Accounting Issues Assignment Sample

Subject Name : Accounting

Economics and Accounting Assignment

Question one

Introduction to Accounting

According Simon Samuels the book value of bank’s net assets is the residual figure that is found by applying accounting rules to individual assets and liabilities, and then deducting one from the other at the balance sheet date. The worth of the net assets does not therefore true reflection of the bank’s book value. Book values for many banks are above their market capitalization and it is not an indication of wrong valuation by accountants or market. Application of accounting rules serve specific and unique purposes when prices are established from the markets. Therefore, market valuations and accounting conventions are two different things.

When calculating bad values during acquisition, they are based on fair values of individual liabilities and assets and therefore not in reference to their book value. Many banks trade below their book value due to many considerations including; the market expects lower than historical returns to equity, and historical returns are at least partially reflected in today’s book values, which does not include a transaction. So, combination of higher capitalization requirements and low interest environment which reduce equity returns results in lower expected returns to equity. Secondly, market valuations signal indications and expectation that the cost base of most banks is different with associated lower returns. Book values does not capture the future costs that are unrealized in the balance sheet date and so brings a difference since they are reflected in market capitalizations.

Furthermore, even if all individual liabilities and assets were valued at fair value during accounting procedures, markets may still believe that some banks are worth less than the summation of their different assets and parts. General accounting for net assets should be market based because this approach does beyond individual assets and liabilities fair value accounting. This will bring the prevailing market view into accounting rules to ensure that market value accounting is captured at any time.

Fair Value Verses Market Value

Fair value is the potential price assigned to assets and liabilities in consideration to its utility, supply and demand and the competition it faces. Market value refers to price of the asset exclusive of its intrinsic worth in the market.

Application of fair values for financial liabilities and assets provide understandable and reliable information than cost based measures in assessment the current financial position of an institution or an entity. Fair values give a detailed accounting of the financial report reflecting on the current cash equivalent of the institution’s financial assets and liabilities rather than prices based from a past transaction. With time, historical prices become irrelevant for carrying assessment to determine entities financial position. Fair value principles include the need to control reported number of assets and liabilities including commitments and guaranties. These should be based on estimated current cash selling and market prices for assets and current settlement prices for liabilities in order to achieve true economic financial position via mark to market accounting of institution’s liabilities ad assets.

Fair value accounting is a market based financial approach measurement that is independent from specifications of a particular entity and therefore this accounting approach represents unbiased measurement to ensure consistency from period to period. The information report from the fair value accounting measurements thus enhances assessment of performance of the institution or an entity by different investors, creditors and other users. Fair value provides significant information about financial liabilities and assets because it reflects the current market prices and conditions and therefore provide comparative analysis of the financial instruments in institution financial performance.

Moreover, fair value enables entities and financial institutions to avoid volatility that result from incomes due to reports from mixed accounting technologies for assessment of assets earnings and liabilities that are related. It reflects the most current and complete estimation accounting based on the value of asset or obligation including riskiness of the future value, timing and amounts associated to the asset.

Reliability of information is determined from the faithful representation of the economic facts and it should be complete, prudent and free from bias. For various financial instruments they have active and liquid markets but in principles of accounting debt securities and equities have no market of any substance of deposits and loans. In Banking system, the fair value of measurement of an own debt would mean a fall in the bank’s credit score rating and this will lead to a measure in accounting profit which indicates discounted or low value of the liabilities. To avoid problems arising from measuring of similar instruments on two different bases, a full fair value accounting is carried out. Banks employ the division of non-trading and trading operations approach to ensure a successful accounting and auditing. The fair value accounting and measurements in banks for their banking books relies on estimation of value of assets and liabilities in absence of market information. It involves various assumptions including collateral, customer behavior, liquidity and credit standing.

Fair value accounting measuring process is difficult. The calculation of relevant and reliable fair value adjustments is a complex process and maybe difficult and even sometimes might not be successful. Fair value principles and procedures have various estimates underlying reported financials. These is a possible source of potential estimation error and may lead to manipulation of estimates. Earnings accounted through fair value might have greater volatility due to risk adjustments and varying yielding curves in relation to conservatively or undiscounted liabilities. Fair value accounting system is very expensive to create, implement and maintain.

The role of banks in liquidity and maturity transformation which involves the join provision of loans and deposits puts banks in a state in which they provide liquidity on demand as well as provide support to other financial sectors and economies that rely on their operations. This has great influence on the value of the bank assets due to non-marketability of loan contracts. Fair value therefore fails to recognize a permanent and positive banking feature and therefore it cannot overcome asymmetries between borrowers and lenders.

The potential impact of fair value standards enhances reporting of financial performance and helps in avoiding problems associated with historical accounting approaches. The upward revaluation of assets could be realized in the bank profits. When calculating bad values during acquisition, they are based on fair values of individual liabilities and assets and therefore not in reference to their book value. Many banks trade below their book value due to many considerations including; the market expects lower than historical returns to equity, and historical returns are at least partially reflected in today’s book values, which does not include a transaction. So, combination of higher capitalization requirements and low interest environment which reduce equity returns results in lower expected returns to equity. Secondly, market valuations signal indications and expectation that the cost base of most banks is different with associated lower returns. Book values does not capture the future costs that are unrealized in the balance sheet date and so brings a difference since they are reflected in market capitalizations.

