The level of agony for individuals and businesses continues to rise as they experience losses in the value of their real estate holdings. In some circumstances, the fair market value of their property has fallen below the loan or mortgage amount. As a result, many debtors decide to walk away from the loan, resulting in repossession of the property by the lender. As shown in Appendix A the default rates continue to rise (United States), affecting accounting issues such as, revenue recognition, measurement, fair value, and impairment.
The reporting of long-term debt is one of the most controversial areas in financial reporting” (Kieso, 709). This is because long-term debt such as, loans for real estate investments, has a significant impact on a company’s cash flows. A company’s cash flows are affected by long-term debt as gains and losses are reported through an equity account, such as “Other Comprehensive Income” (Investments). Cash flows are also impacted by reporting the permanent impairment of an asset as a realized loss through earnings and regulatory capital.
Individuals and institutions involved in the current credit crisis include: the United States Congress, the Federal Reserve Board, Fannie Mae, Freddie Mac, the Department of Housing and Urban Development (HUD), the Securities and Exchange Commission (SEC), credit agencies, banks, mortgage brokers and consumers (Carey, 2). The Financial Accounting Standards Board (FASB) is focusing on the uprising problems in dealing with the reporting of real estate holdings.
Within the housing market, a home buyer (debtor) must go first to a financial institution or mortgage broker (originator) who will approve and make mortgage loans. Next, the originator may choose to s...
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...d a company’s continuing involvement in transferred financial assets. Also, Statement 167 requires companies to provide additional disclosures concerning involvement interest entities, allowing significant changes in risk exposure to be reported.
The new accounting rules will regulate the real estate market. However, the adjustments to business practices and the respected capital levels will prevail over time. The accounting issues resolving the real estate market will always exist. Accounting regulations are constantly updated to accommodate with the constant change in the economy. FASB along with the SEC will provide updated accounting rules that will affect the lender and the debtor. Whether the new regulations in accounting issues are treated fairly among all parties that are involved; they will have to be carried out in all interrelated transactions.
With that in mind, it is important to understand a couple of concepts before analyzing and determining the effectiveness of that document. Although people do not always realize it, the purchase of a home is one of the b...
The Corporation has sustained losses and negative cash flows from operations since its inception. The Corporation is exposed to liquidity risk as it continues to have net cash outflows to support its operations.
Laux, R. C. (2013). The Association between Deferred Tax Assets and Liabilities and Future Tax Payments. Accounting Review, 88(4), 1357-1383. Doi: 10.2308/accr-50417
A majority of mortgage defaults that Americans used were on subprime mortgage loans, which were high-interest-rate loans lent to people with high risk credit rates (Brue). Despite knowing the risks, the Federal government encouraged major banks to lend out these loans to buyers, in hopes, of broadening ho...
The Sub-Prime Mortgage Crisis of 2008 has been the largest financial crisis to take place since the end of the Great Depression. It was the actions of individuals and companies that caused this crisis. For although it could have been adverted, too much money was being made by too many people in place of authority to think deeply on the situation. As such, by the time actions were taken to attempt to rectify the situation, it was already too late. Trillions of dollar of tax payers’ money was spent trying to repair the situation that was caused by the breakdown of ethics and accountability in the private sector. And despite the government’s actions to attempt to contain the crisis, hundreds of thousands lives were negatively affected before, during, and after this crisis.
Bhardwaj, G. & Sengupta R. (2012). Subprime mortgage design. Journal of Banking & Finance, 36, 1503-1519
It is extremely hard to just assign blame to one individual party as there are many different factors at work here. This paper will analyze how the stakeholders created a financial disaster and did nothing to prevent it, as the credit rating agencies created an amount of turmoil due to their unethical decisions and costly mistakes. II. Assessing the Housing Crisis In terms of looking at how credit rating agencies affected the market as a whole, they played a role within the mortgage crisis as they gave way to a real estate credit bubble. The mortgage crisis seems to have been caused by the manipulation of the price of credit default swaps....
Thesis: Businesses deem financing necessary when they are just beginning, expanding, or recovering; Debt financing and equity financing have many advantages and disadvantages but also change the entire accounting method that is to be considered while running the business. Debt financing has both advantages and disadvantages. Debt financing is a business’ way to start up, expand, or recover by borrowing money from a person or company. The money borrowed has to be paid back along with the interest that was accrued during the length of time the loan was carried out. This option is great for company’s that do not want investors.
Mortgage loans are a substantial form of revenue for the financial industry. Mortgage loans generate billions of dollars in the financial industry. It is no secret that companies have the ability to make a lot of money by offering a variety of mortgage loan products. The problem was not mortgage loans but that mortgage companies were using unethical behavior to get consumer mortgage loans approved. Unfortunately, the Countrywide Financial case was not an isolated case. Many top name mortgage companies have been guilty of unethical behavior. Just as the American housing market was starting to recover from its worst battering since the Great Depression, a new scandal, an epidemic of flawed or fraudulent mortgage documents, threatens to send not just the housing market but the entire economy back into a tailspin (Nation, 2010).
This report contains information that is calculated under accrual accounting principle. Because all transactions are recorded at the time when they are made rather than when actual money has been made or received, there is a likelihood that transactions are shown on one accounting period but actual change has not be made it, and it may deliver biased information about the company’s true financial position.
One of the most debatable topics in the accounting industry today is the extent to which we should make the financial statements understandable to the general population.... ... middle of paper ... ... While there is a great deal of controversy over neutrality, it is again important that FASB maintain a careful balance between cost and effectiveness.
On the other hand, fair value accounting raises the concerns of reliability. The estimation of fair value tends to be subjective since because “many assets and liabilities do not have an active markets, therefore the valuations are less reliable” (Bies, 2005). It is reliable only if markets for assets and liabilities are liquid and transparent. Even though fair value accounting has its own importance in term of measurement, the perspective of historical cost should be taken into account. As fair value reflects the current market conditions, an asset for example should have been valued at $50,000 may suddenly fall to $30,000 due to the economic downturn. It results a loss of $20,000 in net income since historical perspective was ignored. Also,
Maintaining a company’s financial assets is a daunting task. Cash management techniques and short-term financing provide accounting executives with the tools needed to survive the constant changes within the economy. The combination of these tools and the knowledge of the world economy will assist companies in maintaining current assets and facilitates growth.
Based on the loan features(interest rates & other charges),eligiblity criteria and services provide the following case study of main players for home loans is given below:
The capital maintenance concept used results in differences between the relevance and faithful representation of the data that appears in the balance sheet and income statement. The difference between financial capital maintenance and physical is the treatment of unrealized holding gains and losses. Financial capital maintenance does not allow for unrealized holding gains and losses. Only realized gains and losses are included in income because they “are considered a return on capital” (Schroeder et al., 2013). This means, “income is measured only after the investment is recovered” (Gamble, 1981). Physical capital maintenance “consider[s unrealized holding gains and losses] as returns of capital and do[es] not include them income.” (Schroeder et al., 2013). Instead, they are treated as adjustments to equity and included in other comprehensive income. Therefore, with physical capital maintenance “an increase in an entity’s wealth as...