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Fair Value Measurement

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A. The prospective criticism of Fair Value Measurement
1. Analysis of nature of Fair Value Measurement
The implement basis of SFAS157 is in an efficient market. Its hierarchy of fair value measurement confirms the priority of market price for the same or similar position. But under the credit crisis, entity will expect to reverse the unrealized losses partially at present or totally in the future. Based on this assumption, some entities preferred to report amortized costs or level 3 mark-to-model fair values, arguing that level 2 mark-to–market fair values will raise larger unrealized losses. [8]
In an illiquidity market, the impairment of assets caused potential risk of system and overreaction of investors. The substantial decreasing values enter into the unrealized losses, which further force investors sell their assets for financing in order to mask financial statements or to accord with the investment policy. The consequence is that counterparties are unwilling to transact with those whose assets are continually impaired. In this situation, investment having high leverage will undertake the crisis of liquidity. The bankruptcy of these investment banks may cause the liquidation of hedge fund or other issuing bond, as well as the investment loss of their counterparties. When crisis extends, so called fair value is no longer “fair”. [9]
In the prosperous economic market, the carry out of fair value measurement follows the bubble price, relative to the basic value of assets and liability. “Bubble prices” appreciates in an optimistic market with excess liquidity and depreciates when the market is pessimistic with illiquidity. It originates not only from the irrational decision in unefficient market, but also from investors’ short-term rationality, both will emerge under the present Fair Value Measurement. [8]
2. The limitation of mark-to-market valuation
As

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