The combination of the relative novelty of fair value accounting and extremely volatile markets has made this interpretation more difficult. Some have questioned the utility of requiring mark-to-market valuations of all assets and liabilities on a corporate balance sheet. 7 The point can be made that, in the current circumstances, existing accounting rules provide a degree of precision that is not warranted.
By reflecting market moves, fair value accounting certainly increases the volatility of reported earnings. Whether it contributes pro-cyclically to market volatility depends on the behaviour of management.