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On the subprime mortgage crisis on the impact of the fair value measurement model

Author: EZhaoZuo¡¡ChenHong From: www.yourpaper.net Posted: 2009-06-12 04:27:16 Read:
[Abstract] fair value problems in the U.S. subprime mortgage crisis context by the unprecedented attention. In this paper, the Financial Accounting Standards Board specification for measuring the fair value analysis of how the fair value of the role of the subprime mortgage crisis in the United States and its Enlightenment on Chinese listed companies.
[Key words] U.S. subprime mortgage crisis fair value of listed companies in China

Intensified the financial crisis in the United States, the issue of fair value has been unprecedented attention, some Wall Street bankers and members of Congress directed against fair value accounting of financial crisis, accusing it is accelerating the deterioration of the financial crisis, critics even proposed the abolition of the fair value accounting or at least extend the period in which the impairment of fair pricing. This newly released accounting standards (U.S. GAAP No. 157) was introduced it wanted to enhance the operability of the value of financial instruments measured, but to catch up with the subprime mortgage crisis, the the unique feedback effect of SFAS No. 157, plus After the Enron accountants and auditors care as if to fuel the subprime mortgage crisis.

Fair value in the United States use

1, the fair value of the course of development in the United States
U.S. Accounting Standards No. 157 two years ago, the Financial Accounting Standards Board (FASB) issued a new standard, this standard requires that the fair value is market participants reference asset or liability market in a current transaction will receive a price of the asset or transfer a liability, as well as standardized financial products "fair value" measurement issues. In fact, as early as the mid-1990s, the United States requires financial products to reflect in the financial statements in accordance with the "fair value". The "fair value" of the introduction of the concept, precisely because of the 1980s U.S. savings and housing crisis is caused, since then, the "fair value" accounting standards gradually been generally accepted. Today, the same is due to real estate issues triggered by the financial crisis, the "fair value" accounting standards are an unprecedented challenge.
SFAS No. 157 proposed solutions to financial products divided into three levels, the first layer is the active market transactions of financial products, such financial products "fair value" is determined based on quoted in an active market; second layer is trading not active financial products in the market circumstances, "fair value" of such financial products refer to similar products quoted in an active market or determine the value of the objective reference support model; third layer is no trading market financial products, "fair value" of such financial products requires management to determine the valuation model based on subjective judgment and market assumptions.
2, the subprime crisis U.S. attitude towards fair value
Citigroup, Merrill Lynch, UBS, AIG (American International Group), Blackstone through financial institutions, have directed at fair value accounting, claiming that the fair value measurement model exaggerated debt loss, enlarged times the breadth and depth of the mortgage crisis. The Fed, the United Kingdom's Financial Services Authority, the International Monetary Fund, the International Finance Association is also involved in a controversy with the accounting profession, to re-examine the fair value accounting model. U.S. Republican presidential candidate John McCain in a recent speech, called for the U.S. accounting profession seriously review the fair value accounting model, because banks and investors in order to determine a reasonable value of the assets held in an unprecedented crisis, bruised and battered. The prevailing view was that fair value accounting model exacerbated the credit crunch.

