Fair Value Accounting And The Measured Degree Of Accounting Conservatism

This paper discusses the effect of fair value accounting on the measured degree of accounting conservatism. The net price of market active assets will rise when the economic cycle is at the expansion stage, and book value of the assets will increase with the rise of the net price if this kind of market active assets is measured by the fair value. This could reduce the measured degree of conservatism. On the contrary, when the economic cycle is at the contraction stage, the application of fair value accounting may increase the measured degree of conservatism. 2007 was at the stage of economic expansion and prosperity, but 2008 was at the contraction stage. 2006 was at the stage of avoiding fair value accounting, 2007and 2008 at the stage of widely using fair value accounting. Accordingly, this paper makes the following predictions: (1) the application of fair value accounting in 2007, an economic expansion period, will reduce the measured degree of accounting conservatism; (2) the application of fair value accounting in 2008, an economic contraction period, will increase the measured degree of accounting conservatism. This paper chooses a sample of A-shares listed companies and uses the accrual-cash flow measure of accounting conservatism. The empirical results are consistent with the predictions.