Fair Value Accounting (FVA) in Barclays Bank Plc

Fair evaluate history (FVA) in Barclays stick PlcBefore starting search Methods, it is briskly important to understand the real meaning of Research in command.Research is a planned and methodical approach of final stage answers to the questions(R Cottrell J F McKenzie 2010)It is an organized set of actions and steps which we entrust follow to achieve our objectives. on that point atomic number 18 many factors in Research Method which atomic number 18 ceaselessly done to get the most precise results. Research is a pre-planned method, non a spontaneous approach. It is foc utilize and limited to a particular scope. A good interrogation is foc utilize on appropriate, valuable, imperative questions and their answers. If there atomic number 18 no questions, there is no point of doing inquiry and similarly finding answers to those questions is the most important. Whether its an answer to a hypothesis or even a simple question. A good search is in telling unless we find the answers to the questions.A good Research is a major lynchpin to complete a successful project, comprehend or Dissertation because if the research is non professed(prenominal) and well organized, then it is nearly impossible to complete a advise or Dissertation.TYPES OF RESEARCH method actingS-Research methods sack up be categorised into twain types. They argon-Deductive Research and Inductive Research. In research methods, conclusions atomic number 18 establish on these two methods. Both ar widely used in research projects.DEDUCTIVE system-Deduction follows an approach which is top-down or from general to specific. Aristotle a Greek philosopher described deduction as Drawing conclusions by applying rules or principles logically moving from a general rule or principle to a specific show upcome(www.hubpages.com/hub/Types-of-Research Dated03-05-2010)It is the af second-rate of getting a conclusion that is certain to pursue, if the data go throughn is real and the ana lysis used to achieve the conclusion is right. In deductive method, the drive (facts) go through an office of 100% accurate conclusion.EXAMPLE OF DEDUCTIVE METHOD-There be 15 packs of cig argonttes on the top-shelf of the cigarette case,There are 7 packs of cigarettes on the lower-shelf of the cigarette case.There are no cigarettes any pop bulge out on the middle-shelf cigarette caseFrom the above, it lav be concluded that there are 22 packs of cigarettes in the cigarette case.INDUCTIVE METHOD founding method is from precise to general. In induction, we scrutinize some events, deduct a pattern and draw conclusion.This method involves moving from an exact tick off to a common conclusion. This method is undefined and investigative. It does non give 100% assurance of reality however a chance of being accurate.EXAMPLE OF knowledgeability METHOD-This coffee is hot. (Specific, base on a direct observation.) every(prenominal) coffees are hot. (General, locoweed be applied to an y ice)OBJECTIVES OF RESEARCH METHODSThe key objectives of this research are-To Critically Analyze the Role of Fair measure account (FVA) in Barclays Bank Plc. Norbury Branch, London and what are its centres on Barclays Bank Plc. before, during and after Credit Crunch?To Investigate whether the trunkatic stake is associated with the monetary crises of Barclays Bank Plc. or not?To Highlight the impact of securities industry to commercializeplace coverage in contri altogether whening fiscal difficulties for Barclays Bank Plc.To husking out the contagion of Barclays Bank Plc with Recommendations Conclusion.KEY literary works REVIEW-An equal- businesslike banking administration is an indicator of sustainable frugality (Imola 2006). Banks perform fundamental uses not only in fiscal system of a country only if likewise globally overdue to their nature of business performance and alike summations policy. Banks play the intent of monetary intermediaries in an econ omy (Imola 2006)FAIR look upon ACCOUNTINGDEFINITIONfiscal business relationship system Standards define Fair honour business relationship as The apprize that would be received to betray an plus or paid to transfer a liability in an orderly transaction surrounded by foodstuff participants at the measurement date (Whittgton 2008) exercise OF FAIR VALUE ACCOUNTING AND ITS BACKGROUNDIn accounting, passably appraise is used as an estimate of the grocery store honour of an summation or liability for which a grocery store price cannot be bind outd. The measurement of assets and liabilities takes place at three levels. At the first level, the passably think of of an asset or liability is calculated at quoted prices if the commercialize is lively for that asset and liability. At second level, the cost of similar assets and liabilities are taken for rating and at last level, the grocery for these assets and liabilities are not available, the cadence supports to us e food mart to model approach for military rating of assets and liabilities (MacNamara 2009).E rating of assets and liabilities at aim three is considered to be to a greater extent than problematic. This ontogenesiss the manipulation put on the line of infection because of non availability of commercialise prices. (Penman 2009) deliberate that for most of the