The impact of the overall situation of financial crisis had a severe reaction on the social institutions as well, leading unemployment rate to increase since a large number of finnacinal institutions had to face failures and ultimately, bankruptcy. As a result, a number of debates have been observed between investigators that the credit crunch was due to the misinterpretation of assets and hedging strategies in the shape of subprime loans and mortgage backed securities (Deff and Phelps). The major concern of the debaters was the implication of fair value accounting systems which led to the situation where it has been blamed for facilitating the sustainment of the financial crisis which has led to massive government bailouts of financial institutions. As a result, it was marked that the Bush administration, FASB and SEC responded to the financial crisis with Acts and amendments to take a grasp of the situation (Twaronite and Levine). The aim of this paper is to critically evaluate the role of the fair value accounting’s role in the financial crisis. This will be done by carefully taking an in-depth analysis of the accounting systems and alternatives. Also, different factors such as subprime loans, mortgage backed securities etc, have led the fair accounting system to affect the financial turmoil. Furthermore, theoretical background of different cases of failure and bankruptcy will be created to prove the role of fair value accounting in magnifying and prolonging financial crisis of 2007. Part 2: Background to Accounting Systems: 2.1 Historical Cost Accounting: It is imperative to understand the historical cost accounting in order to assess the role that fair value and other relevant factors have played in the recent financial crisis. As evident from the term, the historical cost accounting is basically an accounting system which records the assets at the point of their historical cost (Casabona and Shoaf). It should be noted that the recording of assets with a historical cost (the value at which it is purchased at the first place; this equates the fair value accounting and historical accounting) is merely done in order to provide impairments. The market value of the assets is never recorded when balance sheets are prepared by using historical cost accounting. This means that in case there are fluctuations in the market regarding the market value of the asset then under the historical cost accounting, it will not be presented in the balance sheet (Guni and Negurita). In simpler words, it can be said that the historical accounting records assets on the historical cost because it will not increase the asset value for amortization. The reason behind observation of impairment is because the assets at their fair value would decrease to the point of amortization (Fitzsimons, Satenstein and Silliman). As a matter of fact, there is a point where both the fair value accounting and historical cost accounting becomes equal. That point is when the asset reduces its values to a high extent allowing impairment to become evident (Christian and Christian). The comparison between the fair value accounting and the historical cost accounting has been made on the basis of manipulation. Both the systems have been applied to record the assets purchase’s loss and gain. The fact remains that the historical cost accounting does not allow manipulation as compared to fair value accoun
[Name of Student] [Name of Instructor] [Name of Course] [Date] Fair Value Accounting During the Financial Crisis Part 1: Introduction: The financial crisis of 2007 has been a basis of a number of problems being faced by the international business and accounting profession in particular…
The International Financial Reporting Standards (IFRS) are a set of guidelines that are sued to guide accountants and financial professionals in preparation and reporting financial information. This paper will discuss the IFRS in terms of its basic information; by discussing its foundation, and how it was formed.
But this crisis brought forward the weaknesses in the US financial system and called for major financial reforms so as to end the severe recession. The President signed the Dodd-Frank Wall Street Reform & Consumer Protection Act into law in July 2010 and creation of two major bodies for oversight and consumer protection.
ii) The inputs thus provided has to be for the full life term of the financial instruments which are considered above. iii) Any financial instruments not discussed above has to be valued under a similar input valuation techniques based on the given market data.
3). The indices are produced as a result of cooperation of S&P Dow Jones and RobecoSAM indices (DJSI, n.p.). In order to be included in the DJSI, the companies must meet economic, social and environmental criteria (DJSI Annual Review, p. 3). The indices apply a broad variety of country, regional and global DJSI benchmarks and thus, serve as an effective tool for investors focused on corporate sustainability oriented businesses (DJSI Annual Review, p.
Conclusion Brief Introduction on the Global Financial Crises (2007-2009): The Global Financial Crises of the 2007 to 2009 has been regarded as one of the most severe financial downturns in the history. Following the footsteps of the Great Depression of 1923 it was termed as The Great Recession due to the magnitude of the economic disruption caused by it.
nderstand how the ladder fell on the ground, it is significant to research the products’ line and get knowledge on the overall financial portfolio; why it crumbled. An attempt has been made to understand the basic functioning of each of the major financial risks including
d. The valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use in pricing the asset or liability and the level of the fair value
The President signed the Dodd-Frank Wall Street Reform & Consumer Protection Act into law in July 2010 and creation of two major bodies for oversight and consumer protection. It has also enacted the Volcker Rule based on the advice