The Challenges the Changing Landscape of Banking Poses for Accounting and Financial Reporting

This paper summarizes changes that have taken place in banking, the attendant financial innovations, and the challenges these innovations pose for accounting standard setters and regulators. We focus on asset securitizations and the difficulties in accounting for such transactions, in particular their option-like features, and discuss how such option-like features appear in many financial contracts. We discuss ways that such difficulties can be addressed and conclude that a purely measurement approach is likely to be problematic. This suggests that the FASB's approach of requiring an increasing amount of supplementary disclosure relating to the risks faced by banks may be the best solution