loans, the quoted prices are not available in the markets. blush if the prices for these loans are available, they do not reflect the private development of these loans for banks. Therefore, to determine the fair respect of these loans, divers(prenominal) valuation models are used (Penman 2007). Financial Accounting Standards (FAS) allows financial institutions to report their assets at level three but the opponents of (FAS) campaign that it has forced banks to measure out troubled securities at lower prices (MacNamara 2009). contend Street Journal claims that the coverage of assets and liabilities on Fair Val ue Accounting (FVA) causes financial institutions and banks to write down their mortgage backed securities (Gold, 2008). However, most of accountants, regulators and investors indorse this by arguing that it returns to a greater extent accurate and transparent reflection of a companys position (MacNamara 2009). Kurt N. Schacht managing director of CFA (Institute of Chartered Financial Accountants) bespeaks that fair repute measurement is only relevant information under the plethoric circumstances (Gold 2008).ADVANTAGES AND DISADVANTAGES OF FAIR VALUE ACCOUNTING (FVA)-Many Banks around the adult male have started revising their estimates of credit losses. Several parties blame FVA for the sub anthesis crisis (G.Ryan 2008). The controversy has been notice during the discussion paper on Statements of Financial Accounting Standards (SFAS 2006) that the interpretations made by Financial Accounting Standards age (FASB) astir(predicate) fair harbor ignored the transaction costs and entitys specific assumptions (Whittington 2008).However, the advocators of FVA argue that FVA is not liable for crisis. It is just a reporting and measurement system of assets and liabilities (Christian Laux 2009). Wallace (2009) conjures that the fair grade accounting is not the briny cause of live financial crisis. He names it as a messenger of menses crisis and advocates that FVA has helped us to recognize the problem earlier former(a)wise the situation would be much worse as compare to its menses position (Wallace 2009).Moreover, the advocators argue that the accounting rules contradict with framework of institutions. They point out that sometime managers work out deviations from market prices due to their own touch ons (Christian Laux 2009). Singleton (2006) argues that historical cost accounting is out of date and there is a knock-down(prenominal) possibility that management falsify it. In modern era, the current values based reporting (e.g. market based) are mo re relevant and reliable. Henceforth, the supporters suggest that it is difficult to say that FVA is responsible for the current crisis (Singeton 2006). The supporters further keep up that under FVA, assets and liabilities are dischargeed at the price, at which these assets and liabilities can be sold (Gold 2008). Thus, FVA represents the current market condition and put forwards accurate financial information of an entity. (Stephen 2006).In support of FVA, Stephen Penman (2006) mentions the approaching(a) points. Firstly, inventors are more concerned in value not in cost. Secondly, in prevailing situations the historical prices are not relevant to provide up to date financial position of a business. Thirdly, the fair value is based on reality of assets and liabilities actual financial position. Further, it reflects the true frugal substance. Finally, as markets are efficient, they are not influenced by a genius firm or business. Therefore, the information based on market pri ces is more relevant (Stephen 2006). Finnegan (2009) concludes that FVA is suitable to apply in both ends e.g. when market prices are available as well as when markets are inactive and market prices are not available (I.Victor 2009).However, the opponent asserts that FVA is irrelevant and misleading specially for those assets and liabilities which are held for long term (held to maturity).They further argue firstly, as efficient market hypothesis theory does not always true in real life. It fails in some situations. Therefore, in the situation of inefficient market FVA provides wrong information to investors and creates liquidity problems. Secondly, FVA measurement model are not reliable and finally, FVA contributes pro cyclicality in the financial system (Mary E. Barth 1995).In provoke of all criticism, The FASB IASB believe that fair value measurement of financial assets is more relevant in producing useful financial position of firm as compare to historical cost based measure ments. They argue that fair value shows the current cash equivalent of the businesss financial instruments instead than the price of acquisition of financial instruments (Benston 2008). Further, supporting FVA, the former chairman of due south Mr. Breeden, suggests that all financial institutions like banks as well as publicly held companies should report their financial position on market based because market based information are most relevant to financial attributes (Mary E. Barth 1995).Allen and Carletti (2008) assert that banks may become insolvent with the effect of market to market prices. The valuation based on market prices creates instability in market prices that imply the value of banking assets and this