Fair Value Accounting and Regulatory Capital Requirements

Advocates of fair value accounting believe that fair valuesprovide more relevant measures of assets, liabilities, andearnings than do historical costs. These advocates assertthat fair value accounting better reflects underlying economicvalues. The advantages of this method—and thecorresponding weaknesses of historical cost accounting—are described in more detail in “Accounting for FinancialAssets and Financial Liabilities,” a discussion paper publishedby the International Accounting Standards Committee(IASC) in March 1997. The IASC requires that allassets and liabilities be recognized at fair value. Under fairvalue accounting, changes in fair values (that is, unrealizedholding gains and losses) are recognized in current earnings.In contrast, under historical cost accounting, changesin fair values are not recognized until realized.[...]