Fair value accounting in the absence of prudence in accounting standardsan illustration with exotic derivatives

  1. Jacinto Marabel-Romo 1
  2. Andrés Guiral 2
  3. José Luis Crespo-Espert 1
  4. José A. Gonzalo 1
  5. Doocheol Moon 2
  1. 1 Universidad de Alcalá
    info

    Universidad de Alcalá

    Alcalá de Henares, España

    ROR https://ror.org/04pmn0e78

  2. 2 Yonsei University
    info

    Yonsei University

    Seúl, Corea del Sur

    ROR https://ror.org/01wjejq96

Aldizkaria:
Revista española de financiación y contabilidad

ISSN: 0210-2412

Argitalpen urtea: 2017

Alea: 46

Zenbakia: 2

Orrialdeak: 145-167

Mota: Artikulua

DOI: 10.1080/02102412.2017.1387441 DIALNET GOOGLE SCHOLAR

Beste argitalpen batzuk: Revista española de financiación y contabilidad

Garapen Iraunkorreko Helburuak

Laburpena

The aim of this paper is to contribute to the current discussion about fair value accounting (FVA). We discuss the problem surrounding FVA by relying on the role played by prudence, its meaning, and how the treatment of prudence has changed in the accounting framework of standard setters due to its ‘apparent’ inconsistency with neutrality. To highlight the relevance of this issue, we provide (1) a brief analysis of the high impact that Level 2 fair value estimates have on large US and European banks’ financial positions; (2) a ‘case study’ by pricing two common exotic derivatives and comparing the valuation results of two different assumptions of volatility (local vs. stochastic); and (3) a discussion of potential solutions to the problem surrounding FVA. Our findings are consistent with the argument that neutrality is supported by the exercise of prudence in achieving a faithful representation, since a non-conservative use of FVA can lead bank managers towards model misspecification error in the valuation of complex financial instruments. We conclude by arguing that the problem surrounding FVA can be mitigated if prudence is reinstated by standards setters.

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