leads to ruin banking portfolio and contagion (Mahan, 2009). However, the advocators of FVA assert that it has provided early warning of current crisis and asked banks to take corrective actions (Wallance 2009). Mahan (2009) points out that the fair value is not a si ngle reason of the current crisis the other factors, for example, inadequate risk management, sad lending guidements, the assessment of rating agencies and insufficient capital requirements are alike contributors of these crisis.Mahan (2009) claims that the banking regulation, especially the capital requirement is also one of major reason in affliction of banks. However, the logic behind the capital requirement of regulators and inter falsify bank is the same as the secured loans issue by banks to creditors to protect market from financial distress and keep insurance of market discipline.Recently, the London based multinational Accounting Standards Board (IASB) declared that they are going to change the market to market rule and will follows the United States Standard. Recently, the US companies are reporting their assets under level three categories (Morgan 2009).BARCLAYs BANK PLC. CONCERN about(predicate) FAIR VALUE ACCOUNTING (FVA) DURING FINANCIAL CRISIS-Barclays explain the following reasons for rejection of FVA during financial crises.Firstly, they argue the FVA is irrelevant for investors. It does not communicate the rationality (Christian Laux 2009). Critics of FVA have charge it of pouring fuel on the fire rather than simply measure the flame (Morley 2008). Secondly, it is not suitable for banking industry and finally, they said fair value is inappropriate for those assets which are held for long term (i.e. held to maturity) and the assets which have no active market (i.e. for illiquid assets).In the mid of 2008, when the crisis reached at its maximum point, the bank started blaming FVA and their main focus of criticism was the valuation of liquid assets. Barclays argue that FVA has contend an effective role in creating these crises.On the other side of the coin, (Ball 2000) (Leuz 2003) suggested that investors, and other interested groups e.g. Accountants and customers have opposite impression. These interested groups are against the suspe nsion of FVA standards. For example, during November 2008, the joint letter to SEC the Consumer Federation of America, Centre for Audit Quality, Council of Institutional Investors, Investment focusing Association, and CFA Institute assert that investors are more confident on the standards (i.e. FVA) which are more transparent and report current and relevant information for valuation of financial instruments regardless of the direction of markets (Christian Laux 2009).Nicolas (2008) argues that the illiquidity criticism spots light at the market conditions for many financial instruments. These instruments were imbalanced from August 2007 and were not reporting the true prices in markets on the basis of drive and supply principle. most(prenominal) of prices did not reflect the potential to generate the future cash flows associated with an assets or investment. Nicolas (2008) further argues that fair value compelled Barclays Bank Plc. to record assets and liabilities on the value wh ich is unjustified by economic conditions. Resultantly, Barclays Bank Plc. was forced to raise newborn capital under depressed valuation conditions to meet the legal solvency requirements which resulted in reduction in the equity value of existing shareholders.The pro-cyclicality criticism of fair value is based on the idea that when there is boost in market prices it apparently strengths the balance sheet of Barclays Bank. However, in the time of reduction in market prices, it damages the economic position of the bank more severely (Amola 2006). Futher, Nicolas ( 2008) argues that as the studies support that markets do not work expeditiously during the time of crisis when every participant is in the condition of skepticism and market information are disordered. Therefore, the accounting standards which rely on markets information, damages the decision of its users. Additionally, he argues that criticism of pro-cyclicality of FVA is not only when markets are inactive for securiti es but also in the normal conditions of economy (Nicolas 2008).Regardless of criticism of FVA, Wallace (2009) suggests that elimination of fair value standards is not solution to the problem. The government should focus on stabilizing the financial markets, rebuilding investors impudence by promoting liquidity conditions in markets and improving regulations (Wallace 2009).Barclays Bank can spank the shortcomings of historical cost accounting. Reporting at FVA standards, the bank can record their financial instruments including loans at fair value (market based price). Buckland (2005) also argues that for the shoot for of monitoring and supervision, the supporters of FVA consider it more reliable source of information.EMPIRICAL LITERATURE REVIEW RESEARCH OBJECTIVES-During existing literary works review, I rewardd that more often than not, the profound subject has been discussed work papers, reports, conferences and general argumentations.The following literatures give the g uidelines to understand the issues cogitate to financial crisis, systemic