The subprime crisis in the US banks and other financial institutions has ultimately
led to a liquidity crunch and a global financial turmoil. Prices of stocks and reality
across the globe are in a position of freefall and has destroyed the wealth
of individual investors at micro level as well as the economies at macro level.
Financial analysts all over the world have blamed mark-to-market accounting, also known
as fair value accounting, for the present financial meltdown. The fair value
accounting practice has directed the US banks and other financial institutions to compute
the value of the securities at market value, rather than historic cost. The fair
value accounting is not the true root cause of the financial crisis, but certainly it has
fueled the subprime crisis and the effect of fair value accounting practice has assumed
greater significance.
With the impact of Liberalization, Privatization and Globalization (LPG), a lot of
changes have taken place in the preparation and reporting of the financial statements across
the globe. The prime objective in the preparation and presentation of financial
statements is only to provide a true picture of the operational performance, financial position
and future cash flows of the organization to the intended stakeholders. Before going to
prepare and present the unbiased financial statements, organizations have to compute
and assess the value of assets and liabilities in
a systematic manner. The system of financial reporting must cover the important areas
like relevance, understandability, reliability and comparability. The financial statement
must offer the current and future potential information. It should help in assessing
the correct values of assets, liabilities and certainty of future cash flows. Traditionally
two methods were used to compute the value of financial assets and liabilities, such
as historical cost method, replacement cost or net realizable cost method, etc. |
