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Accounting rules plays a vital role in determining fair value for the financial assets of the company. The report evaluated the used of Mark to market accounting rule in bank in case of financial crisis. In Mark and market method, the institution values the assist according to market changes in which sometimes it led to a drastic change the value of mortgage securities. Further, it will recognise the benefits and risk of using this rule in the banks. Thus, the report will critically analyse the pros and cons of implementing this rule in the banking institution in order to come out of financial crisis.
Mark to market pricing rules aims at valuing assets and liabilities according to current market prices. It helps in making changes in values of balance sheet according to the market fluctuation which assist the banking institution in stabilising its situation in case of financial crisis. In financial service industry such as banks market to market accounting is often known as fair value accounting. The current market value of assets and liabilities will be reflected in bank's balance sheet. In the bank's income statement the regular modification related to valuation of assets and liabilities are identified immediately.
The advantages of Market to Market accounting at banks can be as follows-:
- This method of accounting at banks will be depicting a more clear and realistic image of financial position of banks than historical cost accounting.
- A discipline to financial services is applied by the mark to market tools that will act for banks as a disciplinary to bull and bear market cycles.
- The risk to banks is reduced as it is a self-correcting mechanism during the decline of market.
- It will also allow the banks to increase leverage during the time of rising markets and the applying of mark to market accounting will increase the value of assets.
- In the prediction of risk of banks the mark to market accounting is more accurate than any other methods of accounting.
- The mark to market accounting has lead to the solution of bank failures at low cost.
Risks associated with Mark to Market accounting
This method of accounting is not beneficial for all businesses. There is a risk of fluctuation og assets in large amounts throughout the year. The misleading gains or losses can be created in volatile assets.
- The expected earnings are difficult to calculate as the investor cannot tell anything regarding loss and gains. So the investor is not aware about the true value.
- There can be loss of long-term capital profit-A trader may not elect Mark to Market accounting if wants to deal with 1256 contract as this will lead to loss of 60% long-term capital gain on future.
- If the assets and liabilities are not coated properly in the market then there will be difficulty in determining the fair value for banks.
- The election is not temporary. Suppose if mark to marking accounting tool is used then in the future years this tool can also be sued. With the consent of good luck only one can change the election.
- If the capital loss is carried by the trader, then election of this tool will modify the classification of the trading gains going forward. And in order to offset those gains any capital losses cannot be sued.
According to Burke, Chen and Eaton 2017, it helps the banks in making records stable, simpler and easier as it denotes the value of asset according to current market prices and it assists in securing assets more efficiently. Further, it stated that, in order to avoid risky situation banks can determine the fair value by using mark and market tool and can clear off the risky situation. However, in the contrary Amel-Zadeh, Barth and Landsman 2017, has stated that valuing depressed price for temporary basis according to the market situation can be beneficial for the company because it helps the banking institution in managing the values according to up and down of the market. It is important for the banking organisation to look over changes continuously in order to manage the valuing of assets. Moreover, as per the view of Laux 2016, fair value method is manipulative in terms of figures because it accounting seems satisfactory until financial crisis at the time of crisis institutions are unable to decide at what price the assets should be valued in order to stabilise interest and profits. The mark and market accounting rule does help in discloses much information regarding market, interests rate and credit risk which can be a threat to institution in the cases of economic crisis. In accordance, it stated that fair value accounting rules is not responsible for the changes in crisis because it changes values of asset without let economy affect the imposed value.
In accordance to stakeholder theory, it is important for the banking institution to comply with the methods which represents transparency between valuing methods. The stakeholders of bank are the assets for them and therefore it is important for banking firm to run the function according to market fluctuation in order to provide satisfactory and fair returns to its customers.
Legitimacy theory makes easy for institutions to overcome with the crisis because compliance with legal framework work of the country ultimately reduces the risk of falling under economic crises as the banking institutions are aware about the economical fluctuations (James, Bain and Sloan, 2017).
The report concluded with the accounting rule which assist the banking institution in valuing asset in the case of financial crisis. The mark and market method is the most beneficial rule of accounting which majorly assists the making firm s to revalue their asset according to market fluctuations. Moreover, the report critically analysed the fair value accounting rule in order to understand the loopholes and strengths of method for the institution in situations like, economic crisis. Thus, the report outlined the various benefits and risk of implementing mark and market rule in banking institution during financial crisis.