risk and FVA standards. I went through the following literature to understand my topic of research.Magnan (2009) provides general overview of FVA on financial statements. He briefly explains the origins of FVA, its applications and role in the financial crisis. He believes that FVA has contributed in acceleration of financial crisis especially in banks and financial institutions (Magnon 2009).Magnan (2009) explains, how fair value has contributed and created financial crisis? He describes that at the start of 2007, some of the financial institutions (including Barclays Plc.) assets and liabilities dip in value and this drop in value forced these institutions to report assets and liabilities lower at their balance sheets. This reporting at lower value detrimentally touch oned their capital adequacy ratios (Magnan 2009)Morley (2008) discusses the role of accounting standard setters and their comments about the FVA. Further, spotting light at the problems of FVA they argue that the sharp run in market values of many financial instruments unfortunately affect the market price of these instruments. Additionally, they point out the challenges IASB is facing after the fresh financial crisis. They state that the political threat to IASBs independence and believability is continuously growing. Moreover, the headlines such as, Banks accounting gets murkier (Wall Street Journal, November, 11, 2008). The third gear quarter reports of banks provide evidence that banks accounting system get murkier e.g. The Royal Bank of Scotland is said to have avoided booking 1.4 jillion of losses as a result of the rule change, and Deutsche Bank, Lloyds TSB and HSBC collectively are said to have avoided booking losses of 1.5 billion (Morley 2008). arrangingATIC RISK-DEFINITION-The banking regulations were introduced in the system to avoid systemic risk in the heavens (Allen 1995). The regulators of prud ent law are fully aware of the danger that systemic risk can release in the banking sector. Systemic risk is the risk that can breakdown an entire system (Acharya 2002). Kaufman (2003) founded that there is broad(prenominal) correlation between systemic risk and failure of banking system in a country, a number of countries or throughout the world. Sohnke. M (2005) defines systemic risk as The risk of a failure of the global banking system resulting from a failure of the global inter-bank payment system (Sohnke M 2005).SYSTEMATIC RISK BANKING SYSTEM-In the case of the banking industry, all banks are connecting to each other due to inter-banking transactions (Sohnke M 2005). They have common deposits, loans, payment systems and other different indirect services to other financial institutions. Inter-banking system works within a country as well as across countries. Therefore, the adverse shock that effects on a bank in a system damages the entire system. Thus, the insolvency of o ne bank transforms the insolvencies of other banks in the system. The theory and evidence advocate that the danger of contagious systemic risk in the banking industry is faster and stronger as compare to any other industry (Kaufman Scott, 2003).Additionally, Kaufman (2003) suggests that the initial failure of a bank starts knock on reaction in the system. However, at the start of this shock, the other banks do not expect its transmission to them. Kaufman (2003) explains that if a bank has smaller capital to assets ratio, this intend that the bank is highly leveraged. Therefore, this set of banks transfer their insolvency to other banks in a system (caravansary 2009). Moreover, Kaufman (2003) suggests that in banks, the downward trend in the credit market affects the quality of private and public information. This information also increases the uncertainty in the credit market and badly affects these market conditions. In such situations of uncertainty no participant wants to take risks. Therefore, investors quickly transfer their funds to a safer place (Kaufman Scott 2003).Cifuentes, Ferrucci, and Shin (2005) argue that when assets and liabilities are inform on market to market basis and there are also external solvency requirements (e.g. prudential regulation), these situations lead to increase of risk in the financial system. They further argue that when the prices of assets are falling, these assets disrupt the solvency ratio of firms. Prudential regulations in banking system demand banks to maintain capital reserves for their solvency in estimation of risk associated with institutions (Khan 2009). Plantin (2008) has observed that banks lead astray their assets when prices of assets were falling and purchased assets when prices were rising. Such acts of banks increased the volatility in market prices which increased the prospect of rise in the systemic risk in banking sector.MARKET TO MARKET REPORTING FAIR VALUE ACCOUNTING-Plannutin (2008) suggest th at when markets are inactive, FVA becomes more inefficient as compare to historical based accounting (Plannutin G 2008). As market to market accounting increases the probability of pro-cyclical trades that creates the illiquidity situation in markets. The logic behind is that when the market is illiquid for particular assets as compare to other assets which have active market, the sale of assets