Chapter 15 Mark to Market w Understand advantages and disadvantages of historical cost. w Identify factors that led to the emphasis on mark to market.

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Presentation transcript:

Chapter 15 Mark to Market w Understand advantages and disadvantages of historical cost. w Identify factors that led to the emphasis on mark to market. w Describe how the FASB has taken a mark to market approach to many situations.

Mark to Market Accounting w Question: best way to measure the future economic benefits of assets? w Two schools of thought on valuation: input and output. w Related to income determination, Philips. w Apply answers to three topics: marketable securities, stock options, and derivatives. w Two answers….

Answer 1: Historical Cost w Traditional answer: historical cost vs. mark to market w Widespread support w Advantages w So…HC an absolute, a fact, the “soul” of accounting?

Answer 2: M to M w Dis of historical cost, pro mm… w Wealth Effect Today w So…an absolute or Once upon a time…

FASB and M to M w FASB favors market values In CF In SFASs w Three issues: marketable securities, stock options, and derivatives

Marketable Securities w Perfect Issue? w Issue: financial assets as investments-HC or MV w Congress and S & L crisis [typo, p. 318, insert ( )] w Hot potato

Marketable Securities w Politics: w Pro MV: SEC w Con MV: bankers and insurance. Why….. w 1. Volatility w 2. Troubled loans w FASB vote 1992 vote: 3 to 3! ?????

Marketable Securities w SFAS #115, 1993, Securities w Provisions held to maturity available for sale trading w Concerns psyco-analytic accounting: believe them…? partial application w Bottom line: a success

Accounting for Stock Options w Old Stock Options: APB O 25 w New stock options: w AICPA, 7 of Big 8: add to agenda 1984.

Stock Options w June, 1993 ED SFAS #123 Black Scholes Book it as expense w Politics: Who? w FASB DM: June 8, 1994 not require s.o.

Stock Option w SFAS No. 123, 1995 Choice: (1) Adopt fair value approach or (2) Disclose it in notes w Victory then w Now: Stock Options: expense it (ala IASB).

Derivatives w What are they? Reaction to risk Huge market Highly leveraged Big Losses

Derivatives w FASB Financial Instruments Project w SFAS #105 (1990), 107 (1991), and 119 (1994) disclosure standards w SFAS No. 133, (1998) derivatives are assets and liabilities; use fair value (market value) for them Three purposes for hedges Poster child for complex accounting Concerns….

Comparisons of M to M w Referred issues. w Highly visible and controversial. w Produce volatility. w Varying degrees of success

Mark to Market w King’s criticisms HC known and understood MtM distort ni Fair value not exact w Conclusion…