The banking institution should implement this method because it will helps in making optimum utilisation of available information and improve the quality of disclosure and reportingIn the situation of economic crisis banking organisation establish accuracy as it demonstrate current valuation of assets and liabilities. Moreover, it can be used by institutions to make measurement of true income which is very necessary to evaluate during the time of economic and financial crisis.
Books and journals
Amel-Zadeh, A., Barth, M.E. and Landsman, W.R., 2017. The contribution of bank regulation and fair value accounting to procyclical leverage. Review of Accounting Studies. 22(3). pp.1423-1454.
Burke, Q.L., Chen, P.C. and Eaton, T.V., 2017. An empirical examination of mark-to-market accounting for corporate pension plans. Journal of Accounting and Public Policy. 36(1). pp.34-58.
Laux, C., 2016. The economic consequences of extending the use of fair value accounting in regulatory capital calculations: A discussion. Journal of Accounting and Economics. 62(2). pp.204-208.
The report evaluated the important sand benefits of implementing global reporting standards in the business. The reporting standards are implemented in the business in order to have control over impact created by community, environment and economy. Moreover, it evaluated that, environmental reporting principle of Global reporting initiative states that company should focus on using environmental friendly products in order to serve quality of life to its customers to earn sustainability. Further, it states that GRI focuses on mandatory compliance with legal framework of country which assists the enterprise in achieving competitive advantage, establishing stability and reputation among all stakeholders. Thus, it identifies the influence of theories on key asset of entity which are society and stakeholders.
Sustainable development is a process which establishes a link between all the environmental factors in order to stabilise the functioning of business operations. Global reporting initiative has its own set of rules and regulation which assist the firm in maintaining the influence of climate change and corruption activities. The report will evaluate benefits of implementing global reporting initiative in an organisation in order to empower sustainable decisions. It will analyse theoretical perspective linked with sustainable development in context company decision making process. Thus, the report will identify the influence of GRI standards with sustainability over society, organisation and shareholders (Fisher and Bonn 2017).
The Global reporting standards are implemented in the business in order to have control over impact created by community, environment and economy. It is important for the firm to implement FRI standard in order to develop employee participation and customer loyalty towards company. The frame work of GRI standard is based on Universal standard (101) series includes the base that is foundation, general disclosure and management approach. The base of standard states that how it fulfils the necessary requirement of sustainability. Secondly, it comprises with all the sustainable practices like, ethics, strategy, process, structure which is followed by the organisation to establish stability and to provide better living experience to its all shareholders. Hence, in 103 series it discloses about the material used by the company in order to deliver sale and healthy services to buyers.The major impact of GRI standard is on economic, environmental and social factors which come under 200, 300 and 400 series of specific standards. The global economic standard states that firm should comply with all the mandatory legal framework of government in order to earn quality of sustainable development. The environmental reporting principle states that company should focus on using environmental friendly products in order to serve quality of life to its customers to earn sustainability (Findlay 2017). The environmental sustainability is promoted in manner to reduce the emission of harmful gases like Co2. Further, in order to maintaining the sustainability of society, the global reporting standard focuses maintaining regulations which protects rights of society which includes delivering quality goods, appropriate information regarding all the products and services of organisation (Abernathy and et.al 2017).
Positive impacts of sustainable reporting are as follows:
- Implementing global reporting standard assist the firm in enhancing the image of enterprise and is beneficial in saving business reputation from negative publicity and controversies.
- It is the strategy which can assist the firm in attracting customers and retaining employees because its motive is to provide healthy and safe work environment to workers and quality of life to customers.
- Moreover, it helps the entity in identifying future risk and threats in order to avoid the interruption in business operations. Further, it evaluates the opportunities for the company like the Swot analysis. It specifies the goals and objectives according to the performance of firm which helps the management in analysing loopholes and shortcomings.
- The reporting standards help in gaining stakeholder engagement with the business functions which establishes transparency between conversation, accountability and review over companies' performance.
- Maintaining the balance between reporting standards and sustainability helps the enterprise in attaining competitive advantage for a long, as it focuses on establishing stable market of the businesses (Andrews 2017).
