You have been hired as Risk Consultant at a U.S.-based bank.The bank is cuently reporting its...

Question

You have been hired as Risk Consultant at a U.S.-based bank.
The bank is cu
ently reporting its financials using the book value accounting method. The bank is
considering an international move in which it can switch to the market value accounting method.
You have been asked to write a 3-page report for the bank`s management. The report should discuss the
following:
1) What is the difference between book value accounting and market value accounting?
2 How do interest rate changes affect the value of bank assets and liabilities under the two methods?
Provide an example that supports your position on this.
3) What is marking to market?

rm-unit-4-jjxamzqt-h4rildgh.pdf

Khushboo · Accepted Answer

Brief introduction about accounting:
Accounting is one of the major concepts for financial reporting and it is necessary that the entities or banks should follow the correct accounting approach. The accounting may be bifurcated into two types i.e. book value accounting and fair value accounting. Further for recording and disclosure of transaction, the FASB has defined the accounting standards and guidelines which are known as Generally Accepted Accounting Principles (GAAP). 
Difference between book value and fair value accounting:
The book value accounting concept and fair value accounting concepts are completely different. Under book value accounting, the accounting values are recorded at their carrying value. Book value is the acquisition value of assets and liabilities. In case of assets other than plant, property and equipment (PPE), the assets acquisition or purchase price or transaction price is known as book value and under PPE the depreciation is reduced from book value or transaction value. In case of liabilities, the transaction value is known as book value of liabilities (Shobhit Seth, 2020). The carrying value of assets and liabilities is also known as book value of assets. Under book value accounting, all assets and liabilities are recorded at carrying value and any addition or deletion in assets or liabilities are also recorded or settled at transaction value. 
Under fair value accounting, the assets and liabilities are recorded at their fair value or market value. The assets and liabilities are revalued at their market or fair value at each reporting date and loss or gain on fair valuation is recognized in income statement or OCI based on nature of assets and liabilities (Doron Nissim, 2007).

You have been hired as Risk Consultant at a U.S.-based bank. The bank is currently reporting its financials using the book value accounting method. The bank is considering an international move in...

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