adversely affects the price of assets and firm for whom there is no seller or buyer ( Khan 2008). Therefore, it can be argued that under the FVA reporting (which is based on market to market), prices of assets and liabilities further decline prices of assets and liabilities for which no markets exist.Further, in such situations of uncertainty, the management of these firms sell these assets at lower prices. In reaction to this, pro-cyclical trades starts which increase the overall risk especially in the banking sector. Therefore, we can understand that during the recent financial crisis, how the FVA is associated with the systemic risk of banking system? As the market for banking assets became illiquid during the financial crisis and sale of assets of other firms increased pressure on banks management to sell their asset at lower prices (Pollock A 2008).JUSTIFICATION-Why I have chosen the role fair value accounting in Barclays Bank Plc.?Being a student of MBA Banking and finance, this topic will give me a unique opportunity to cover both fields of my MBA in one research i.e Banking as well as Finance. Fair value accounting will help me to learn about the finance and financial crises while FVAs role in Barclays Bank Plc. will give me a chance to understand more about UK Banking system. This topic will also provide me empirical evidence about the role of fair value accounting in Barclays Bank Plc. I have a strong desire to built my career in Banking or Finance sector in future as those two fields are of my interest so definitely, this topic will be help me to achieve my future goals. It is also pertinent to mention here that three of my close friends working in Barclays Bank Plc. (two of them working in the same branch i.e.Norbury, london) which will give me an easy access to the data to complete my research methods/ language without any hurdles.HYPOTHESIS-To make an assumption or prediction about any research is not an easy thing to do but on the basis of literature review, I can predict that the role of Fair Value Accounting (FVA) in Barclays Bank Plc. has a unequivocal effect on UK Banking industry as (Nicolas 2008) argues that Fair Value Accounting compelled Banks to record assets and liabilities on the value which is unjustified by economic conditions and it has played an important role in Barclays Bank Plc. success during credit crunch. I can also predict that the systematic risk is not associated with the financial crisis of Barclays Bank Plc. and by highlighting the impact of market to market reporting in financial difficulties for Barclay s Bank Plc, It is assumed that its contribution for the banking industry was vital during financial crisis.RESEARCH METHODOLOGY-Research methodology consists of two types of research. They are-Primary Research.Secondary Research.PRIMARY RESEARCH-Primary Research is research which is used to gather statistics for a precise task. Types of firsthand data allurement methods include-Personal ObservationThe observation of the respondent by a skilled observer or by electronic tools e.g camera, video. The aim is to observe customer response and activities to a product or consumer service.Personal Interviews bet to face interview between an interviewer and the respondent.ADVANTAGES OF face-to-face INTERVIEWS-In detail answers achievable. soft statistics can be set abouted from small sample.Observation improves precision.Understanding leads to less refusals.DISADVANTAGES OF PERSONAL INTERVIEWS-Costs qualified Interviewer expensive.Interviewer bias.Difficult to get an appointment if the in terviewer is a crabbed person.Invasion of privacy.FINDINGS ANALYSIS-PRIMARY RESEARCH-SCOPE OF qualitative METHOD-To collect the primary data for my qualitative analysis, poorly develop questionnaires to identify answers of the research questions in the dissertation. Ill follow (B Healey 2005) approach who developed close ended questionnaires with validation boxes to answer these questions. Gannon (2001) asserts that amongst all the other research techniques, the questionnaires have been given high priority due to negligible cost and scope for easy rating they offer. Close ended questionnaires are one of the most common used tools for getting opinions ( L H Wang 2006).Further, it is an adequate way to get the opinion of uprights from the relevant field of research that has good representation of practical experiences and expert knowledge. Underneath this logic, most of companies, Banks and government agencies use this method to collect information.LIMITATIONS OF QUALITATIVE MET HODGannon (2001) critics that the information gathered as the results of questionnaires are limited because broadly speaking questions ask in questionnaire allow only positive or negative response. Additionally, it is pragmatic that sometime the respondents refuse to answer certain questions or enceinte their answers in hazel and even sometime do not record the questions (Sproull 2001). Chambers and Pretty claim that in spite of problem with respond the questionnaires, it was considered that it is time consuming, expensive and not suitable for reaching at conclusion ( Marslan 2001) .SECONDARY RESEARCH-Secondary research is the most general research method engaged in the every field today. It involves dealing out