Fair Value Accounting Case Study

Main concerns surrounding the application of fair value accounting to banks and other financial institutions are identifies in this section.

Does fair value accounting create difficulties in risk and capital management?

In managing risk and capital, the introduction of “fair value accounting” in US GAAP & in IAS 39 was creating difficulties observed by many bankers before the present crisis. Resultant to the shift to fair value accounting, a four way treatment of financial assets was resolute on the following difficulties. Which are held to maturity, loans and receivables, available for sale & trading assets.

The new IFRS 9 of November 2009 resolve many things by lessening the classification to only two categories: held to maturity, based on

The lines between banking and trading books were being blurred which suggests the need for a more reliable treatment between contradicting business lines. While the mix of valuation procedure introduced by IAS 39 over debate these problems. Both management and outside investors effected with this. The recent crisis are the examples include UBS, Merrill Lynch, AIG and the UK bank HBOS whose losses have been largely arises and were not understood by the management or stockholders. Such accounting treatment can only be appropriate when liabilities both short and long term are secured against specific assets but the whole balance sheet of the

This requires that companies should make their statements on fairly and comparable basis including notes to help stakeholders to understand and let them make decision easily. Financial institutions especially banks make their statements most lengthy and complex which only make their statement impossible to understand.

The US rules make an attempt to make the statements comparable by restricting the companies to make reports with the SEC, the annual 10-k, the quarterly 8-k, providing information in a fairly standard reporting template. This makes somehow easier to compare the statements in US while outside the US in European Union should have more standardize formats, and where the US SEC rules are silent there a considerable variation of disclosure can be observe.

These are the fundamental concerns about the construction of financial statements. The one issue is the degree of latitude allow to individual firms if for them is possible to adopt a different valuation method other than forcing them to depend on the choice made by the management. But there will be a need of notes to make those things understandable both over time and between