Mark to Market Accounting - 3163 Words

Running head: Mark to Market Accounting Mark to Market Accounting and Ethical Issues Ethical Issues ACC-504 April 16, 2012 Abstract Economic principle’s rationale for requiring guidance for financial institutions is to use mark-to-market accounting or fair value accounting on their financial reports. With the current economic crisis, questions have been raised as to whether or not fair value accounting is making this crisis worse. In this paper I review the history of fair value accounting and the ethics behind whether fair value accounting gives an accurate picture or is it causing a need for higher capital requirements and unnecessary concern with investors. There is a need for transparency. It is Accounting Standards and†¦show more content†¦This objections implies that a company may be cash poor with valuable assets, this ignores the fact that a company can use temporary financing to fund current operations with future cash flows. 4. Valuations may be flawed or imperfect. This is an understandable objection, because some assets are more easily valued than others. That does not mean though that fair value method should not be used when the alternative method is just as flawed. When we look at a benefit of the fair value accounting method we see that a firm will behave differently, and will take this method into consideration when they are purchasing this asset. The decisions tend to be less risky if they know that they will have to devalue the asset in the future. Bad decisions would be something that they would have to identify publicly with future marking to market. Companies would no longer have a motivation to sell assets for the benefit of recognizing an accounting gain. Historically a major financial event or crisis prompts reconsideration of accounting rules governing reported asset valuations. The credit crisis in 2008 generated reconsideration. In the 1980’s the savings and loan crisis prompted accounting rules move away from historical cost accounting. Had there been a fair value accounting system in place in the 1980’s the savings and loan crisis would have not taken years to realize. The banks had made long term mortgage l oans and borrowed short term. When the interestShow MoreRelatedAdm4342 Mid-Term1171 Words   |  5 PagesADM 4342M Accounting Theory Mid-Term Exam February 4, 2009 Instructor: B. La Rochelle, Ph.D., C.A. Duration: 2 hours Value: 25% of your final grade Note to students: This is a closed-book exam, containing 3 questions, worth 30 marks in total. 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