Part B

Exposure Draft and Comment Letters

Proposed accounting standards update-codification improvements

Outline of the proposal

The Financial Accounting Standards Board (FASB) Accounting Standards Codification is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by non-governmental entities. An accounting standards update is not authoritative, rather it is a document that communicates how the Accounting Standards Codification is being amended. It also provides information to help a GAAP user to understand why GAAP is changing and when the changes will be effective.

What is being Amended on this Exposure draft

Codification improvements

The board is proposing amendments to the codification that would remove references to various concepts statements. In most instances the references are extraneous and are not required to be understood or apply to the guidance. In other instances, the references are substitute of actual wording from a concepts statement, specifically the definition of some elements from the FASB Concepts Statement No. 6 Elements of Financial Statements.

Concepts statements are non-authoritative, there is possibility by some stakeholders to perceive an inconsistency in applying authoritative guidance when standard settings and changes to the Concepts is not synchronized. The board therefore are the of idea that removing all the references to the concepts statements and including the actual text of definition that were intended to be applied in the guidance will bring codification simplification. Removing the references to Concepts Statements will bring various benefits to the future standard setting efforts and therefore the changes to Concepts Statements will ensure:

Elimination of any perception by stakeholders that a change in the Concepts Statements changes existing authoritative guidance.
Reduction in risk amendments to the Concepts Statements could result in unintended change in practice or trigger a need to amend the Codification.
Elimination of the need for stakeholders to refer to another source for definitions or to find other information that could easily be contained in the Codification.

Moreover, this proposed update contains proposed amendments that would improve the consistency of the codification by including all disclosure guidance in the appropriate disclosure section which is section 50. Many of the proposed amendments have arisen because the board resolved to give certain information either on the face of the financial statements or in the notes to the financial statements, this option was only included in other presentation sectors of the Codification. The section to disclose information in the notes to the financial statements should have been codified in the Disclosure section as well as other presentation matters section. Those proposed amendments are not expected to change current practice and therefore there might not be any transition guidance required.

Section C of these Proposed updates contains the proposed codification improvements that vary in nature.

How would the main provisions differ from current GAAP and why would they be improved?

The amendments in section A of this proposed update would simplify the Codification by removing references to the Concepts Statements. This will improve the codifications cohesiveness because the Concepts Statements are not authoritative. Users of the Codification will easily identify all requirements necessary for standard application in one place. Furthermore, removing the references in the Codification will ease perceptions that changes in the Concepts Statements may have an effect on existing standards. Finally, Removing the references to the Concepts Statements from the Codification will improve and simplify the efficiency of future amendments to both codification and the concepts statements by reducing risk that the entity would inappropriately apply changes to the concepts statement to the existing guidance that could result in unintended changes in practice. FASB does not anticipate the proposed amendments would have any changes to the current GAAP

The amendments in section B of this proposed update are to improve the Codification by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to the financial statements is codified in the Disclosure Section of the Codification. This will reduce the possibility of missing the disclosure requirement.

The amendments in section C are varied in nature and may affect the application of the guidance in cases in which the original guidance may have been unclear. The amendments in this section would clarify guidance so that an entity can apply the guidance more consistently. Some amendments in this section may require transition guidance since they might cause changes to the current GAAP.

Comment letters

KPMG

On 20^th December, 2019 KPMG commented on FASB proposed accounting Standards Update, Codification Improvements and supported the objective to remove references to the FASB Concepts Statements from the codification. They believe that the codification should not refer to the non-authoritative guidance. KPMG analysis reported that those amendments might have changes on current accounting practices and therefore the board should consider comments they have suggested. First, recommendations that would minimize effects as detailed in question 1 response of their report. Second, Board to provide transition provisions for all amendments related to the references to the Concepts Statements.

PricewaterhouseCoopers (pwc)

Pwc through their comment letter supported the amendments by the FASB on Codification Improvements. In their comments they recommended a content transition guidance rather than general transition guidance. In addition, they suggested changes in use of terms including Amendments of “financial Instrument term, Obligation term and Transfer definition. They agree with elimination of reference to Concepts Statements but they disagree with elimination of Master Glossary Definition of expected loses and expected residual returns. Deletion of “transfer” term from master Glossary would result in confusion.

Grant Thornton

Grant Thornton Comments to the proposed FASB amendments to the Concepts Statements were directed to specific questions and they are agreeing removal of references to the concepts statement as it would improve and simplify stakeholders use of codification by eliminating unnecessary cross referencing to the concepts statement and will reduce the risk that changes to the concepts statements would result in changes to Authoritative GAAP.

Delloite & Touche LLP

Despite the support to the amendments by FASB, Delloite believe that some of the amendments in the proposed ASU go beyond simple technical corrections and may have significant implications for practice and application of generally accepted accounting principles (GAAP). In addition, they do not believe that the proposed ASU sufficiently describes the Board’s rationale for removing the references to the concepts statements from the Codification. From their understanding of “removing all the references to the Concepts Statements and including the actual text of the definitions that were intended to be applied in the guidance will simplify the Codification.” To them, this statement is unclear

References for the Accounting Assignment

Aldaoar, A. A. A. (2019). Development of Algorithm Using Deep learning for Share Market Prices with Time Series Analysis.

Jang, J. (2017). Stock return anomalies and individual investors in the Korean stock market. Pacific-Basin Finance Journal, 46, 141-157.

Whittington, G. (2008). Fair value and the IASB/FASB conceptual framework project: an alternative view. Abacus, 44(2), 139-168.

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