Accounting and Financial Crisis

 Accounting and Financial Crisis Essay

June 2010, Vol. six, No . 6 (Serial Number 61)

Log of Modern Accounting and Auditing, ISSN 1548-6583, USA

Fair value accounting under financial meltdown

HE Cai-xia1, ZHANG Chi2

(1. School of Accounting, Zhongnan University or college of Economics and Law, Wuhan 430073, China; 2 . School of Management, Huazhong University of Science and Technology, Wuhan 430073, China)

Abstract: The recent financial meltdown has led to a vigorous controversy about the pros and negatives of fair-value accounting (FVA). This debate presents a significant challenge intended for FVA in the years ahead and common setters' drive to extend FVA into other areas. In this article, we all highlight three important concerns as an effort to make perception of the debate. First, much of the controversy comes from confusion by what is fresh and different regarding FVA. Second, while there happen to be legitimate concerns about observing to market (or pure FVA) in times of financial disaster, it is significantly less clear why these problems affect FVA while stipulated by the accounting specifications, be it IFRS or U. S. GAAP. Third, traditional cost accounting (HCA) is definitely unlikely as the remedy. There are a variety of issues about HCA as well and these concerns could be larger than those with FVA. Key words: reasonable value accounting; historical price accounting; financial disaster

1 . Advantages

The the latest financial crisis provides turned the spotlight in fair-value accounting (FVA) and led to a serious policy debate involving and the like the U. S. Congress, the Western Commission as well banking and accounting regulators around the world. Critics argue that FVA, often are usually called mark-to-market accounting (MTM), has drastically contributed to the financial crisis and exacerbated it is severity to get financial institutions inside the U. T. and around the universe. On the other extreme, proponents of FVA believe it simply played the role from the proverbial messenger that is at this point being taken. In our view, there are issues with both positions. FVA can be neither accountable for the turmoil nor is that merely a dimension system that reports asset values not having economic effects of its own. In this article, we make an attempt to make sense with the current fair-value debate and discuss whether fair worth accounting plays a part in financial crisis. We come to the following several conclusions. 1st, much of the controversy about FVA results from confusion about what is definitely new and various about FVA as well as diverse views about the purpose of FVA. Second, you will find legitimate concerns about tagging asset principles to market prices in times of financial crisis once we recognize that there are jewelry to contracts and rules or that managers and investors may care about industry reactions in the short term. Nevertheless , it is not obvious that these danger is best dealt with with becomes the accounting system. While our third conclusion illustrates, there could be execution problems in practice. It is important to acknowledge that accounting rules interact with other components of the institutional framework, which may give rise to unintended consequences. As well, it is important to realize that giving management more flexibility to manage potential challenges of FVA also clears the way for manipulation. Thus, normal setters and enforcement organizations face a fragile trade-off. Last, we stress that a go back to historical cost accounting (HCA) is improbable to be a solution to the issues with FVA. HCA has a group of problems when he Cai-xia, University of Accounting, Zhongnan College or university of Economics and Law; research areas: accounting and financial crisis. ZHANG Chi, College of Management, Huazhong University of Scientific research and Technology; research areas: accounting and financial crisis. 59

Fair benefit accounting underneath financial crisis

very well and it is which for certain assets they are as severe, or even worse, than the complications with FVA. Depending on extant scientific evidence, it is difficult to evaluate the role of FVA nowadays in this crisis. In...

References: Allen, F & Carletti, Elizabeth.. (2008). The role of liquidity monetary crises. Wharton Financial Institutions Centre, University of Pennsylvania. Plantin, G., Sapra, H. & Shin, H.. (2008a). Reasonable value accounting and financial stability. Remuneration de England Financial Stableness Review, 85-94. Plantin, G., Sapra, L. & Shin, S.. (2008b). Marking-to-market: Sanalotodo or pandora's box. Log of Accounting Research, 46(2), 435-460. Persaud. (2008). So why bank risk models failed? The 1st global financial crisis of the 21st century. MPRA Paper No . 11862, 11-13.

(Edited simply by Linda and Mary)


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