Application Of Fair Value In Financial Instruments: Development And Enlightenment

The accounting standards will inevitably undergo changes at the time of economic crisis.The development of fair value is no other than the historical result of continuous innovation for financial instruments.The outbreak of the United States sub prime mortgage crisis in 2007 has jeopardized the stability and health of the stock market,the real estate industry and financial systems through financial channels.Some financial institutions which suffered a huge loss criticized the measurement of fair value severely.This led to a heated discussion about the accounting issue of fair value.Aiming at ongoing financial crisis,FASB and IASB took immediate measures including issuing expert panel report on the measurement and disclosure of the financial instruments in inactive markets,modifying the fair value hierarchy to improve its measurement and emending the requirement for reclassification of financial assets.The accounting standards in China have fully used the international standards for reference and we have already realized the convergence of accounting standards by and large.The dynamic situation of FASB and IASB is of great value for China.As a result,to learn from international experience and select is essence can help China save the cost of establishing and implementing the accounting standards and ensure the consistency with international standards.Starting with the features of financial instruments pricing and its related theory research,the present paper proposes that fair value is still the best option for the measurement of financial instruments.By means of comparison,the present paper then analyses the measurement requirements of different types of financial instruments under the standards of GAAP,IAS and CAS;the difference in the application of fair value in financial instruments by comparing the two sets of financial statements of BOC under the standards of IAS and CAS respectively and the financial statement of Citibank under the standards of GAAP.The final part concentrates on the latest development of application of fair value in financial instruments before and after the outbreak of sub prime crisis,including the fair value hierarchy,fair value option and reclassification.The chapter of"the fair value hierarchy of financial instruments"introduces the rules prescribed in the SFAS 157 and IFRS 7 and analyses the influence of the fair value hierarchy on financial statements.The fair value hierarchy provides the investors with useful information and improves the degree of transparency of financial statements,the consistency and comparability of fair value."The fair value option in financial instruments"introduces how this concept was proposed.By analyzing its application,the present author holds that it can solve the accounting mismatching issue of accounting standards to some degree,but it is still subject to some limitations.The road of the application of fair value in financial instruments could not be smooth.The fair value option is just beneficial trial of expanding application of fair value."The reclassification of financial instruments"follows the latest rules of IASB and analyses the influence of this modification on financial statements of public companies.The present author holds that this is the historical retrogression of the application of fair value.Given the possibility that enterprises might take advantage of reclassification to manipulate the profits,we should treat this modification in a cautious manner.