...Fair value accounting and financial stability The recent financial crisis gave boost for intense policy discussion over fair value accounting among US Congress, the European Commission, and banking and accounting regulators all over the world. Critics state that fair value accounting had significant impact on the financial crisis and over exaggerated its force for financial institutions around the world. On the other hand, there those who oppose that fair value accounting was just a measurement tool of measuring assets. Currently both Financial Accounting Standard Board (FASB) and International Accounting Standard Board (IASB) escalated their efforts towards establishment of a single source of guidance for all fair value measurements and clarification of the definition of fair value and related guidance. The IASB is aiming to complete all phases of replacement of IAS 39 Financial Instruments: Recognition and Measurement by IFRS 9 Financial Instruments by 30 June 2011, which would apply to financial statements for annual periods beginning on or after 1 January 2013. In this essay I will provide different opinions for fair value accounting and whether those arguments give potential for further research. First, the essay will provide genesis of fair value accounting and reviews researches dedicated to this issue. Second, the paper will comment on FVA role in the financial crisis and its contribution to it. Third, the essay will analyze historical cost accounting and show that...
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...June 2010, Vol.6, No.6 (Serial No.61) Journal of Modern Accounting and Auditing, ISSN 1548-6583, USA Fair value accounting under financial crisis HE Cai-xia1, ZHANG Chi2 (1. School of Accounting, Zhongnan University of Economics and Law, Wuhan 430073, China; 2. School of Management, Huazhong University of Science and Technology, Wuhan 430073, China) Abstract: The recent financial crisis has led to a vigorous debate about the pros and cons of fair-value accounting (FVA). This debate presents a major challenge for FVA going forward and standard setters’ push to extend FVA into other areas. In this article, we highlight three important issues as an attempt to make sense of the debate. First, much of the controversy results from confusion about what is new and different about FVA. Second, while there are legitimate concerns about marking to market (or pure FVA) in times of financial crisis, it is less clear that these problems apply to FVA as stipulated by the accounting standards, be it IFRS or U.S. GAAP. Third, historical cost accounting (HCA) is unlikely to be the remedy. There are a number of concerns about HCA as well and these problems could be larger than those with FVA. Key words: fair value accounting; historical cost accounting; financial crisis 1. Introduction The recent financial crisis has turned the spotlight on fair-value accounting (FVA) and led to a major policy debate involving among others the U.S. Congress, the European Commission as well banking...
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...24, Number 1—Winter 2010—Pages 93–118 Did Fair-Value Accounting Contribute to the Financial Crisis? Christian Laux and Christian Leuz I n its pure form, fair-value accounting involves reporting assets and liabilities on the balance sheet at fair value and recognizing changes in fair value as gains and losses in the income statement. When market prices are used to determine fair value, fair-value accounting is also called mark-to-market accounting. Some critics argue that fair-value accounting exacerbated the severity of the 2008 financial crisis. The main allegations are that fair-value accounting contributes to excessive leverage in boom periods and leads to excessive write-downs in busts. The write-downs due to falling market prices deplete bank capital and set off a downward spiral, as banks are forced to sell assets at “fire sale” prices, which in turn can lead to contagion as prices from asset fire sales of one bank become relevant for other banks. These arguments are often taken at face value, but evidence on problems created by fair-value accounting is rarely provided. We discuss these arguments and examine descriptive and empirical evidence that sheds light on the role of fair-value accounting for U.S. banks in the crisis. While large losses can clearly cause problems for banks and other financial institutions, the relevant question for our article is whether reporting these losses under fair-value accounting created additional problems. Similarly...
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...Counteracting the global economic crisis: values, institutions, policies. When talking about the broad and complicated subject of economic crisis, it is important to mention ideas concerning neutralization of its consequences and prevention of future calamities. The current disturbance in the global economy requires not only to understand how it was initiated, but also how to counteract and draw conclusions from it. The Chinese proverb says: “may you live in interesting times.” These times are now- financial markets are in turmoil, China is rising as economic power, young people from Europe and America are protesting against, what they see as ineffective government and regulations. In next years the world will change even more- also thanks to changes, that will be made as an answer to the global economic crisis- in terms of values, necessary institutions and policies. The first step toward ending the crisis is to introduce new regulations, that would stabilize the market. Since 1980’s the American financial market has been experiencing a long period of deregulation. Although the obvious results of this move- the example can be the deregulation of savings and loans companies, that led to crisis in 1989, the process continued. Decade later, in 1990’s the new market instruments- derivatives, became increasingly popular. Although, their allies argued that they would stabilize the market, the opposite happened. Any attempt to regulate hedge funds was cut out by Commodity...
