Accounting theory report - Word Count BUS 304 Group Case...

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BUS 304 Group Case Study Report Name: Nur Nadia Azmi Yee Heng Mako IIno Michelle Linn Lecturer: Dr Md Moazzem Hossain Tutor: Mellisa Lewis (Tuesday – 8:30am) Word Count :
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Table of Contents Executive Summary ................................................................................................. 3 Introduction ............................................................................................................ 4 Body of Report ........................................................................................................ 5 Question 1 ...................................................................................................................... 5 Question 2 ...................................................................................................................... 6 Question 3 ............................................................................................................................................. 7 Conclusion and Recommendation ........................................................................... 9 References ............................................................................................................ 10
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Executive Summary This report provides an introduction to the fair value of accounting measurements and analysis about its application and impacts on credit market. By answering the three questions listed, the relationship between financial crisis was analysed, market value of financial institution and its valuation technique was introduced. Based on the analysis, the report concludes with the opinion that fair value is not involved in causing financial crisis and instead of abandoning the concept, it should be optimized and applied to the valuation of financial or non-financial asset and liability. A fair value measurement is the point to ensure that it is the most representative of the fair value in the circumstances.
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Introduction This report is to discuss the case “Former FDIC Chief: Fair Value caused the crisis” by David M Katz from the perspective of Fair Value Accounting measurement. This case study illustrates that the implementation of fair value method caused the recent financial crisis from 2007-2009. William Isaac, the former FDIC (Former Federal Deposit Insurance Chief) chairman and the current chairman of a banking consulting firm, argued that significant amount of capital had been destroyed by the fair value accounting system and it subsequently resulted in the loss of bank lending capacity of $5 trillion. Isaac, further asserted that the situation was even worsened by Accounting Standards setters and regulators that forced banks to mark their illiquid assets.   Several theoretical and empirical researches have been done previously related to fair values, on which many arguments about whether it is should be blamed for resulting in financial crisis. Giorgiana et al. (2010) analysed those researches and revealed that majority of researches were in favour of fair value. The reason of financial crisis is considered to be the negligence in the process of underwriting and mortgage credit instead of fair value accounting measurement. The study of Ryan (2008) also clarified that the fair value not only didn't but also will not result in financial crisis. The aim of this report is to analayse the impact of Fair Value Accounting on the credit market and whether it caused the global crisis. In detail, the discussions of the case includes answering three questions and providing a few recommendations. First, discussing our opinion of the argument that a number of obsevers suggest that fair valuing of CDOs under the old defintion caused the global financial crisis of 2008.
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