The paper 'Impacts of Fair Value Accounting in the Financial Industry' is a perfect example of a financial and accounting term paper. Fair value accounting or mark-to-market accounting involves accounting for the fair value of a liability or an asset based on the current market price or for similar liabilities and assets or any other fair value. It is part of the GAAP in the United States of America. In mark-to-market rules, the recording of assets and liabilities in the financial statements is done at their market values. A swing in the market will, therefore, result in a swing in the financial statements.
The current market conditions have shown the implications of the applications of these accounting rules in financial reporting, for instance, pro-cyclical behaviors and fall of financial institutions. This paper looks into arguments of various individuals who had discussed the impacts of fair value accounting in the financial industry. Paul E. Kanjorski: CongressmanMr. Paul starts his statement by stating that initially, he was not for the idea of allowing congress to engage in the creation of the accounting rules. He argues that financial experts, standard setters, and regulators should create these accounting rules and policies.
He noted that the then mark-to-market accounting accelerated the economic crisis that was witnessed worldwide. He warns the relevant authorities to come up with relevant measures to curb the economic crisis before the congress steps in. Even though he acknowledges the transparency of mark-to-market accounting rules to investors, he is not for its full application since it facilitates economic distortion. He further states that the financial sector is one of the industries that the mark-to-market rules hit hard.
He also states that each economic sector requires specific accounting rules and a single mark-to-market rule cannot apply in all the sectors. He calls upon the bank regulators to liberalize regulatory capital requirements. Mr. Paul is for the idea that relevant authorities should separate losses of assets due to liquidity risk from losses due to credit risk when applying mark-to-market rules. He also clarifies that mark-to-market accounting is not fully the cause of the economic crisis but the application of its fundamental principles should be improved in order to help solve the economic crisis.
Finally, he calls upon the relevant authorities such as the Securities and Exchange Commission and Financial Accounting Standard Board to come up with the relevant accounting rules to help curb the economic crisis. Robert H. Herz: Chairman of Financial Accounting Standards BoardMr. Herz in his report analyses the roles of Financial Accounting Standards Boards. He states that the main role of FASB is to come up with accounting and financial reporting standards for private, public, and not-for-profit organizations. These standards when fully implemented provide investors with reliable, relevant, and transparent information concerning the financial performance of a company.
FASB is tasked with coming up with standards that would enhance transparency in financial statements reporting so as to enable investors to make decisions regarding capital allocation. He states that the current reporting system takes into consideration the fair value measurements and historical costs. In the report, he states that financial institutions and brokers use mark-to-market accounting to measure liabilities and assets in the trading accounts. However, most banks measure their liabilities and assets based on historical costs.
Mark-to-Market Accounting: Practices and Implications, Available at http://archives.financialservices.house.gov/Hearings/hearingDetails.aspx?NewsID=1290), August, 2015
Fair Value and Mark-to-Market Accounting, Available at http://www.aba.com/Issues/Index/Pages/Issues_FairValue.aspx, August 2015