Open AccessFair Value Accounting Practices and Efficiency of Banks: A Theoretical Perspective
Author(s) -
Sisira Dharmasri Jayasekara,
Wasantha Perera,
A.R. Ajward
Publication year - 2018
Publication title -
accounting and finance research
Language(s) - English
Resource type - Journals
eISSN - 1927-5994
pISSN - 1927-5986
DOI - 10.5430/afr.v7n4p66
Subject(s) - intermediation , financial intermediary , fair value , accounting , economics , mark to market accounting , accounting information system , value (mathematics) , boom , financial accounting , management accounting , business , finance , machine learning , environmental engineering , computer science , engineering
This conceptual paper discusses the impact of fair value accounting practices on performance of commercial banks in relation to the established banking theories i.e. Credit creation, fractional reserve and financial intermediation theory. These theories are discussed in view of historical cost accounting principles and fair valued accounting principles considering the performance in terms of efficiency during different stages of economic conditions. The analysis shows that fair value accounting practices in banks create reserves in economic booms improving efficiency and deteriorate created reserves in economic downturns causing financial crises. Enhanced financial performance in terms of unrealized gains improves the overall efficiency of banks in view of the intermediation approach of the financial intermediation theory. Therefore, it can be interpreted that external factors such as accounting, infrastructure, and technology can influence efficiency of the financial intermediation process. This is the first study to discuss the implications of fair value accounting on banking theory in view of performance of banks and stability of financial system.