The Subprime Crisis became noticeable first in the second half of 2006, when many subprime mortgage borrowers in the United States of America (U.S.) were no longer able to make their loan payments, and securities linked to those mortgages, that had been sold all over the world, turned out to be often worth quite less and in general substantially more risky than market partici-pants had expected. As the market tried to figure out the problems underlying the crisis, financial reporting, especially regarding derecognition of financial assets, special purpose entities and fair value measurement, became a matter of public concern. Consequently, the purpose of this work is to discuss these concerns in order to estimate whether and to what extent financial reporting might have contributed to the crisis and to present and assess the usefulness of actions taken by the U.S. Financial Reporting System in response to the crisis.
In order to meet this objective, the paper first provides a brief description of how the housing boom and the subsequent crisis evolved. The following chapter describes the U.S. Financial Reporting System, by providing basic information about U.S. institutions that authoritatively deal with the elements of the system, including their aims, basics about their work and how they interact. Afterwards, the paper examines the relevant reporting concepts and disclosure requirements, provides suggestions for improvements, and assesses concerns voiced by market participants with respect to financial reporting. Subsequently, the author analyzes and judges actions taken by authoritative institutions of the U.S. Financial Reporting Sytems in response to the crisis. This thesis considered publications issued until December 10, 2008.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- History of the Subprime Crisis
- The Term Subprime in Context of the Crisis
- Key Causes and Development of the Subprime Mortgage Boom
- Broader Economic Factors
- Mortgage Securitization - Volume, Process and Participants
- Development of the Subprime Crisis
- Outbreak of the Subprime Crisis and Underlying Factors
- Confidence and Liquidity Crisis
- Intermediate Results: Key Causes of the Crisis
- U.S. Financial Reporting System – Elements and Organizations
- Reporting Standards and Authoritative Organizations
- Auditing Standards, Ethic Code and the PCAOB
- Examinations, Enforcement and Assigned Organizations
- Education and Related Organizations
- Critical Analysis of Reporting Standards Related to the Crisis
- Fair Value Measurement in Context of the Crisis
- Scope and Acceptance of Fair Value Accounting
- Fair Value Measurement Pursuant to FAS 157 and Related Criticism
- Fair Value Hierarchy Pursuant to FAS 157
- Analysis of Public Criticism Related to the Fair Value Hierarchy
- Critical Review of Disclosure Requirements Pursuant to FAS 157
- Discussion of Allegations Regarding Procyclicality
- Reporting for Off-Balance Sheet Arrangements and the Crisis
- Assessment of Accounting Concepts and Disclosure Requirements
- Derecognition of Financial Assets
- Characteristics of Qualifying Special Purpose Entities
- Concept and Consolidation of Variable Interest Entities
- Related Key Disclosure Requirements
- Evaluation of Public Criticism
- Assessment of Accounting Concepts and Disclosure Requirements
- Fair Value Measurement in Context of the Crisis
- Critical Evaluation of Actions Taken in Consequence of the Crisis
- Clarifications and Planned Amendments to Accounting Standards
- Clarification of Fair Value Measurement in Inactive Markets
- Elimination of the Qualifying Special Purpose Entity Concept
- Amendments to the Derecognition Model
- Changes to Consolidation of Variable Interest Entities
- Proposed Disclosure Amendments to FAS 140 and FIN 46(R)
- Introduction of Overall Objectives and Aggregation Principles
- Selective Disclosure Amendments Regarding Derecognition
- Disclosure Amendments with Respect to Variable Interest Entities
- Assessment of Disclosure Amendments to FAS 140 and FIN46(R)
- Assessment of Effective Dates with Respect to Standard Setting
- Findings Regarding Auditing and Ethic Standards
- Actions with Respect to Examinations & Enforcement
- Educational Proceedings and Considerations
- Advising Letters of the SEC Regarding MD&A Disclosures
- Advises for Disclosures about Off-Balance Sheet Arrangements
- Advises for Disclosures Concerning Fair Value Measurements
- Educational Publications Regarding Fair Value Measurement
- Individual Publications of the FASB, AICPA and PCAOB
- Joint SEC and FASB Clarifications on Fair Value Accounting
- Advising Letters of the SEC Regarding MD&A Disclosures
- Clarifications and Planned Amendments to Accounting Standards
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This diploma thesis aims to analyze the effects of the subprime crisis on the U.S. American financial reporting system. Specifically, it focuses on the impact of the crisis on the derecognition of financial assets, special purpose entities, and fair value accounting. The research aims to evaluate the adequacy of existing accounting standards in light of the subprime crisis and discuss the effectiveness of actions taken by relevant organizations in response to the crisis. Key themes and objectives explored in the thesis include:- Analyzing the origins, key causes, and development of the subprime crisis.
- Examining the U.S. financial reporting system, including its key standards and organizations.
- Critically evaluating the application and adequacy of fair value accounting and off-balance sheet arrangements in the context of the subprime crisis.
- Assessing the effectiveness of clarifications, amendments, and educational initiatives undertaken in response to the crisis.
- Analyzing the role of auditing and ethic standards, examinations and enforcement, and educational initiatives in mitigating future financial crises.
Zusammenfassung der Kapitel (Chapter Summaries)
The first chapter provides an overview of the topic and sets the stage for the subsequent chapters. It introduces the subject of the subprime crisis and its potential impact on the U.S. financial reporting system. Chapter 2 delves into the historical development of the subprime crisis. It examines the term "subprime" in the context of the crisis and analyzes the key causes and development of the subprime mortgage boom. This chapter also explores the outbreak of the subprime crisis and its underlying factors, as well as the subsequent confidence and liquidity crisis. Chapter 3 provides a comprehensive overview of the U.S. financial reporting system. It examines key reporting standards and authoritative organizations, auditing standards, ethics code, and the role of the Public Company Accounting Oversight Board (PCAOB). This chapter also explores examinations and enforcement activities, as well as educational organizations related to the U.S. financial reporting system. Chapter 4 offers a critical analysis of reporting standards related to the subprime crisis. It focuses on fair value measurement in the context of the crisis, including the scope and acceptance of fair value accounting and the specific provisions of FAS 157. This chapter further analyzes public criticism related to the fair value hierarchy and examines disclosure requirements pursuant to FAS 157. The chapter also discusses allegations regarding the procyclicality of fair value accounting. Finally, it delves into the reporting for off-balance sheet arrangements and the crisis, assessing accounting concepts and disclosure requirements related to the derecognition of financial assets, qualifying special purpose entities, variable interest entities, and related key disclosure requirements. It also evaluates public criticism regarding these arrangements.Schlüsselwörter (Keywords)
The core keywords and focus topics of this thesis are: subprime crisis, financial reporting system, fair value accounting, derecognition of financial assets, special purpose entities, variable interest entities, FAS 157, FAS 140, FIN 46(R), PCAOB, SEC, auditing standards, ethics, examinations, enforcement, education, procyclicality, and off-balance sheet arrangements.- Quote paper
- Miriam Janzen (Author), 2009, Effects of the Subprime Crisis on the U.S. American Financial Reporting System, Munich, GRIN Verlag, https://www.grin.com/document/132446
