Accounting Theory And Practice Final May 2014 Essay

Submitted By Nahim-Ahmed
Words: 3561
Pages: 15

THE ROLE OF FAIR
VALUE ACCOUNTING IN
THE FINANCIAL CRISIS2007-2010

Word Count:2185

11007741

CONTENTS
INTRODUCTION ....................................................................................................................................... 2
BACKGROUND ......................................................................................................................................... 2
ISSUES AND ALLEGATIONS ...................................................................................................................... 2
MAIN ALLEGATION .................................................................................................................................. 2
TRANSPARENCY AND FRAUD ISSUES ...................................................................................................... 3
FAIR VALUE ACCOUNTING AND HISTORICAL COST ACCOUNTING COMPARED ..................................... 4
ACCOUNTING PROFESSION CHANGES .................................................................................................... 5
CONCLUSION ........................................................................................................................................... 5
GLOSSARY................................................................................................................................................ 6
APPENDIX 1 ............................................................................................................................................. 6
APPENDIX 2 ............................................................................................................................................. 7
APPENDIX 3 ............................................................................................................................................. 7
APPENDIX 4 ............................................................................................................................................. 8
REFERENCES ............................................................................................................................................ 9
BIBLIOGRAPHY ...................................................................................................................................... 10

1

INTRODUCTION
This report aims to critically analyse the fundamental issues in the area of Fair Value Accounting
(FVA) and its role in the financial crisis. The report will begin by providing a brief background of FVA and the financial crisis. This will lead to an in-depth examination of the fundamental issues. An assessment and evaluation will be made of any changes to the accounting profession as a result of this research. One of the findings reveals the blame towards FVA is from the banking industry, which majority hold responsible for the crisis.

BACKGROUND
There is no one specific definition associated with FVA. FASB (Fasb.org, 2014) defines Fair Value as the price that would be received when selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (Appendix 1). Fair value in its simplest form is reporting assets and liabilities at its current value in the balance sheet and recording the changes in value in the income statement. In 2006, FVA was mandated and the financial crisis began in 2007.
The financial crisis was the worst crisis since the great depression of the 1920’s. Various causes of the financial crisis have been cited, including weak regulation, excessive mortgage lending, a growing housing bubble, the rise of derivatives instruments such as collateralized debt obligations and questionable banking practices (Kothari and Lester, 2012). From the accounting industry, blame was placed on FVA and the role was controversial. Fair value was accused of making the financial markets extremely volatile as assets had to marked down to meet their market valuation, the resulting loss in