The use of fair-value disclosures to assess liquidity and solvency in credit decisions

To learn the practical effects of the current focus on fair-value (FV) accounting by the Financial Accounting Standards Board, the use of FV disclosures by bank loan officers was studied. The purpose of the study was to: 1. determine if bank loan officers use FV or historical-cost data to calculate the current and long-term debt-to-equity ratios when assessing the liquidity and solvency of a potential loan client and 2. if the placement of information in the body of the financial statements versus in the notes affect the values bank loan officers use when calculating financial ratios. Overall, 128 of 194 respondents surveyed (66%) used FV data to calculate the current and long-term debt-to-equity ratios. The results of a Chi-square test suggest that the use of FV data relies, in large part, on the format of the FV disclosure. That is, 129 of 194 respondents (66.5%) used the values reported in the body of the balance sheet and apparently disregarded alternative valuations contained in the notes.