Valor Razonable en la ausencia de prudencia en las normas contables

El caso de las derivados exoticos

Translated title of the contribution: Fair value accounting in the absence of prudence in accounting standards: an illustration with exotic derivatives

Jacinto Marabel-Romo, Andres Guiral, José Luis Crespo-Espert, José A. Gonzalo, Doocheol Moon

Research output: Contribution to journalArticle

Abstract

The aim of this paper is to contribute to the current discussion about fair value accounting (FVA). We discuss the problem surrounding FVA by relying on the role played by prudence, its meaning, and how the treatment of prudence has changed in the accounting framework of standard setters due to its ‘apparent’ inconsistency with neutrality. To highlight the relevance of this issue, we provide (1) a brief analysis of the high impact that Level 2 fair value estimates have on large US and European banks’ financial positions; (2) a ‘case study’ by pricing two common exotic derivatives and comparing the valuation results of two different assumptions of volatility (local vs. stochastic); and (3) a discussion of potential solutions to the problem surrounding FVA. Our findings are consistent with the argument that neutrality is supported by the exercise of prudence in achieving a faithful representation, since a non-conservative use of FVA can lead bank managers towards model misspecification error in the valuation of complex financial instruments. We conclude by arguing that the problem surrounding FVA can be mitigated if prudence is reinstated by standards setters.

Original languageSpanish
Pages (from-to)145-167
Number of pages23
JournalRevista Espanola de Financiacion y Contabilidad
Volume46
Issue number2
DOIs
Publication statusPublished - 2017 Apr 3

Fingerprint

Accounting standards
Fair value accounting
Derivatives
Prudence
Neutrality
Exercise
Financial instruments
Local volatility
Model misspecification
Inconsistency
Managers
Fair value
Pricing
European banks

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

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title = "Valor Razonable en la ausencia de prudencia en las normas contables: El caso de las derivados exoticos",
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Valor Razonable en la ausencia de prudencia en las normas contables : El caso de las derivados exoticos. / Marabel-Romo, Jacinto; Guiral, Andres; Crespo-Espert, José Luis; Gonzalo, José A.; Moon, Doocheol.

In: Revista Espanola de Financiacion y Contabilidad, Vol. 46, No. 2, 03.04.2017, p. 145-167.

Research output: Contribution to journalArticle

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