facts figures that has already been collected by a different party. With this research, researchers will check with previous studies and findings such as reports, press articles and earlier market research projects in order to come to a conclusion. This has comparativel y low cost in comparison toprimary research.TYPES OF SECONDARY RESEARCH-There are different types of resources offered for secondary research. The most well-known arePublished statistics survey, house and social security statisticsPublished texts abstract work, secondary analysis byexpertsand reportsMedia documentaries as a source of informationPersonal documents diariesADVANTAGES-Economical and reachable especially at University/College Library.Often the only source, for example historical documents Books. except way to look at major trends.DISADVANTAGES-Lack of stability of perception.Biases and inaccuracy can not be checkedAvailable data often increase more questions than they answer.The worry over whetheranystatistics can be entirely detached from the perspective of its gathering or not.FINDINGS AND ANALYSIS-SECONDARY RESEARCH-SCOPE OF numeric METHOD-Prior to 2004, UK firms and Barclays Bank Plc. were preparing their financial statements according to UK GAAP (Generally tru e Accounting Principles). 2005 was the first year when International Accounting Standard Board (IASB) and UK Accounting Standard Board asked UK firms Banks including Barclays Bank Plc. to prepare and report their financial statements at IFRS. (Ormrod 2007). Additionally, Gannon and Ashwal claim that more than hundred countries worldwide use International Accounting Standards on either a compulsory or on a permitted basis and more countries are expected to follow in the near future.(Ormrod 2007).Ill consider year 2005 when Barclays Bank Plc. adopted IFRS as start of FVA regime. Henceforth, year 2005 to date, Ill take as my sample period for quantitative testing. Ill use secondary data sources to gather information for quantitative analysis eg Barclays website, Journals, Books. Ill collect the details of assets and liabilities which are reported at fair value of different banks from the web sites of these banks and then Ill compare them with Barclays Bank Plc. This study will provide me evidence that the expiration between reporting assets and liabilities at fair value and book value on investment securities explains the share prices of insurance companies and banks as (Penman 2007) described.LIMITATIONS OF QUANTITATIVE METHOD-Mirosevich (2008) argues that most of quantitative methods are based on classical tests which produce correct results only when underlying assumptions are fulfilled. These tests produce incorrect P-values, effect sizes and confidence intervals when they violate the key assumptions to calculate P- values. Therefore, the evaluations of these results mislead the research objectiveness (Mirosevich 2008). The researchers observed that the assumptions made under quantitative methods to test hypotheses are mostly not correct in real life. Many factors are to be considered constant or assumed not affecting the dependent variables. Therefore, the results obtain from such tests are sometimes misleading the research goals (Mirosevich 2008).RECOMME NDATIONS AND CONCLUSION-The consider of costs and benefits of fair value will go on and the psychoanalyzes conducted in this study are considered to be a new addition to literature which addresses important and complex issues of FVA in current debate of accounting usefulness.These issues require further investigative studies. The financial crisis has made clear that the financial statements organizers need additional guidance to calculate fair values in illiquid markets. Users of these financial reports need better disclosures of financial information especially at the exact level 3 inputs. The users of financial information are interested to analyse the sensitivity of fair value measurements and its influence on the Barclays Bank Plc. Accounting standard-setters need to consider the demands of interested parties and issue guidance and disclosures accordingly. Preparers need to provide these disclosures in an informative fashion, and users must analyze them carefully and dispassi onately. Additionally, accounting researchers and teachers can contribute to all of these processes. Indeed, for all of us who care about accounting and its role in the economy, there is much work need to be done (G.Ryan 2008).Further, I believe that more time and research is take to determine reality that whether FVA has played its role in failure of Barclays Bank Plc. or not? To understand the role of FVA seems vital for future developments and implementations of accounting standards in Barclays Bank Plc. Additionally, future studies of FVA will give new bring into being and directions to financial reporting framework. I hope that over next hardly a(prenominal) years, most likely the conduct of lot of empirical studies will give us a distinct answer to the question about the role of FVA in Barclays Bank Plc. during financial crisis.The debate of FVA mainly revolves around the issues cost and benefit of reporting assets and liabilities at fair value and its role during financial crisis. The researchers such as Penman (2007) Simatupang