F012244227 - TOPICS: Disclosure Requirements, Fair Value...

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Mark-to-Market Accounting, Banking, Disclosure SUMMARY: In a CNBC program on Monday, Warren Buffet called for suspension of mark-to-market accounting for regulatory capital purposes. This article emphasize that "market-to-market accounting is fine for disclosure purposes". It also notes that "CNBC, sadly, has been playing a loop of Mr. Buffet that. ..leaves out his most important point. Nobody cares about the merits of mark-to-market in the abstract, but how it impacts our current banking crisis." regulatory processes, and the purposes of financial reporting can be covered extremely well using this opinion page editorial. QUESTIONS: 1. (Introductory) What is mark-to-market accounting? 2. (Advanced) How can banks' capital ratios be insufficient and banks be reported as insolvent under mark-to-market accounting, even if "their assets continue to perform"? In your answer, define insolvency and compare the notions of impairment of an asset versus the market value of an asset. 3. (Introductory) What is the difference between using financial reports for regulatory purposes and using them for disclosure purposes? In your answer, comment on the definition of "general purpose financial statements". 4. (Advanced) Why does regulatory reporting "require actions that might make no sense in the circumstances"? In your answer, comment on how regulatory reporting results in requirements to raise capital. 5. (Advanced) Refer again to your answer to question 3 above. Explain the implications of raising capital for current shareholders. 6. (Advanced) Define the concept of moral hazard. According to these Opinion page editors, how must regulators change their approach to handling our current banking crisis to avoid the problem of moral hazard? How does that differ from using a system of regulatory capital requirements for banks? 1
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F012244227 - TOPICS: Disclosure Requirements, Fair Value...

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