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...With the Global Financial Crisis came the search for answers as to what led to the meltdown in the United States mortgage market and ultimately the rest of the world economy. Speculation was rife that accounting standards, in particular, fair value accounting was the prime reason for this significant meltdown. “This sparked a fierce debate with some experts believing that fair value accounting was primary cause of the crisis whilst others considered that it exacerbated it. On the other side of the debate were those commentators that believed that fair value accounting was successful in acting as an early warning system and effectively prevented more calamitous consequences.” (Pabuccu, 2011) In response to this speculation, the International Accounting Standards Board (IASB) and the Australian Accounting Standards Board (AASB) immediately took action to review this matter and implement the necessary changes to address the uncertainty surrounding Fair Value accounting. Body Due to the economic significance of the crisis, financial commentators around the world analysed the situation, made comment, pointed the finger; and laid blame for this event. Due to the speculation, a ferocious debate commenced, with many of them believing that fair-value accounting was the primary cause of this event. Bubbles and Busts have occurred throughout history and are closely linked to the periods preceding a financial crisis. According to McMahon (2011), “fair-value accounting amplifies business...
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...measures impact on French bank securities volatility during the financial crisis In Group with Mr Duchemin and Mr Melloul Benjamin CNUDDE Introduction: The world of finance is from now global and has huge repercussions all over the planet as we could see during those last years of the recent recession. The subprime crisis triggered in the United States during the second half of 2006 has quickly turned into an international financial crisis with huge repercussions on the European financial markets. Banks and financial intermediaries were particularly affected by it because of the fair value accounting for financial instruments. As we all know, the real estate crisis in the United States has been the triggering element of the financial crisis which has initiated the international financial crisis we are facing now. Credit rarefaction and an obvious rise of market volatility were the fundamental consequences of the crisis. And to stop the proliferation of the crisis worldwide (especially provoked by the “toxic” assets owned by banks) comes the International Accounting Standards Board (IASB) intervention. We will discuss if such an intervention has managed to prevent a rise of the French banks securities volatility. In the financial crisis we are passing through, many personalities criticized the installation of IFRS (International Financial Reporting Standards), and notably concerning the impact on fair value. According to Christine Lagarde (French Minister of Economy, Industry...
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...How did Financial Reporting Contribute to the Financial Crisis? Mary E. Barth & Wayne R. Landsman a a b Graduate School of Business , Stanford University , Stanford, CA, USA b Kenan–Flagler Business School , University of North Carolina at Chapel Hill , Chapel Hill, NC, USA Published online: 07 Jul 2010. To cite this article: Mary E. Barth & Wayne R. Landsman (2010) How did Financial Reporting Contribute to the Financial Crisis?, European Accounting Review, 19:3, 399-423, DOI: 10.1080/09638180.2010.498619 To link to this article: http://dx.doi.org/10.1080/09638180.2010.498619 PLEASE SCROLL DOWN FOR ARTICLE Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) contained in the publications on our platform. However, Taylor & Francis, our agents, and our licensors make no representations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of the Content. Any opinions and views expressed in this publication are the opinions and views of the authors, and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon and should be independently verified with primary sources of information. Taylor and Francis shall not be liable for any losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoever or howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the...
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...Did Fair-Value Accounting Contribute to the Financial Crisis? Christian Laux and Christian Leuz I n its pure form, fair-value accounting involves reporting assets and liabilities on the balance sheet at fair value and recognizing changes in fair value as gains and losses in the income statement. When market prices are used to determine fair value, fair-value accounting is also called mark-to-market accounting. Some critics argue that fair-value accounting exacerbated the severity of the 2008 financial crisis. The main allegations are that fair-value accounting contributes to excessive leverage in boom periods and leads to excessive write-downs in busts. The write-downs due to falling market prices deplete bank capital and set off a downward spiral, as banks are forced to sell assets at “fire sale” prices, which in turn can lead to contagion as prices from asset fire sales of one bank become relevant for other banks. These arguments are often taken at face value, but evidence on problems created by fair-value accounting is rarely provided. We discuss these arguments and examine descriptive and empirical evidence that sheds light on the role of fair-value accounting for U.S. banks in the crisis. While large losses can clearly cause problems for banks and other financial institutions, the relevant question for our article is whether reporting these losses under fair-value accounting created additional problems. Similarly, it is clear that determining fair values for illiquid...
