Liberal Fair Value Accounting in Banks: A South African Case Study

Abstract

Research findings on the role of fair value accounting (FVA) in the global financial crisis suggest that FVA is not applied neutrally by banks. The results of FVA are accepted when they contribute to higher profits and are actively resisted when they lead to losses. The aim of this article is to investigate how FVA is practically applied by banks in detail. The focus is on banks as most of their assets are financial instruments and thus potentially fair valued, and banks' behaviour is significantly influenced by their regulatory environment. The research objective is pursued by using a case study of two South African banks. One of these is the largest and most systemically important bank in the South African system and the other is on the crossover between systemic and not systemic. It is found that FVA as applied by these two banks is not neutral. Also included is a demonstration of a method to derive the unrealised portion of profit and equity, the identification of the gap between assets and liabilities at fair value as the driver of where in a banking group FVA profits and losses are realised, and the finding that the restatement of comparative figures was used to circumvent the prohibition on reclassifications into and out of the 'designated as at fair value' category.

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“…Thus, numerous prior studies (e.g. Laux & Leuz, 2010;Pabuccu, 2011;Prochá zka, 2011;Badertscher, Burks & Easton, 2012;Kaya, 2013;Betakova, Hrazdilova-bockova & Skoda, 2014;de Jager, 2014;Markarian, 2014) have discussed the role of fair value in international financial crisis. For example, when the financial crisis occurred in 2008, some banks reclassified their financial assets in order to avoid recognizing the losses that resulted from fair value pricing after adopting IAS 39 "Financial Instruments: Recognition and Measurement" and IFRS 7 "Financial Instrument: Disclosures" (Mănoiu & Damian, 2015, p. 94).…”

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