A note on fair value accounting in a crisis: The influence of the hedge accounting regulations

Abstract

The role of fair value accounting in the financial crisis is contorversial and heavily debated. Some claim that fair value accounting of financial instruments contributed to the recent crisis. This note acknowledges that, in many industries, a significant proportion of the financial instruments are entered into for hedging purposes. I examine if a crisis through the hedge accounting regulations, can affect the overall use og fair value accounting in an economy. I present analytical evidence that the boosting price volatility during the crisis lead to more companies complying with the hedge accounting requirements, and thus to an increased extent of hedge accounting at the expence of fair value accounting. Hence the analysis suggests that the hedge effectiveness provisions ensure more hedge accounting in uncertain and turbulent times, which are exactly the periods when hedge accounting is especially called for.