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...Strategic Plan, Part I Joanelle Jones BUS/475 March 22,2012 Robert Smith Strategic Plan, Part One A Way out Women’s Crisis & Family Outreach Center is a non-profit business organization. The author would like to develop and start this organization in the near future. This paper serves as a preliminary business plan. The organization’s services and customers are defined within the mission statement. The vision clearly states the direction the organization hopes to achieve in the future. The principals and values are defines as they relate to social responsibility, ethics and the organization’s culture. The conclusion analyzes how our mission, vision, and values that guide our strategic direction and how the organization addresses the needs of whom we aim to serve. Mission A Way Out Women's Shelter and Crisis Center is as support based family shelter that thrives to help our communities STOP domestic violence and sexual assault. In the process, it is our desire to help clients within our communities that wish to create better lives for themselves and their children. Our Crisis center provides quality residential and non- residential services to woman and children who are victims of domestic and sexual violence. The Way out Woman Shelter and Crisis Center is a non-profit, 501(c) (3) organization comprised of members throughout the state of Arkansas and services Pulaski, Faulkner, Saline Counties and rural communities as well who share the conviction that violence...
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...CRISIS IN GREECE: STUDY OF THE FACTORS THAT LED TO THE CRISIS. A Research Paper: Under The Guidance of:Dr Somesh Kumar Mathur Indian Institute of Technology Kanpur Pankaj Kumar Y8333 Sanchit Singhal Y8442 Sulabh Boudh Y8513 INTRODUCTION Greece is currently facing a very severe crisis, with expectations of a sovereign default as Greece confronts with the second highest budget deficit, as well as the second highest debt to GDP ratio in the EU. The paper uses insights from the literature to offer an analytical treatment of the crisis in Greece. The crisis itself is very likely to be a result of: The gradual worsening of Greek macroeconomic Fundamentals over 2000-2009 to levels discrepant with other EU members. A shift in market expectations, from a scenario of credible commitment to future EU participation to a scenario of non-credible EU commitment without fiscal guarantees, respectively occurring in November 2009 and February/March 2010. The pricing by markets of a (previously nonexistent) default risk that follows the withdrawal of an implicit guarantee on Greek debt by other EMU countries (mainly Germany). Interestingly, our account of the 3 factors sparking and escalating the crisis also helps explain why prices on Greek government bonds have not recovered but continued to plummet following the announcement of the EU/IMF rescue plan. Our analysis suggests that the involvement of an external institution like the...
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...Harrigan The Impact of the Asia Crisis on U.S. Industry: An Almost-Free Lunch? • The large devaluations experienced by Korea, Malaysia, Thailand, and Indonesia beginning in the summer of 1997 raised concerns that imports from these countries would soar while demand for U.S. exports weakened, causing U.S. industries to suffer. W • As it turned out, manufactured imports from the four countries rose only slightly, and the decline in U.S. exports was not large enough to have a significant effect on trend output for most industries. • The one exception to this pattern was the steel industry: there, sharply rising imports and falling exports led to a drop in output and prices. • Overall, the United States enjoyed an “almost-free lunch” in the wake of the Asia crisis. Cheaper imports benefited consumers, and domestic production and employment were largely unhurt. hen the Asia crisis erupted in the summer of 1997, many forecasters predicted that one effect would be an end to the economic boom in the United States. Surely, it was argued, the drop in demand for U.S. exports combined with surging import volumes would finally be enough to slow the U.S. economy. It did not happen. Indeed, the Asia crisis’ overall effects on the United States were small.1 In terms of trade flows, total manufactured imports from the Asian countries affected by a currency collapse—Indonesia, Korea, Malaysia, and Thailand, which I will refer to as the “Crisis 4” countries—grew only slightly...
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...2006). And as a factor that influences the performance of family firm, family business governance can be seen as one of the most important determinant of family firm success. It is more easily to test the performance of the firm during the hard time which provides an extreme environment to clearly show the differences between the performance of family firms and non-family firms. And the latest global financial crisis in 2008 provides such an ideal setting investigating such a topic due to its magnitude and global scale (Haoyong Zhou, 2012). In this paper, whether family firms performs better during hard time especially in a financial crisis will be critically discussed based on Haoyong Zhou’s recent work. He provided that to be specific, family firms do not perform better in the crisis while it is the companies with founder presence do outperform non-family firm due to different agency cost, investment strategy and access to credit market. Generally, in order to give a critical review to the assertion that family firms are better performers in a financial crisis, zhou’s evidence will be reviewed in the second part followed by some more discussion about...
