Welcome to the first edition of Genesis Analytics Bank Board of Directors and corporate governance charter for the Middle East. This monthly briefs, we will examine some of the key issues in banking and corporate governance today, and now what they mean for banks and financial institutions in the region.
We begin by taking a look to play the role of fair value accounting in the global financial crisis, and asks whether a new assessment of how it is used justified.
In the March issue of Harvard Business Review, said the president of MFS Investment Management, Robert C. Pozen, is what, for many a troublesome issue. “And ‘fair value accounting fair to blame the global financial crisis” The answer is not easy, but the problem is Pozen’sexploration reveal.
Mark-to-market fair value accounting, or has a bad reputation, and some commentators like Steve Forbes, President of Forbes Media, of which the blame for the entire financial crisis on its doorstep. Pozen, however, whether this practice, the value of cultural stories for their actual value on the open market, but for the shock wave that pulses through the financial markets around the world can be attributed to a half years ago.
Some bankers have argued that it was fair value accounting, where the global crisis after the credit crisis of 2008 pushed the value of key assets in their portfolio at historic lows. They have argued that fair value accounting rules, the value of these assets affected so badly that even though most of the mortgages, corporate bonds and structured debt securities still run, many banks have been faced with insolvency.
Convinced by these arguments, politicians in the U.S. and Europe for a suspension of fair value in favor of historical cost accounting, the assets of which the original value or acquisition can be set. Fair value accounting, but it has its defenders, among them Lisa Kroonce, accounting professor at the University of Texas.
“This is just a case of blame the messenger,” he said in an article in the Magazine of Texas recently. “Fair value accounting is not the cause of the current crisis. E ‘rather than the consequences of such errors, such as subprime loans and letters of credit default swaps, has announced … The alternative is to keep these loans on books of their initial amounts is equivalent to ignoring reality. “shareholder groups and the Financial Accounting Standards Board (FASB), which in the retracted position, arguing that it is more important than ever to real market value of the goods out in the portfolios of banks.
So this is a matter of black and white, or is there more?
Genesis Analytics would argue that not only the accounting, that the question of understanding in times of crisis, but also the depth at which the boards of both banks of the rules and ask them to view. Obviously, in the interest of anyone for the banks, because short-term fluctuations in the value of failure. For the same reason it is in nobody’s interest to hide losses from investors, or cleaning up toxic assets and, where appropriate delay.
It ‘is clear that the legitimate needs of banks and investors into account, a new multidimensional approach to be adopted for financial reporting to the historical value and mark-to-market value must be considered.
Before this can happen, but it is important that a number of misconceptions about the rules and methods to be clarified.
First, it is not correct to assume that the historical cost accounting is not tied to current market value. Of course, the historical accounting rules, the majority of assets are valued at cost or original value, with small adjustments for depreciation in their lives (as in the case of buildings), or for certification of maturity (as in the case of debt purchased with a discount on the nominal value). But even after these rules take into account the current market value accounting, and listed companies and financial institutions should ensure all their assets were permanently impaired report. So, despite what the assets are measured at initial value is performed, the institutions have not returned anything other than a decline in value as it is durable, but in the situation in a sense, as measured by fair value accounting rules. do
It ‘s also wrong to think that most of the activities of financial institutions that are highlighted on the market. Implemented, in fact, according to an SEC study in 2008, only 30% of bank capital in this way, and the rest are valued at cost. This is because, according to the rules of fair value, the administration is divided by the activities of the three categories: those that are required, which are traded and which are for sale.
So, if management intends and has the ability to keep certain assets to maturity are valued on the books at amortized cost and are written only when affected permanently. In contrast, all goods traded in the market indicated on a quarterly basis, and the final decline of the traded bank assets must be reported on this basis.
Finally, it was not fair value accounting, where all assets are very liquid and easy-to-value on the direct market prices, but this is obviously not the case. Because markets are not always smooth, honest accounting rules, but for two other levels of evaluation to the bank manager to ensure that activities to enable the observable market data or on the basis of original cost.
So when the dust has settled, it is clear that the historical cost accounting and fair value accounting is not as distant as they seem. The art of managing a bank or financial institution is clearly a crisis in something greater than the GAAP. In times like these, falls on bank boards, with the knowledge and information necessary to settle for a detailed and informed decisions. In a rapidly changing environment, financial services operates, only signs that this kind of deeper understanding of their institutions to stay on course, even in difficult times may have.
KEY POINTS FOR MEMBERSHIP:
Fair value accounting is a fundamental problem that the card has a direct impact on bank performance
-It ‘s important to understand the movement of goods between the various categories, banks and examiners are asked to provide details of such movements will occur
-It ‘s also important to understand the assumptions underlying the valuation of assets and their classification into different categories
Significant changes in the classification must be closely monitored
-It ‘s important for the rules of fair value accounting, understand the responsibility that the bank is working to apply
Genesis Analytics recommends that the bank advised the use of facilitated briefings and strategy sessions at regular intervals to ensure they are well equipped to deal with a constantly changing environment in the financial services industry. Genesis Analytics is a consulting firm that works with the advice of financial services companies, for their understanding and understanding of the institutions that govern them, and the context in which they operate to improve. If you want more info about financial crisis analytics so you can click the link.