Fair Value Accounting Compared to Other Accounting Systems [Discussion]

Perrot and Hines have written an excellent paper contrasting fair-value earnings with U.S. GAAP earnings for a single-premium deferred annuity. They have used a realistic set of interest rate scenarios and a reasonable basis for both fair value and GAAP assumptions in those scenarios for purpose of the comparisons. They have shown that fair-value earnings are much more volatile than GAAP earnings. This is a scary thought when most company CFOs have a difficult time explaining the volatility in GAAP earnings. [Skip to Page 26 in PDF for Discussion]