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...Dzhalil Atakeev Finance 190 Professor Shlyakhov 10/21/2013 Asian Currency Crisis The Asian Currency Crisis started in Thailand. The crisis just reflected structural and policy misinterpretation of the Asian region. Fundamental imbalances triggered the currency and financial crisis in 1997, due to crisis markets overreaction and herding caused the plunge of exchange rates, asset prices and economic conditions. Everything started from Thailand, before 1997 the economy grew was very high in Thailand, it was averaging 9% per year. The rate between USD and Baht was $25 per 1 baht. The 1997 was crucial for Thailand because massive speculators attacked Thai baht. The spark on Asian crisis was when prime minister of Thailand announced that he would not devalue the baht, and government just couldn’t defend baht, which was fixed to several currencies, one of the dominant components was USD. The decrease in economy of Thailand cause massive layoffs in finance, real estate, and construction that resulted many people to return their villages and countries. The Thailand baht was devaluating and by 1998 it reached lowest value of 58 baht over 1 USD. Without any support from foreign reserves Thai government had to float the baht, so that way baht was set on currency market. Since baht was pegged to other currencies crisis spread to another Asian countries. By 2001, Thailand's economy had recovered. The increasing tax revenues allowed the country to balance its budget and repay its debts...
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...A STUDY OF FINANCIAL CRISIS AND ITS IMPACT ON STOCK MARKET A MANAGEMENT RESEARCH PROJECT SUBMITTED TO DHARMSINH DESAI UNIVERSITY FOR THE PARTIAL FULFILLMENT OF FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION (MBA) SUBMITTED BY CHARMI S. SHAH ROLL NO.: 42 UNDER THE GUIDANCE OF Dr. FALGUNI PANDYA ASSISTANT PROFESSOR (FINANCE) CENTRE FOR MANAGEMENT STUDIES DHARMSINH DESAI UNIVERSITY NADIAD 2014 DECLARATION I hereby declare that the project titled “FINANCIAL CRISIS AND ITS IMPACT ON THE STOCK MARKET” is my own work and I have not copied it from somewhere else. The project report is prepared just as a part of partial fulfillment of MBA programme and no other use of this project will be done. MANAGEMENT RESEARCH PROJECT is a part of syllabus in MBA programme of CMS – DDU , Nadiad, Gujarat. Name : Charmi S. Shah Signature : Date : 21st February, 2014 CENTRE FOR MANAGEMENT STUDIES DHARMSINH DESAI UNIVERSITY CERTIFICATE This is to certify that the Management Research Project has been Carried Out under the theme “FINANCIAL CRISIS AND ITS IMPACT ON STOCK MARKET”. This report is the bonafide work of Ms. Charmi Shah Roll Number 1542 of MBA Semester IV during the academic year 2012-14. Faculty Guide: Prof. Falguni Pandya Date: 21/02/2014 Head of Department: Dr. Naresh Patel Date:21/02/2014 Preface Practical knowledge by way of research is a step to bride up the gap between the theoretical studies of finance and its practicality in the world. Hence D...
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...to the Financial Crisis? Mary E. Barth Graduate School of Business Stanford University Stanford, CA, 94305 mbarth@stanford.edu. Wayne R. Landsman Kenan-Flagler Business School University of North Carolina at Chapel Hill, Chapel Hill, NC 27599 wayne_landsman@unc.edu. May 2010 Forthcoming, European Accounting Review, 2010 We appreciate comments from seminar participants at the Bank of Spain, Rob Bloomfield, Elicia Cowins, Hilary Eastman, Gavin Francis, Christian Kusi-Yeboah, Jim Leisenring, Martien Lubberink, Richard Rendleman, David Tweedie, and an anonymous reviewer. We acknowledge funding from the Center for Finance and Accounting Research at UNC-Chapel Hill and the Stanford Graduate School of Business Center for Global Business and the Economy. Electronic copy available at: http://ssrn.com/abstract=1601519 How did Financial Reporting Contribute to the Financial Crisis? Abstract We scrutinize the role financial reporting for fair values, asset securitizations, derivatives, and loan loss provisioning played in the Financial Crisis. Because banks were at the center of the Financial Crisis, we focus our discussion and analysis on the effects of financial reporting by banks. We conclude fair value accounting played little or no role in the Financial Crisis. However, transparency of information associated with asset securitizations and derivatives likely was insufficient for investors to assess properly the values and riskiness of...
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