Historical cost versus fair value accounting in banking: Implications for supervision, provisioning, financial reporting
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Volume 6 Number 2
Papers Historical cost versus fair value accounting in banking: Implications for supervision, provisioning, financial reporting and market discipline Yiannis Anagnostopoulos* and Roger Buckland *University of Aberdeen, Aberdeen University Business School: Department of Accountancy and Finance, Edward Wright Building, Aberdeen, AB24 3QY, UK tel: +44 (0)1224 273491; e-mail: [email protected]
Yiannis Anagnostopoulos is a researcher at the University of Aberdeen. His research interests include bank accounting, bank regulation and practice, accounting disclosure practices and corporate governance issues. Roger Buckland is Professor of Accountancy, Aberdeen University Business School, Aberdeen.
ABSTRACT The issue of historical cost accounting (HCA) versus fair value accounting (FVA) is a fruitful area for research, when examined under the prism of the intersection between bank capital and bank risk management, and the regulators’ and the standard setters’ approach towards the purposes of HCA and FVA. This paper debates the applicability and enforceability of two diametrically opposite approaches to bank accounting, their effects on transparency, reliability and the associated regulatory (official) discipline. It analyses the usefulness, relevance and reliability of these two contrasting accounting frameworks for the measurement, recognition and disclosure of bank financial instruments in the banking books (particularly loans and loan-loss provisions). It touches upon the benefits and costs associated with the application of these accounting frameworks. It
suggests that the principled advantages of turning to full FVA (FFVA) for banks are outweighed by the pragmatic and practical difficulties in operationalising such an accounting treatment. The introduction provides for an overview of current developments concerning the introduction and application of FVA in banks’ banking books as a response to the limitations of the mixed accounting approach followed currently. The first section analyses the usefulness of HCA, as well as the regulators’ support of a differentiated HCA. The second section, the main part of this paper, focuses on the impact of FFVA on banks’ capital, bank risk management and financial reporting, again with reference to the banks’ banking books. An analysis of the merits of FFVA provides grounds for its enforceability and potential alignment with the banking books by comparison generated from the first section. The paper concludes that fair values have quite different attractions and dangers for regulators as opposed to accounting standard setters. INTRODUCTION During the 1990s bank financial accounts passed from being based entirely on historical cost accounting to a mixed model of historical cost and market values approach.
Journal of Banking Regulation, Vol. 6, No. 2, 2005, pp. 109–127 # Henry Stewart Publications, 1745–6452
Page 109
Historical cost versus fair value accounting in banking
This reflected changes and developments in the role of the financial sector in the dynamics of economic
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