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Need to do a critical review on the article: Power, M (2010) 'Fair value accounting, financial economics and the transformatio
Finance & Accounting
Pages 4 (1004 words)
Critical Review Introduction “Fair value accounting, financial economics and the transformation or reliability” explains how and why fair value accounting gained a lot of significance before the financial crisis of 2007 despite the growing opposition against it…
The article concludes that four conditions necessitated the significance of fair value accounting. Summary The author draws from several summaries and analyses to discuss the debate about fair value. The discussion focuses on how the notion of accounting and reliability emerged and was articulated before the financial crisis. Further, the paper examines the rise of financial economics as a challenge to and as a cultural resource for financial accounting. Power then discusses how accounting for derivatives challenged the credibility of accounting while acting as a catalyst for the significance of fair value as well as for reliability. The author further notes that de-legalisation of balance sheet created a demand for accounting numbers in the balance sheet. Analysis The author argued that four main conditions led to the significance of fair value accounting before the financial crisis. One of them was the cultural authority of financial economics. Power (2010) argues that financial accounting has increasingly drawn on the cultural authority of financial economics – an authority that is not in question. Power (2010) argued that pro-cyclicality of fair values was demonstrated by the financial crisis. This is consistent with the arguments by Allat (2001:22) that fair value accounting leads to more restrictive lending policies and more demanding loan covenants. ...
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