At the beginning of the 21th century, the Financial Accounting Standards Board (FASB) started to realize the importance of fair value accounting as for a new measurement basis for asset and liability. The FASB believed the primary objective of financial reporting is to provide relevant and useful information about the future cash flow to current and prospective investors and creditors (Whittington, 2008). Since the historical cost accounting usually gives information about past transaction, not information about the future, to existing shareholders or creditors, FASB thought financial statements based on historical cost accounting could not be relevant and useful to prospective investors, which makes them difficult to achieve the main …show more content…
Brain Wesbury, the Chief Economist at First Trust Advisor L.P, also pointed out that the price of mortgages, corporate bonds, and structured debt have fallen below their fundamental value in uncertain and illiquid market, and banks had to write down their asset to this distorted market price in accordance with fair value measurement and record more losses than they had to (Wesbury, 2009). Oher critics make a further argument that this phenomenon has led to the depletion of bank’s regulatory capital and it forced banks to sell off their asset at fire sales prices, which resulted in a contagious downward spiral as fire-sale price from this distressed bank became relevant marks for other banks (Plantin, 2008). Although the contagion effects and asset-fire sales might have been occurred during the financial crisis as critics argue, a careful analysis should be made to find out whether the fair value accounting actually aggravated the severity of the impact of global financial crisis. In fact, according to the research conducted by Laux and Leux (2008), there is little evidence that supports fair-value accounting contributed to the financial crisis. Firstly, most of the financial assets held by banks in the time of crisis were not marked to market. Under fair value accounting, financial executives in banks have to classify their securities and loans into (maximum) three asset categories: Trading securities, Available for Sales (AFS) securities and
When it comes to the rules of accounting, the Financial Accounting Standards Board, or FASB, is in charge mostly. Their main responsibilities include making changes to the rules of accounting they think is crucial for key people and businesses as well as inform them of the changes made. To make sure the rules are understandable by the people and businesses, FASB change and update them to fit what is in today’s capabilities. One of the most important recent changes happened in the first month of twenty-sixteen: many known as “Standard Update 2016-01”.
Financial world is at the pace when the accountants are moving their steps towards fair value accounting, moreover FASB and IASB is motivating accountants to increase the use of fair value accounting by establishing new rules. Most of the people concur that fair values are the most reliable measure for financial assets and liabilities that an entity strongly trades, on the other hand some believes if management wants to hold an asset or liability till their maturity then historical method is best for measuring financial assets.
Almost 10 years ago on July 13, 2006, FASB, the Financial Accounting Standards Board issued FIN 48 the Accounting for Uncertainty in Income Taxes. FIN 48 is also known as Interpretation No. 48 that became effective during December 2006 fiscal year. It explains the uncertain tax positions regarding the calculations and disclosures of reserves in the Statement No. 109 of the FASB. The purpose of the FASB Interpretation No. 109, also referred to as, FIN 48, clarifies uncertainty in income taxes recognized by FASB Statement No. 109. The Statement does not recognize a threshold or measures the contribution for the financial statements. Accounting for income taxes (No. 109) is used for business enterprises. Also, it is applicable to
The national Financial Accounting Standards Board (FASB) and The International Accounting Standards Board (IASB) came together and jointly issued a newer revenue recognition standards. This will change the effects of the current revenue guided under US GAAP and IFRS. It will take not much of the time to be used as the date is set to have effects from 2017. All of the firms had to work under the rules and regulations set. There is enough of the time left to understand and work on the changes. On dated 28th May, 2014 the new revenue standards were issued for contracts with customers. It has the power to give limitations and new rules are to be followed by various industries. It also includes those industries which have their own policies
The global financial crisis of 2007-present caused the largest meltdown of major economies worldwide since the great depression of 1930. It involved the collapse of large investment banks and as a result affected all markets in the western world. A number of books, newspaper articles and media reports have been written in relation to what caused the crisis; due to the vast source of information and discussion on the topic, origins of the crisis could now be misconstrued. All forms of credible information; accurate financial data, statistics and reports are available to draw a conclusion from as to the cause, but greed was a motivating factor through the use of subprime
On February 26, 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) which revised the standards on leasing. The intent for this revision was to improve how leases are being reported on the financial statements. The consensus is that the classification tests in current use for making this determination fail to provide a faithful and accurate representation for leasing transactions in general. In 2005, the U.S. Securities and Exchange Commission had also made recommendations which indicated this need for change in regard to how leases were being reported. Overall, it is believed that this change would ensure greater transparency in the financial statements concerning these type transactions.
Earnings per share is introduced by the Financial Accounting Standards Board as the functionality used to calculate an institutions’ earnings for the year-end financial statements. The institutions can be made of up a simple or complex capital structure. It must be calculated on a constant basis in order for reports to remain consistent. FASB provides a formula of “dividing income available to common stockholders by the weighted average number of common shares outstanding during the period” (FASB 2009), to measure each share of stock earned. The net income of an institution simply comes from their income statement. The weighted average of common shares outstanding references on average how much was stock was outstanding during the entire year, since it fluctuated throughout the year. An issue that can be faced when determining earnings per share is the concept of share buybacks. This concept discusses cash that is not actually being invested but gives off the impression of good performance, when in all actuality, nothing had been generated. Investors and creditors focus a lot of attention to the findings of earnings per share as it sparks monetary interests. Ultimately, institutions strive for higher rates of earnings per share to demonstrate the institution’s performance and the likelihood of future success.
