Critics have declared FVA as an inappropriate measure for financial instruments in highly volatile market conditions like the one being experienced since 2008. The write down for banks was caused by the recognition of unrealized loss on the financial instruments, which the critics say sends a negative signal to the investors and only the recognized gain or loss should be recorded which entails Positive Accounting Theory or PAT and signalling theory.
The people who favour this standard are of the view that FVA provides information to investors that will best serve their interest in making decisions which entails Decision Usefulness Theory. The interest groups involved with FVA are the standard setters, regulators and company management. The standard setting bodies and regulators view FVA as an accurate measure for financial instruments as it explains the fair value of assets rather than the historical cost which is more useful for investors in decision making as the investors could estimate the future cash inflows and the timing of these cash flows more precisely. The management of companies specially the banking sector view the standard as a negative impact on the financial statements as the recognition of unrealized losses could send a negative signal to the investor and according to the signalling theory the investors could lose confidence in the company management without realizing the write down in an asset is due to changes in the market rather than the asset itself (PricewaterhouseCoopers 2009).
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