logo

Financial Crisis | US Financial System Meltdown Report

   

Added on  2020-02-24

6 Pages1531 Words50 Views
Advanced Financial Accounting 1

IntroductionThe financial crisis that occurred in the period of 2007-2008 was attributed mainly tooccur due to mark-to-market accounting that caused the melt down of the U.S. financial system.The accounting professionals has emphasized on the weakness existing in the current accountingstandards that results in the occurrence of global financial crisis during the year 2008 (ACCA,2011). In this context, the present essay emphasizes on the controversy and complexitysurrounding the accounting for financial instruments at the time of 2008 financial crisis.Controversy and complexity surrounding the accounting for financial instruments at thetime of 2008 financial crisisThe global financial crisis has caused the debate among the accounting professionalsregarding the reasons responsible for its occurrence. It has been argued by the financial analyststhat current deficiencies in the accounting standards and their application have contributed to thecollapse of the financial system. The main weaknesses as pointed out by the financial analysts inthe accounting standards are use of fair value mark-to-market accounting approach in illiquidmarkets, the delayed loss recognition arising from financial instruments such as loans and thecomplexities in the structuring of the balance sheet (Zadeh, Barth and Landsman, 2013). Themajor point of criticism in the current financial reporting standards was use of fair valueaccounting that as per the views of many financial experts contributed to financial breakdown.The use of fair value accounting has caused the pro-cyclical of financial instruments byrecognizing excessive losses that resulted in large sale of assets and debt repayments (Pozen,2009). The pro-cyclicality of the accounting leverage refers to the decrease in the debt amountduring economic downturn and increase during upturn. Thus, it has been argued that fair valueaccounting model has lead to the reporting of excessive profit and losses leading to thedevelopment of a vicious cycle. The decline in asset price has caused their write-downs leadingto their forced sales for meeting the capital requirements and thus increasing the price of assets.On the other hand, some financial experts have a different view in relation to the use of fair valueaccounting. The fair value accounting approach provides early signs of inflated asset values andthus it can help in overcoming the occurrence of a corporate scandal. Thus, there are differing2

views in relation to the contribution of fair value accounting practices to the global financialcrisis (Zadeh, Barth and Landsman, 2013).The accounting standards are not responsible for the wring accounting of financialinstruments during the crisis as pointed out by various financial experts. It can be realized fromthe fact that banks adopt the use of historic cost approach for asset valuation. However, the valueof these assets was also overstated despite of the fact that these assets are not marked to marketand are not subjected to liquidity in market. Also, the provision for recognition for losses was toocomplex during the crisis that has caused the delay in identifying the losses on loan portfolios.Also, the complexity involved in implementing the off-balance sheet standards has also causedthe understatement of losses in the financial system during the crisis. Thus, it can be said thataccounting standards are not responsible for introducing pro-cyclicality in the financial system(Jarolim and Oppinger, 2012). On the basis of above discussion, it can be said that only improving the currentaccounting standards cannot restrict the occurrence of financial crisis as there are other economicand governance issues that are responsible for financial collapse. The development of accountingstandards for improving the transparency and reliability of financial information is essential forminimizing the chances of financial crisis occurrence in future context. In this context, it is alsoessential that adequate risk management and corporate governance systems need to be developedfor safeguarding against the financial crisis. The major factors responsible for the economicdownturn during the global financial crisis were asymmetry in accounting for stating gains andlosses, use of fair value accounting and pro-cyclicality. However, there has still no relationdetermined between the fair value accounting and pro-cyclical accounting leverage. Thus, thereis no single factor but a combination of various factors that led to the collapse of global financialsystem in the year 2008 (ACCA, 2011).The accounting of financial instruments is a topic of debate among the accountingprofessionals ever since the global financial crisis. There is also debate around the rules-based orprinciples-based accounting standards to be implemented for the development of financialreports. The IASB (International Accounting Standards Board) and Financial AccountingStandards Board (FASB) are largely emphasizing on reviewing and resolving the accountingissues that have developed from the crisis. This involves developing new and revised accounting3

End of preview

Want to access all the pages? Upload your documents or become a member.

Related Documents
Pros and Cons of Fair Value Accounting in Financial Accounting Theory and Practice
|10
|2424
|452

Pros and Cons of Fair Value Accounting in Financial Reporting
|8
|1939
|381

Financial Accounting for Business Combinations Assignment
|7
|1944
|21

Global Financial crisis 2008 PDF
|7
|1920
|130

Financial Accounting Essay
|9
|2151
|34

IFRS and Fair Value Accounting: Contributors to the Economic Crisis
|9
|2167
|271