Regulators and Accounting Standards Board have long struggled with the developing comprehensive reporting standards that will improve transparency, reliability, completeness, and comparability of the financial statements prepared by the company. The need to promote investor confidence in the market makes it important to improve the financial reporting standards so that investors are able to obtain accurate, reliable and complete information in order to make informed judgments. This paper reviews recent attempts by SEC and FASB to improve the reporting of off-balance sheet transactions, variable interest entity, and non-controlling interest.
I appreciate the chance to respond to the Financial Accounting Standards Board’s invitation to comment on the Proposed Accounting Standards Update-Property, Plant, and Equipment (Topic 360): Changes in Measurement of PPE on the Balance Sheet and Income Statement.
According to the conceptual frameworks used by both the Financial Accounting Standards Board and the International Financial Standards Board, one of the main reasons why companies prepare financial reports is to allow users of financial statements make decisions regarding the provision of resources to the firm (Financial Accounting Standards Board, 2010; International Financial Standards Board, 2010). These decisions relate to the buy, sell, or hold moves that investors make based on the information received from the company. Both conceptual frameworks also include credit investors as being interested in the company’s performance as reflected in the financial reports. Apart from proving information to investors on the company’s projected cash flows, financial statements also play the important role in enhancing stewardship responsibilities that rest with managers. These requirements have connotations of financial statements being relevant to the targeted audience. In addition, financial statements are expected to be reliable from the audience’s viewpoint.
In today’s businesses, there has been an increase in the demand for financial reporting and also, the need to have reliable measurements of fair value and its disclosures. The need for reliable information has caused continuous change to accounting policies which has posed a challenge not only to management of companies, but also to auditors. The frequent changes in accounting principles pose a challenge for managers in measuring accounting estimates accurately and are an exceedingly difficult task. Fair value accounting is a financial reporting approach in which companies are required to measure and report on an ongoing basis certain assets and liabilities at estimates of the prices they would receive if they were to sell the assets or would pay if they were to settle their liabilities. Under fair value accounting, companies report losses when the fair values of their assets decrease or liabilities increase. Those losses reduce companies’ reported equity and may also reduce companies’ reported net income.
The Financial Accounting Standards Board (FASB) suggested that firm performance is measured more accurately by using accrual accounting instead of cash-flow accounting. The main reason to adopt accrual accounting as a standard when reporting earnings is that it measures short-term firm performance better, as it efficiently mitigates timing and matching problem in cash-flow accounting. Another fact that supports accrual accounting is that earnings has proven to be a better indication of future share returns and share prices. However, the costs of adopting accrual accounting are firm make assumptions and estimations when recorded the information. There are intentional errors, such as managements manipulate the classifications of the data in their preferences. Also, the unintentional errors will arise especially in the firm which have long operating cycle and/or the firms that have huge fluctuations in working capital requirements. The disadvantages will thus reduce the beneficial role of accrual accounting. The importance of cash-flow accounting is that it helps the public inspect the firm’s short-term solvency. Also, cash flows accounting prevent the errors caused by firm management deliberately manipulate over recording accounting data. Therefore, the information that accrual accounting and cash-flow accounting provided are incremental to each other in explaining firm
In 2008 the world economy faced the worst global financial crisis since the great depression of 1930’s. The impact of the crisis on the banking industry was critical during this period. From 2007, bank runs began on several British and American major banking firms, but instead of the classic bank run it was as described by Gorton, G. and Metrick, A. (2009) ‘a run on the shadow banking system’. This period was characterised with failure of major banks across Europe and the US. This financial crisis resulted in few takeovers in backing sector and forced governments to rescue the global financial market. In this essay I will discuss what happened during the financial crisis of 2008-09, why it happened, and what questions researchers have
Preparation and presentation of a company’s financial statements is a process that is laden with the use of estimates. The conceptual framework released by the Financial Accounting Standards Board indicates that a company prepares financial statements with the intention of assisting investors assess the company’s future cash flow prospects (Financial Accounting Standards Board, 2010). However, the process used by a company in assessing its cash flows is reliant on the use of estimates and conjecture. For example, the company has to determine the fair value of its assets on an ongoing basis if approximate value in the market is to be reflected in the financial statements. These values are arrived
The generally recognized most important cause is, however, excessive and imprudent lending by banks.1 One cannot blame banks for this because, like everyone else, they also wish to maximize their profits in a materialist cultural environment where maximization of income and wealth is the highest measure of human achievement. The more credit they extend, the higher will be their profit. It is high leverage which enables excessive lending. Excessive lending, however, leads to an unsustainable boom in asset prices followed by an artificial rise in consumption and speculative investment. The higher the leverage the more difficult it is to unwind it in a downturn. Unwinding gives rise to a vicious cycle of selling that feeds on itself and leads to a steep decline in asset prices followed by a serious financial crisis, particularly if it is also accompanied by overindulgence in short sales. It is the combined influence of three forces which can help prevent the recurrence of crises. One of these is moral constraints on the greed to maximize profit, wealth and consumption by any means in keeping with the mores of the prevailing secular and materialist culture. The second is market discipline which is expected to exercise a restraint on leverage, excessive lending and derivatives. The third is reform of the system’s structure along with prudential regulation and supervision appropriately designed to prevent crises, achieve