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The new employees will be doing their first audits of the 20

Part I

The new employees will be doing their first audits of the 2008 financial statements. In 2008, many businesses lost asset value as a result of a decline in market activity and asset value. A discussion arose in the financial and accounting community regarding mark to market or fair value accounting. The auditors need to have an understanding of what this means and how they should evaluate the assets of a business.

Discuss the following:

Define and explain fair value accounting and historical accounting.
Compare fair value accounting and historical accounting to each other as well as their impact on the balance sheet.
Give your opinion about using fair value accounting in a down market.

Part II

In the fall of 2008, the United States suffered massive corporate failures causing a financial meltdown. These corporate failures had a shock-wave effect on the banking industry, U.S. financial giants, and U.S. corporations that quickly spread around the globe. The banking, financial, and, eventually, U.S. automotive industry asked the government for help. The United States responded to the financial and banking industries very quickly with the Troubled Asset Relief Program (TARP). The use of the resulting bailout money was amazing. The questions and blame surrounding 2008 economic failure, as well as the congressional relief, will be discussed for years.

Consider the history of regulations in the United States and the probability of new regulations on the financial markets resulting from the 2008 economic collapse. Answer the following questions:

What do you think are the 2 main causes of the 2008 economic collapse and why? Support your opinion with facts.
What might some new regulations be, and what would be the purpose of the regulations?
Do you think new regulations are needed? Why or why not?

Solution Preview

Historical value accounting is a process of using the historical value of assets as a basis for financial reporting. Fair value accounting uses the fair value, also known as the market value, of the asset as the basis for financial accounting and reporting purposes. When fair value accounting is used, it presents the actual value of the assets owned by the company fairer than using historical value accounting. With historical value accounting, an asset purchased for $10,000 many years ago is certainly not worth $10,000 in today's market. By using fair value accounting, users of the financial statement are given a more precise snapshot of the actual value of assets that are currently being held by the company. Fair value accounting is not currently used or acceptable for financial reporting purposes, including the balance sheet presentation.

Under GAAP, all assets must be valued at their historical cost on the balance sheet. The balance sheet reports the historical cost of the asset (the purchase price), less the total amount of accumulated depreciation on the asset or assets. If fair value accounting were used on the balance sheet (although it's not currently ...

Solution Summary

The new employees will be doing their first audits of the 2008 financial statements. In 2008, many businesses lost asset value as a result of a decline in market activity and asset value. A discussion arose in the financial and accounting community regarding mark to market or fair value accounting. The auditors need to have an understanding of what this means and how they should evaluate the assets of a business.

Discuss the following:

Define and explain fair value accounting and historical accounting.
Compare fair value accounting and historical accounting to each other as well as their impact on the balance sheet.
Give your opinion about using fair value accounting in a down market.

Part II

In the fall of 2008, the United States suffered massive corporate failures causing a financial meltdown. These corporate failures had a shock-wave effect on the banking industry, U.S. financial giants, and U.S. corporations that quickly spread around the globe. The banking, financial, and, eventually, U.S. automotive industry asked the government for help. The United States responded to the financial and banking industries very quickly with the Troubled Asset Relief Program (TARP). The use of the resulting bailout money was amazing. The questions and blame surrounding 2008 economic failure, as well as the congressional relief, will be discussed for years.

Consider the history of regulations in the United States and the probability of new regulations on the financial markets resulting from the 2008 economic collapse. Answer the following questions:

What do you think are the 2 main causes of the 2008 economic collapse and why? Support your opinion with facts.
What might some new regulations be, and what would be the purpose of the regulations?
Do you think new regulations are needed? Why or why not?

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