A Note on Fair Value Accounting in a Crisis: The Influence of the Hedge

The role of fair value accounting in the financial crisis is controversial and heavily debated. Some claim that fair value accounting of financialinstruments contributed to the recent crisis. This note acknowledges that, in many industries, a significant proportion of the financialinstruments are entered into for hedging purposes. I examine if a crisis, through the hedge accounting regulations, can affect the overall use offair value accounting in an economy. I present analytical evidence that the boosting price volatility during the crisis lead to more companiescomplying with the hedge accounting requirements, and thus to an increased extent of hedge accounting at the expense of fair valueaccounting. Hence, the analysis suggests that the hedge effectiveness provisions ensure more hedge accounting in uncertain and turbulenttimes, which are exactly the periods when hedge accounting is especially called for.