Institution-specific value

BIS Working Papers No 210
August 2006

On 11-12 November 2005, the BIS held a workshop on Accounting, risk management and prudential regulation, which brought together a multi-disciplinary group of around 35 external participants including senior accounting practitioners, standard setters, finance academics, supervisors and central bank officials. The workshop programme is attached. This paper was presented at the workshop.

Abstract:

The introduction of a new accounting standard for financial instruments, has raised a number of issues related to the application of fair value principles. This paper discusses some of these issues which are generally related to the fact that "fair values" are not always easily defined or readily available. It concludes that the application of fair value for financial liabilities might present fewer complications if it is matched by similar valuation principles for financial assets. The issue of measurement error is more complicated as it can be related to whether valuations refer to exit value, as postulated by the IASB, or deprival value, which is more closely related to firm-specific valuation. Measurement error is magnified in the income statement and so will be any biases from the application of historical accounting for derivatives. Despite any measurement issues, the problem of institution-specific dimensions of value that looms so large in the case of non-financial enterprises and makes the systematic application of fair value accounting fraud with difficulty there, would seem to be much more manageable for financial institutions because of their familiarity with risk measurement and management techniques for financial instruments.

JEL classification: E58, G15, M41.

Keywords: Financial statements, fair value, financial reporting, institution-specific value