Leslie Hodder led a discussion of fair value accounting at Office Hours.  fasb-snapshot-32-people_003

We had over 30 avatars present, some of them acting as the eyes and ears of a roomful of faculty and doctoral students.  A number of attendees wanted a copy of  Leslie’s  fair-value slides.

Leslie started off the discussion with a review of the various questions one could pose regarding fair value.   My favorite phrase on slide one is “Fair value accounting is the nexus of reporting evil.”  This isn’t Leslie’s view (as far as I can tell), but it certainly is some memorable wording.   It took a little while for the crowd to get fully engaged–I know the mechanics of Second Life are new to people.  But the text chat fired up with questions after about 20 minutes, and then there was way more participation than time, and we ended up going 10 minutes over schedule!

Read on for details.

We talked at some length about the two papers mentioned in the pre-session announcement, and it was nice to have the authors on hand for that (Jeffrey Ng and Wayne Thomas).  We also heard from Urooj  Khan, PhD student from University of Washington, who has a road-show paper showing that fair-value reporting is associated with an increase in contagion among banks.

I have to admit that I am have some concerns about how some of these studies should be interpreted–especially the ones that focus entirely on 2008 data.  In short, my concern is that these studies are drawing inferences about fair-value accounting by analyzing a highly unusual (and very short) time period, during which banks are holding highly unusual assets–most of which are accounted for under other-than-temporary-impairment rules.  So we have problems in inference, not just due to the difficulty of generalizing from a very special data set to a larger issue, but because there are likely to be a lot of correlations among variables.  I had a chance to talk with Ohio State’s Anne Beatty, who expressed those concerns more eloquently and forcefully than I could.  Hopefully, we can get Anne into office hours to give her take.

After a session like this one, with so many views and results thrown around, I am sure people walked away with very different ideas and conclusions.  If you were there, please provide a quick comment on what you saw as the big take-aways.

p.s.  At one point during the discussion, someone talked about research on market price reactions to assets that were reclassified from Level 1 to Level 3 (or vice versa).  But I didn’t catch the paper’s title and authors.  Can anyone provide a pointer in the comment thread?