Second, as identified by a number of researchers such as Hodder et al. (2006), Barth et al. (1996) and Corona et al. (2013), there are negative effects of using fair value accounting during the turmoil of economy. It is stated under this claim that the utilization of fair value seriously results in reducing the ability of business organization and financial institutes for resistance of risk. When there is an activeness of market, the measurement of financial products by fair value always turns out to be lucrative and mostly, managers hold the tendency of being unrealistically optimistic (Power, 2010).
Once there is an expression of weaker tendency by the market, there is an undervaluation for the value of financial assets. As per the IAS, financial institutes have to be accruing towards impairment as per the attributes of measurement for the assets, further reducing the equity of owner. This impacts the profitability of the company followed by the level of ratio for capital adequacy (Ramanna, 2008). At the same point of time, for the evasion of any adverse impact, a number of companies consider selling their assets that further results in declining the value of each and every asset. This vicious cycle does not come to an end until or unless there is a bankruptcy of the back.
Third, the use of fair value accounting provides an unreasonable guidance to the economic behaviour of the people as identified by several researchers such as Sinnett (2007), Metzger (2010) and Power (2010). The use of fair value resulted in inducing irrational investment behaviour among the public. In the turmoil of finance, some financial rating agencies and analysts, playing a significant role in some of the business organizations, often end up changing the rating of credit in an extremely short period of time for the evasion of their responsibility (Song et al., 2010). Such a behaviour not only results in exacerbating panic across the market, but also results in enlarging the negative impact. As pointed out by Koonce et al. (2011), it becomes necessary for preventing the economy from being overheated. However, this results in the prevention of the economy from being extremely cold.