Fair Value Accounting for Financial Instruments: Concepts, Disclosures, and Investment Securities

This chapter provides an understanding of how fair value accounting works in theory and in relatively simple contexts. It illustrates how one can analyze the information contained in financial institutions' fair value accounting and disclosures to assess their solvency and profitability better than is possible using amortized cost accounting information. The chapter describes the FASB's (The Financial Accounting Standards Board) general approach to fair value accounting and disclosures expressed in SFAS No. 157, Fair Value Measurements (2006). This standard defines fair value and includes a hierarchy of the types of inputs that may be used to estimate fair values. The chapter also describes two significant accounting standards that require disclosure or recognition of the fair value of financial instruments: SFAS No. 107, Disclosures about Fair Value of Financial Instruments (1991), and SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (1993).