Fair Value Accounting (FVA) in the S&P 500: Value Relevant Information for Investors or a Moral Hazard to Society in a Financialized World?

Fair value accounting (FVA) has been adopted by the FASB and underpins the argument for the provision of value relevant information to shareholder investors. FVA substitutes the service-potential of assets-in-use with assets-in-exchange for holding gains. In a financialized world FVA inflates the value of assets in current time because it crystalizes future earnings in present time but these valuations can become impaired. Shareholder equity is a buffer that absorbs asset impairments but in the S&P 500 dividends and share buy-backs are hollowing out shareholder equity. The potential for firm level financial instability and insolvency is heightened in the financialized firm.