The IAS/IFRS after the crisis: limiting the impact of fair value accounting on companies’ capital

The recent financial crisis has demonstrated that fair value accounting can affect not only the informational importance of annual reports but also a company’s financial integrity. In regulatory structures where standards of company law prompt companies to maintain minimum amounts of capital (or an equilibrium between assets and liabilities) the reporting of unrealised losses may reduce company share capital to a level below minimum thresholds. If fair value losses are transitory and do not reflect an actual lowering of a company’s assets’ worth, fair value accounting may still prompt shareholders to consider an unnecessary recapitalisation or the “premature” dissolution of a firm. The negative consequences arising from interaction between fair value and the legal capital rules can be prevented by neutralising (through appropriate rectifications of reported balances) fair value profits and losses for the sole purpose of respecting the provisions for share capital maintenance. This solution would make it possible to limit the impact of accounting rules on companies’ capital without prejudicing the informational importance of annual reports.