ACCOUNTING THEORY

Accounting Theory

Answer 1

Reasons for blaming Accountants responsible for Global Crisis

Mr.Schwarzman who is the co-founder of a private equity firm called Blackstone Group. He has been advocating his view that the bean counters are responsible for the economic crisis in US. It is a controversial thing that others have put them forward and it has been of great debate in the industry. According to Mr. Schwarzman is truly convinced that the accounting rule which is known as the FAS 157 has forced the accountants to overstate the issues at the largest banks of nation.

FAS 157 states that the FVA (fair value accounting) rule has put into the effect by the FASB (Financial Accounting Standards Board), which is the rule making of bookkeepers. It needs that some particular assets are held by the financial firms, including the tricky investments which are linked to the mortgages and some different types of debts, which should be marked to the market. In different words, you need to value the assets at those prices which you can attain in order to value the assets at which you can sold them in the open market.

Personal Views

I am convinced with what Mr.Schwarzman has said because FVA has been implemented by the accountants so called the bean counters. FVA fluctuates the value and on the other hand Historical cost accounting stays with the same original cost. This thing has fluctuated the market and made the value of the securities valueless. Which resulted in bankruptcy of so many banks.

Answer 2

It is another name for FVA ( Fair Value Accounting) is considered as the marked to make believe in the article and it can change the values of items over the balance sheet as the conditions of market gets changed. On the other hand historical cost accounting (HCA) which is based on the original cost at which the asset was acquired, it is more stable, simpler and it is easy to perform, but it does not reflect the current market value. It summaries transactions of past. The accounting of Mark to make can become inaccurate if the prices of market changes unpredictably. The sellers and buyers might claim for a number of particular instances when it is the scenario. Mark to change is called such because it is subject to the changes in the market and that updates the values over the balance sheet.

Answer 3

Subprime Crisis

In 1996 there is 9% subprime crisis but it is 21% subprime lending in 2004. Because of securitization, the appetite of investor for MBS (securities backed by mortgage), & the rating agency's tendency in order to assign the ratings of investment grading to MBS, the loans with high risks could get initiated by default, the risk which is ready to be transferred to others and packaged too. Furthermore to the consideration of the borrowers which are of high risk, the lenders have increasingly offered the option for loan consisting high risk and the incentives given to them.

Homeowners were taking advantage of the increased value of property ...