Negative impacts of sustainable reporting are as follows:
- It leads to negligence over financial performance of the entity as it only focus on maintaining economic, environmental and social sustainability.
- While focusing on environmental and other factors company forget to determine its goals and objectives which sometime degrades the performance of business.
- Setting appropriate rules and regulation binds the company under contract in which firm loses the priority over profits and turnover and instead only focuses on maintaining sustainability of external factors (Armstrong and et.al., 2017).
Influence of Legitimacy theory on society, company and stake holders.
Legitimacy theory binds the business under contract with internal and external stakeholders. In this company loses its flexibility as in this organisation is bound to follow the rules and regulation according to contractual agreement. In this theory the firm follows the responsibility determined under social, environmental and economic factors of reporting standards (Chapman, Tezuka and McLellan 2017). Thus, under legitimacy theory, the global initiative focuses on six major factors, labour practices, stability of environment, human rights, product responsibility, society and decency in work or work practices.
Stakeholder theory in reporting states that there are various business operation which impact the interests of society and its stakeholders similarly there are several interests of stakeholders and society which impact the interest of organisation therefore it is important of enterprise to understand the requirements of stakeholders and incorporate policies and procedures accordingly (Bateman, Blanco and Sheffi 2017). In accordance to this, theory the major function of management is to look over the roles and responsibilities and to formulate the mm according to the expectation of all stake holders of firm. Further, this theory is the major element of corporate social responsibility because in this enterprise focus on interacting with community in order to identifies and meet their expectations (Beck, Dumay and Frost 2017). The expectations of the buyers are changing and per climatic changes that is why the market demand is drifting towards sustainable products therefore it is very important for the management to amend the roles and responsibilities in order to deliver quality and healthy services to society and stakeholders.
The report summarized that, implementing global standards helps the firm in attaining advantage over economics, environmental and social factors. The report evaluated the 3 basic series of specific standard under global reporting initiative which states importance keeping balance between economic, social and environmental factors of the business. Moreover, the report identifies the positive and negative impacts of complying with Global reporting standards. Thus, the report outlined the theoretical perspective of GRI and its influence over society company and shareholders.
As a consultant, it can be advised to board directors that company should comply with Global reporting standards in order to meet the expectation and requirement of its consumers. Moreover, organisation with the use of GRI the firm can maintain its stability which can be influenced due to climatic changes and corruption activities. Further, it can be fruitful for the enterprise because it majorly focuses on the expectations of stakeholders which plays a major role in stabilising business operations. Thus, it neglects the finance of company but helps the business in attaining consumer loyalty and reputation among all the individuals who are related with the firm.
Books and Journals
Abernathy, J and et.al., 2017. Literature review and research opportunities on credibility of corporate social responsibility reporting.American Journal of Business. 32(1). pp.24-41.
Andrews, M., 2017. Rule sees bull market ahead.Australia's Paydirt.
Armstrong, A and et.al., 2017. Enabling Innovation in Building Sustainability: Australia's National Construction Code.Procedia Engineering. 180. pp.320-330.
Bateman, A.H., Blanco, E.E. and Sheffi, Y., 2017. Disclosing and reporting environmental sustainability of supply chains. InSustainable Supply Chains. Springer International Publishing.
Beck, C., Dumay, J. and Frost, G., 2017. In pursuit of a ‘single source of truth': from threatened legitimacy to integrated reporting.Journal of Business Ethics. 141(1). pp.191-205.
Chapman, A.J., Tezuka, T. and McLellan, B., 2017. Renewable Energy Policy Efficacy and
Findlay, M., 2017. Masking neo-liberal Development: Polanyi, rule of law and dis-embedding dynamics.International Journal of Development Issues, (just-accepted).
Fisher, J. and Bonn, I., 2017. Sustainability and undergraduate management curricula: Changes over a 5-year period.Australian Journal of Environmental Education. 33(1). pp.18-33.
James, M., Bain, K.R. and Sloan, D.E., 2017. Undamming the Federal Production Tax Credit: Creating Financial Incentives for Dam Trading and Dam Removal. Idaho L. Rev.
Faisal F. Greg T. and Rusmin R. Legitimising corporate sustainability reporting throughout the world 2012. [Online]. Available through: <http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1335&context=aabfj>. [Accessed on 19th September 2017].