credit risk of debtors allows them to recognize gains and vice versa, and (3) increasing information asymmetry when combining realized and unrealized gains and losses as well as failing to disclose the drivers of holding gains and losses. These problems with fair value accounting do not necessarily mean that we should abandon fair value accounting. Instead, the proposal is made to produce two sets of financial statements: one based on historical cost and the other based on fair value. Each type serves a different purpose. Mixing and blending historical costs and fair values is problematic in that it worsens transparency and enhances information asymmetry