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  • Essay / Historical Cost Method and Fair Value Model in Accounting

    In other words, the accounting model requires that gains and losses be recognized during that year. During the financial crisis, many financial instruments saw their fair values ​​decline, leading to many losses on the income statement. The observation of losses can lead investors to overreact, further aggravate the situation and subsequently lead to crisis. However, even if the recognition of losses linked to changes in fair value can reinforce the excessive reaction of investors in the event of poor economic conditions, fair value accounting is only one of the accounting tools allowing entities to account for their operational strategies, their implementation and their results. I don't think it's fair to attribute the crisis to the method. In fact, in my opinion, it is the people involved in inappropriate activities who should be blamed. Banks, companies and authorities could have better supervised lending and mortgage securities transactions so that the crisis was not as severe.