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Journal of Applied Research in Accounting and Finance

Vol 3 (1) July 2008

Old Wine in New Bottles: Subprime Mortgage Crisis - Causes and Consequences by Michael Lim

This paper seeks to explain the causes and consequences of the U.S. subprime mortgage crisis and how this has led to a generalized credit crunch in other financial sectors that ultimately affects the real economy. It postulates that despite the recent financial innovations, the financial strategies - leveraging and funding mismatch - that led to the present crisis are similar to those found in the U.S. savings and loans debacle of the late 80s and in the Asian financial crisis of the late 90s. However, these strategies contain new innovations that have heightened, not reduced, systemic risks and financial instability. They are as the title implies: old wine in new bottles. Going beyond these financial practices, the underlying structural causes of the crisis are located in the loose monetary policies of central banks, deregulation, and excess liquidity in financial markets that are a consequence of the kind of economic growth that produces various imbalances - trade imbalance, financial sector imbalance, and wealth and income imbalance. The consequences on risks, moral hazards and rolling bubbles are discussed.


Information Lost: A Descriptive Analysis of IFRS Firms' 20-F Reconciliations by Marlene Plumlee and David Plumlee

In December 2007 the SEC issued a formal rule release that allows foreign-private issuers that employ the IFRS to file their financial statements without providing a reconciliation to U.S. GAAP. While the rule change was made after the SEC received and analyzed comments from various constituents on the proposing release, the rule change has not been without controversy and may have argued that the decision was 'premature', based at least partially on evidence of the usefulness of the reconciliations to investors and others.

The purpose of our study is to provide a more complete picture of the information that will be lost to investors due to the rule change. Our analysis focuses on the quantitative values included in the reconciliation, a measure of the information formerly required by the SEC. We identify 100 FPIs that filed 20-Fs during 2006 using IFRS. We collect and classify the line-by-line amounts into 22 categories and, using this classification, examine the frequency, magnitude, and sign of the reconciling items. We also sort the FPIs based on market cap (size) and industry and provide the same statistics within those groups. In our analyses we document that there are a few categories where a large proportion of FPIs have reported reconciling items while there are several categories where reconciling items are relatively infrequent. In addition, we observe that size does seem to matter; the frequency, magnitude, and sign of the reconciling items differ across size groups. We also observe differences across industry groups.


Negative Goodwill: Issues of Financial Reporting and Analysis Under Current and Proposed Guidelines by Eugene E. Comiskey and Charles W. Mulford

Under current GAAP, initial bargain-purchase amounts, also known as negative goodwill (NGW) or the excess of the fair value of acquired net assets over the cost of an acquisition, are typically reduced or eliminated altogether by being allocated against the fair values of certain acquired assets such as property, plant and equipment and intangible assets. Any negative goodwill that is not offset against these assets is reported in the income statement as an extraordinary gain. However, in a joint effort with the International Accounting Standards Board (IASB), the Financial Accounting Standards Board (FASB) has developed a replacement for current GAAP, which, among other things, requires that all NGW, without offset, is to be immediately recognized as a gain.

This report outlines the current and proposed accounting treatment of negative goodwill and their impact upon financial statements as well as their implications for financial analysis. For a sample of companies, we find material increases in assets, shareholders' equity and net income under the proposed new treatment.