The Current Accounting

Accounting
A)
In the current accounting rules for banks, there is a distinction between financial instruments for trading (trading books) and those held to maturity (banking books). All instruments in the trading books are priced at market prices. As a result, any profits or losses that arise from the revaluation are recognized in the balance sheet (profit and loss account). This indicates that the trading book takes into account all market risks including price, interest rate, foreign exchange, and liquidity risks. However, instruments in the banking book are carried on to the balance sheet at the lower of the market value and historical cost. This means that a loss is transferred to the balance sheet and accounted for but unrealized gains are not displayed or recognized. The gains may thus become hidden reserves within the balance sheet, and market risks are not accounted for in the banking books. The historical approach delves on income statements major focus and as the historical cost a reference for measurement. According to the Exposure Draft, the changes to the fair value do not flow to the net income but appear as a separate line on the balance sheet and in the statement of comprehensive income along amortized cost. It would be beneficial to the stockholders as it would add new disclosures and call for disaggregation. Including all risks on the balance sheet means an increased accountability and transparency especially on the company’s unregistered benefits (Biondi et al.

861-863). For a stakeholder, this will ensure transparency in profit accounting and sharing. All benefits and losses are viewable hence giving a real account of the bank’s assets, gains and losses. Some of the disclosures the draft would make are the loss and incomes from continuing operations, tax expenses and income tax paid or payable each disaggregated from corporate trading. The stakeholder can gain timely insight on the deteriorating assets, a deviation from the historical coat that gives the managers a leeway to hide problems assets and delay recognition of losses.
B)
Putting the fair value on a separate line on the balance sheet would inject a market transparency and discipline when evaluating the stability or health of the bank. At the same time, it will assist disclose the impact of interest rate changes for the banking instruments. Also, the draft would be beneficial if used to supplement assessment of both the banking and trading instruments for individual credit ratings. The strategy could be very useful where there are prospective future deteriorations by allowing critical revaluation and accurate information for the stakeholders.
C)
There is, however, an issue with the lack of homogeneity and therefore comparability. For the banking books where instruments are non-negotiable introduction of the exposure draft would alter the bank’s core business. The proposed display of fair value alongside the amortized and comprehensive cost does not reflect the long-term decisions such as credit quality. Issues like loan interests are not fixed and depend on specific cost and structure of the banks (Shaffer 43-48). Making a standard way in which the banks should plot the profit loss accounts would only expose some inherent weaknesses that are unnecessary for the bank. Further, for credit risk markets that are narrow and insufficiently, liquid information regarding the fair value of loans cannot be priced in the market. Banks depend on modeling and estimates at times and errors are very likely. Implementation of the exposure draft would mean that all these errors are carried to the balance sheet and disclosed to stakeholders. Eventually, it would be difficult to audit and validate the estimates.

Works Cited
Shaffer, Sanders. “Evaluating The Impact Of Fair Value Accounting On Financial Institutions: Implications For Accounting Standards Setting And Bank Supervision”. SSRN Electronic Journal n. pag. Web.Biondi, Yuri et al. “A Perspective On The Joint IASB/FASB Exposure Draft On Accounting For Leases”. Accounting Horizons 25.4 (2011): 861-871. Web.