Essay: Accounting Practices in Banks

Sample Essay

The article entitled Bankers Craving Bonuses Fudge Loan-Loss Reality written by David Reilly for is being critically analysed here to identify and evaluate the accounting issues presented in the article. The highlight of the article is the delayed recognition of credit losses by banks and financial institutions in order to present a better current picture which results in huge losses in the future. The main theme outlined here is the practice of valuing assets and liabilities in banks and financial institutions.

The need for setting standards and regulations for valuation of assets and liabilities has increased by far in significance in the wake to the financial crisis and recession like conditions. It has been described in the article that banks value their assets and liabilities at historical cost and create provisions for potential future losses. These provisions are created based on management’s judgment and may not truly reflect real losses and may be significantly under estimated as the management is astoundingly optimistic. The historical prices of assets and liabilities may also be highly under or over valued as significant changes in economy and market conditions are not applied. The article presents an idea of using mark to market valuation methods and recognising future credit losses and revaluing assets and liabilities based on current conditions. The writer concludes by stating that the key to achieve success in bank regulations is to consider the true value of banks (Reilly 2009).

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