Essays on Fair Value Contribution to the Global Financial Crisis Coursework

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The paper 'Fair Value Contribution to the Global Financial Crisis " is a good example of finance and accounting coursework.   The classic definition of fair value in any market is the amount for which an asset could be exchanged or the amount in which liability could be settled. This is in the case of a transaction between two willing parties transacting at arm's length transaction being knowledgeable parties. It is the price used in exchanging an asset or settling any liability thereof as at the measurement date. As discussed by Ragatz and Duska (2011, p.

115), fair value assists consumers of financial information make rational decisions about their interactions with the various companies. Accounting standards give more preference to this method of valuation and critics have linked it to the global financial crisis. The Australian Accounting Standards Board has responded to these claims. The major role or objective of fair value accounting is to enable firms in estimating as best as possible the prices at which the positions they hold could change hands in an orderly transaction given the prevailing conditions. To achieve this goal firms and organizations must be up to date regarding their cash flows and other accounting information.

When fair market values are estimated using adjusted or unadjusted market rates, they are referred to as mark to market values. When such rates are not available, models are applied and this is referred to as mark to model values. There is thus a preference by many firms and the Australian Accounting Board to evaluate assets using fair value accounting. Basically, accounting standards have played a major role in the financial crisis globally.

As regards to our research, the accounting standards will mainly focus on the standard of fair value accounting. Fair value accounting is an approach of financial reporting that companies, organizations and firms are required and so permitted to measure and report on a regular or ongoing basis the current assets and liabilities using estimates regarding the situation of if they were to sell the assets or settle any of the current liabilities. This method is recommended by the International Accounting Standards. Under fair value accounting, the accountant reports losses if the fair value of an asset decreases or the fair value of liability has increased.

This would in effect reduce the equity of the firm or even reduce the income of the firm according to Ryan (2008 p. 240). Under fair value accounting the most important aspect is whether the organization or firm in question can estimate fair values accurately and without discretion. It is the most accurate and least discretionary. The concept of fair value can be seen in the practice in organizations in two different ways, and the governing accounting standards require that firms disclose qualitative information on how they estimate fair values.

Accounting standards also require the disclosure of the valuation inputs used and the sensitivities of their reported fair values. This disclosure helps the investor in assessing the reliability of reported fair values and deciding on whether to use or ignore the information. This way, the investor is able to make a rational decision regarding the company. When firms make unrealized profits or gins, it becomes the role of management to voluntarily disclose any information that would be of use in the valuation of the fair values and realizing the nature and cause of such profits or losses.

The insincere principle, fair value accounting is the best and most reliable measurement attribute and especially for inducing the firms’ management in voluntarily disclosing the firm’ s fair values and thereby helping the investor in making critical investment decisions. Accounting standards that require the use and estimation of assets using the fair value method of measurement has considerably increased over the years and across the globe.

References

Lin, J & Pleskovic B 2011. Annual World Bank Conference on Development Economics,

World Bank Publications, London. Pp. 354-370.

Linsmeir, T 2011. ‘Financial institutions and financial crisis’. A Journal on Fair Value

Accounting. Vol. 25 no.2 pp. 409-456.

McMahon, G 2011. ‘Mark- to-market real role in the crisis’. The CPA Journal vol.81 no.2 pp.

466-560.

Negurita, O. & Guni N. (2011). ‘Accounting Standards and Financial Reports; Guilty for the

actual crisis?’ Journal on Accounting Standards.vol. 6 no.1. pp. 7-10.

Prochazka, D 2011. ‘The role of fair value accounting in the recent financial crunch’. Journal

On Economics, management and Financial Markets.vol. 6 no.1 pp. 300-432

Ragatz, J & Duska, B 2011. Accounting Ethics, John Wiley and Sons Publishers,

New Jersey.

Ryan G 2008. Fair value accounting: understanding h issues raised by the current crunch,

New York University Publishers, New York.

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