Essays on Fair Value Accounting and Global Financial Crisis Essay

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The paper 'Fair Value Accounting and Global Financial Crisis' is a perfect example of a Finance and Accounting Essay. The global financial crisis that was witnessed in 2008 was attributed to various factors including the accounting principles. Fair value accounting contributed to the global financial crisis in various ways. Regulations in terms of fair value accounting have weaknesses which led to the banking institutions adjusting their prices unlawfully. This contributed to the decline in the market and hence contributing to the global financial crisis. The public and private regulations also contributed to the problem due to its weaknesses and failure to monitor the situation in the market.

Fair value accounting also has weaknesses in the banking sector and it led to the exploitation of the market by the bankers. The fall in the housing prices also affected other organizations that use the concepts of fair value accounting. This led to spill over to the market and hence affecting the housing and mortgage sector. Politics also contributed to the global financial crisis due to the taking of sides by the politicians and their failure to adopt some important recommendations. Introduction and Purpose Fair value accounting is a means that is usually used for the purposes of measuring the value of assets and liabilities in a company as it appears in the balance sheet (Penman, 2007).

During the process of selling an asset, it is usually important to ensure that the principles of willing buyers and willing sellers are upheld. These concepts also place emphasis on the method that should be used to establish the prices. The use of quoted prices in the active market as fair value is usually considered in case it is available.

However, in instances when the prices are not available in the active market, valuation techniques and market information are usually put in place. The use of fair value is commonly used when dealing with financial assets and liabilities (Ryan, 2008). It is also important for both parties to make the appropriate adjustments during the process. Fair value accounting has, however, been blamed for contributing to the global financial crisis in 2008. The report supports the views and it discusses how it contributed to the global financial crisis in 2008 in response to the commissioning by the Chair of the Australian Accounting Standards Board. Discussion Public and private interest theories and fair value valuation According to the public and private interest theories, the regulations are aimed at preventing or correcting the undesirable results in the market (Siegers, 2003).

The undesirable results include the global financial crisis that was witnessed in 2008. The regulation that governs the private and public firms always aims at rewarding the organizations that perform well. However, this overlooks the impact that the performance may have on the economy.

This is because the market process may have negative impacts on the growth and development of the economy. The public and private interest regulations also give powers to the government to prevent undesirable market outcomes by putting in place incentive measures. However, the public and private interest regulations have a weakness which exposes the economy to undesirable effects. The regulations make assumptions that the government will fully ensure that the regulations are accounted for and that the market will be controlled.

However, in most instances the markets usually self compensate in cases of irregularities. The weaknesses in the public-private interest theory greatly contributed to the global financial crisis in 2008. This is because companies are in a bid to outperform each other in order to be rewarded. The financial value accounting enabled the banks to increase their leverage in booms and hence leading to the vulnerability of the market. The public and private interest regulations did little to contain the situation as it did not intervene in the situation.

The measures were also taken by the banks in a bid to self compensate the irregularities that were in the market and hence leading to the crisis (Persaud, 2008).

References

List of References

Laux, C, et al, 2009, The crisis of fair-value accounting: Making sense of the recent debate, Accounting, Organizations and Society 34, 826–834.

Siegers, J, 2003, Public and private interests in regulation, Essays in law and economic regulations.

Leuz, C, et al, 2010, Did Fair-Value Accounting Contribute to the Financial Crisis? Journal of Economic Perspectives—Volume 24, Number 1—Winter 2010—Pages 93–118

Arispe, F, et al, 2013, Fair Value Accounting and the Global Financial Crisis, European Journal of Banking and Finance, Vol.11.

Penman, S, 2007, Financial reporting quality: Is fair value a plus or a minus? Accounting and Business Research Special Issue: International Accounting Policy Forum, 33, 44.

Persaud, A, 2008, Regulation, valuation and systemic liquidity, Banque de France, financial stability review – Special issue on valuation, no. 12.

Morris, S, 2008, “Financial Regulation in a System Context.” Brooking Papers on Economic Activity, Fall, pp. 229–61.

Wallison, J, 2008, Fair Value Accounting: A Critique, American research institute for public policy research.

Ryan, G, 2008, “Accounting in and for the Subprime Crisis,” The Accounting Review, 83(6): 1605–38.

Scoles, M, 2008, “What Is Fair Value Accounting and Why Are People Concerned about It?” American Enterprise Institute, Washington.

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