Q1. “Fair value accounting is argued to be conceptually and practically preferab

Question

Q1. “Fair value accounting is argued to be conceptually and practically preferable to amortized cost accounting for most financial instruments, especially for financial institutions holding matched positions in these instruments.” What are your views about this statement?

Q2. Mortgage Banks’ main revenues are usually fees for mortgage origination and servicing as well as gains on the sale of mortgages. Although amortization and impairment of Mortgage Service Rights are logically expenses and losses, respectively, mortgage banks often deduct these items directly from mortgage servicing fees as if they are contra-revenues. Prepare an Income Statement of a Mortgage Bank with at least five items of revenue and three items of expenses with imaginary figures.

Q3. Statement of Financial Accounting Standards (SFAS) NO. 140 defines transfers of financial assets as conveyances of noncash financial assets by and to someone other than the issuer of the assets. These transfers include securitizations. What motivates issuers to securitize? Give some reasons.

Explanation / Answer

Solution. 1.. Fair value Accounting is argued to be conceptually and practically preferable to amortized cost accounting for most financial instruments, especially forfinancial institutions holding matched positions in these instruments. The FASB and IASB agree with this argument, and they are working actively to develop fair value accounting for financial instruments. It has 2 primary purposes

To provide users of financial reports with robust understanding of how fair value accounting works in theory and relatively simple contexts. Users must have such an understanding in order to grasp fully application of fair accounting in the more complex concepts.

To illustrate how users can analyze the information contained in financial institutions to assess their:

1)Solvency and profitability better than is possible using amortized cost accounting information.

2)Discretionary gains trading –the timing of sale of securities and other financial instruments recognized at amortized cost to realize gains or lossesand therby manage income and book value. Assessing gains trading in financial instruments accounted for at amortized cost, since one side of matched positions inevitably appreciates, while other depreciates, allowing these institutions to raise or lower their income by selectively realizing gains or losses on one side of the positions.

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