Second, how fair value impact of the U.S. subprime mortgage crisis

1, the principle of fair value
Financial assets or financial liabilities at fair value through profit or loss, such as financial assets and financial liabilities held for trading, held-to-maturity investments, loans and receivables, available-for-sale financial assets, financial assets held for trading and financial liabilities, mainly refers to the enterprise of selling or repurchase of financial assets or financial liabilities. In practice, domestic financial institutions are generally at the end of the month to do a one-time calculation, for some foreign investment bank, entered in the day-by-day investment gains and losses due to internal, Mark-to-Market is calculated on a daily basis, based on the market closing price at the date and profit or loss.
Financial turmoil in the global credit, Bear Stearns, Lehman Brothers, Merrill Lynch, UBS (UBS AG) held by a large number of U.S. sub-prime mortgage bonds are trading financial assets. , Subprime bonds sharp depreciation, the international investment bank has also been an unprecedented hit. UBS announced in January 2008, by the U.S. subprime mortgage crisis, its fourth-quarter provision for impairment of assets of $ 14 billion, enabling the company to losses in the fourth quarter reached a record 12.5 billion Swiss francs (about 11.4 billion U.S. dollars), and the loss for the year 2007 amounted to 4.4 billion Swiss francs. The same time, since the U.S. subprime mortgage crisis emerge in the second half of 2007, with the continuous rise in mortgage delinquencies, derived by the Housing Loan asset-backed securities such as MBS and CDOs prices continued to fall, leading financial institutions have their account mention of impairment, the asset's carrying value has shrunk dramatically indirect pulled down the capital adequacy ratio, the financial institutions under the tense situation in the capital was forced to sell off its subprime mortgage assets in a short period of time, and thus lead to a new round of more Impairment of assets due to low market prices, so that the market into prices - assets less total - panic selling - prices fall further "vicious cycle.
In this process, SFAS No. 157 played a role in fueling. The credit default swaps held by AIG is a typical example. AIG's former president Robert Wheeler Grimstad, said AIG internal valuation models, such financial losses on the derivatives of about 9 billion U.S. dollars, but Waterhouse pointed out that its credit default swaps financial reporting internal control significant deficiencies, AIG had recognized a loss of $ 11 billion.
2, the positive impact of the fair value
FASB Chairman Robert Hertz pointed out in the fair value of the Round Table 2008, the FASB is should be clear to investors and clear requirements stipulates that financial assets should be measured at fair value, fair value is to provide investors with more transparent information. The financial sector will only unwarranted charges of fair value accounting, but not provide a convincing alternative. He pointed out that the fair value is more transparent than the historical cost, a timely and efficient manner so that information users to understand the scale and impact of the subprime crisis. In fact, the financial sector has created a real estate bubble, unregulated, opaque asset securitization and financial innovation practices amplify the financial asset bubbles before eventually led to the disaster-ridden subprime mortgage crisis. Accounting with the fair value approach, timely, transparent and public disclosure of financial asset bubbles, to promote the financial sector, investors and financial regulatory authorities to face and resolve financial asset bubbles. In the absence of fair value accounting, investors may never be concealed in the financial sector and create the illusion of foam.

Third, the fair value of the subprime mortgage crisis to the

1, the subprime crisis exposed defect
fair value
The subprime mortgage crisis also exposed the United States of SFAS No. 157 "Fair Value Measurement defects. FAS 157 fair value is defined as "market participants at the measurement date in an orderly transaction, it is assumed that the sale of an asset received or to be a liability transfer price paid". Measured by this definition assumes that there is a accustomed trading market for the asset or liability. But the subprime mortgage crisis has shown that this assumption is not always true, for instance because of the excessive investor panic and credit withering CDO's market exists in name only. The need to use complex mathematical model for the valuation of the fair value requires management to make a number of assumptions, estimates and judgments to the market conditions, its reliability is indeed suspicious. Similarly, FAS 157 did not consider the impact of the lack of liquidity of assets measured at fair value. Unfortunately, the subprime mortgage crisis in the ABS, MBS and CDO mostly due to the credit crunch into a lack of liquidity of financial assets.
2, the SEC and FASB issued new guidance on fair value
September 30, 2008, the U.S. Securities and Exchange Commission (SEC) issued for the guidance of the Accounting Standards No. 157, the guidance does not suspend the use of fair value, but pointed out that in the case of non-active and non-rational market, corporate through internal pricing, including reasonable judgment to determine the fair value of financial assets. SEC stressed, can not simply rely on transaction prices in an active market conditions, the company needed more by the length of time the price decline, decline in market liquidity judgment, using internal valuation models and assumptions to determine the financial assets at fair value. The guidance also covers the factors to be considered in determining when an investment is other than temporary impairment should be.
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