The financial instrument accounting standards have proved to be highly controversial. According to S.P.

Kothari and Rebecca Lester, both of the Department of Economics, Finance, and Accounting at MIT.( Friday March 2, 2012) The outstanding decline that begins in 2008 has had important impacts on the US and global economy; approximation of the quantity of US missing capital, are about $14 trillion (Luhby 2009). Different situation of the financial crisis have been cited, which includes lax regulation over mortgage lending, a growing housing bubble, the rise of derivatives instruments such as collateralized debt obligations, and questionable banking practices. In addition to these and many other reasons, we explain two factors that partially contributed to the crisis: certain management incentives and fair value accounting standards. Following the dot-com bubble in 2000 and the September 11, 2001 attacks, the U.S. economic policies of low interest rates coupled with easy credit, lower taxes, and the cheap dollar generated significant economic growth from 2000 to 2007. Low interest rates motivated many in the United States to pursue home ownership, a goal long propagated and encouraged by the government as a wise investment and worthy social objective. Easy credit facilitated by agencies such as Fannie Mae and Freddie Mac enabled financial institutions to focus on the lucrative subprime mortgage market. Mortgage lenders initiated a growing number of new home loans, many of which were granted to individuals with a poor credit rating, who would eventually be unable to service monthly mortgage payments once interest rates increased. Unfortunately, gains generated from securitization of the home loans and from income on the servicing of the loans inflated financial profits, motivating executives of mortgage origination firms to focus on quantity, rather than quality, of borrowers. Investors, seeking new investment opportunities, fueled the demand for mortgage backed securities that were created through securitization of the home loans. Such securities received high ratings from analysts who also did not correctly assess the underlying default risk. In early 2005, interest rates began to rise, increasing up to 8.25% in 2007 from 4% in 2004. In response, a large number of homeowners, particularly those with adjustable rate mortgages, began to default on their monthly payments. In 2007, New Century Financial, the second largest subprime mortgage originator in the US, announced a restatement of its financial statements for

the first three quarters of 2006 due to under-reserving certain loan loss provisions. This announcement was followed shortly thereafter by large losses for firms with significant subprime positions, including Bear Stearns, Lehman Brothers, Merrill Lynch, and Citigroup. The market (using the Dow Jones Industrial as a benchmark) dropped precipitously from over 14,000 points in October 2007 to under 7,000 in March 2009, with a drop of almost 2,000 points in one week alone in September 2008. The subprime mortgage woes resulted in a significant and prolonged recession. The companies engaged in the subprime mortgage business, including both

originators/securitizers of loans and purchasers/investors in the securitized instruments, were able to report certain gains on securitization of loans under U.S. accounting standards. Furthermore, companies followed U.S. accounting standards to record loan servicing assets and residual interest assets, as well as certain loan loss reserves, using historical prime mortgage performance to estimate the appropriate value. 2. According to Andreoli, Brian E., David Colker, and Michael S. Lebovitz. "Legal and Practical Issues in Applying FIN 48." Tax Executive 59.1 (Jan-Feb 2007): 43-47. University of Florida Health Science Center Libraries. The Financial Accounting Standards Board (FASB) issues many statements regarding various accounting standards. From these standards different interpretations are issued. Financial

Interpretation Number 48(FIN 48) is a fairly recent and controversial accounting standard. It is an interpretation of FASB statement 109. First passed in 2006, companies are now required to measure and disclose all tax positions that are taken or ones the company might expect to be taken. A tax position may be determining a tax liability, reducing or transferring taxes payable, or changing how deferred tax assets will be realized (Jarnagin). In 2009 a new framework was put into place to reorganize Generally Accepted Accounting Principles (GAAP) and standards. FIN 48 and statement 109 are now codified and fall under Accounting Standard Codification (ASC) 740. I will continue to use the term FIN48 to describe the rules related to reporting for uncertain tax positions.

Issued in 1992, Financial Accounting Standard Board Statement No 109 was issued to recognize any additional tax assets and help minimize any implementation costs. It superseded statement No 96 but still follows the asset-liability method for accounting interperiod income tax allocation. The asset-liability method is balance-sheet oriented. It established rules on the

effects of income taxes during current and preceding years. It covers the recognition of deferred tax assets and deferred tax liabilities. Statement 109 requires that deferred tax assets are accounted for separately from deferred tax liabilities. (Peavey) The statement also provides methods for determining whether a valuation allowance to reduce deferred tax assets is needed. 3. According to Bakale, Anthony S. "FIN 48 and Tax Return Disclosure." The Tax Adviser (2010). Then in June 2006 to help increase transparency of financial data, FASB issued FIN 48 to require disclosures regarding uncertainty in income tax positions. Fin 48 was expected to improve comparability and consistency among company reports. By increasing comparability, FASB hopes are that the more accurate financial reporting will be more helpful to auditors and investors. However, the Fin 48 rules place more responsibility and burdens on the tax

department. (Cowan) The Comparability among years and companies will be increased because the criteria used for measurement and disclosure are universal. This interpretation addresses issues regarding any uncertainty in income taxes. FASB declined the Private Company Financial Reporting Committees (PCFRC) recommendation to exempt private companies from the disclosure requirements. Fin48 is effective for any entity that issues GAAP financial statements including Non-profit organizations. Companies in both the public and private sector are required to follow these guidelines. Fin 48 provides a two step process that companies are to follow. The first is recognition. Companies must recognize whether a tax position is more likely than not (a greater than 50% probability) to be sustained upon an examination. When considering this step one must realize and assume that all pertinent information will be revealed and nothing hidden. The second step is recognition and determines the amount of benefit or liability to be recognized. The amount to be recognized is the largest amount that also passes the more likely than not threshold. (Andreoli) Generally, deferred tax liabilities and deferred tax assets are created. This will account for

deferred income tax expenses or benefits. In order to recognize a tax benefit, the company must be sure that it passed the 50% threshold and will be able to be sustained upon examination. This threshold is arguably higher than previously. Before this process, companies would look at the probability or likelihood of occurrence to adjust their income tax returns. They followed a contingent-liability model. The tax benefits of a tax position were recognized in the financial statements. Only those that were uncertain were measured using Financial Accounting Standard 5 (FAS 5). A loss was only documented when it was probable that the tax benefit would be lost if challenged by an authority. Now FIN 48 follows the benefit-recognition model. This requires all material tax positions to use the two-step process. Now under FIN48 only the benefits that meet the criteria of the two steps may be recognized. Under FIN48 companies are now required to disclose their uncertain tax positions on their financial statements. The SEC does not require that companies provide full disclosure in interim reporting. (Gruen) Typically the beginning and ending of a period a tabular arrangement is prepared. This includes the amounts of changes in unrecognized tax benefits from tax positions in both current and prior periods. As well any amounts of decreases in unrecognized tax benefits must be noted. FIN48 also requires the companys policy on the classification of interest and penalties to be disclosed. (Jenkins) The first year FIN48 is applied, a companys retained earnings are affected. Each year after that, the companys income and balance sheet liabilities are affected by FIN48. Any tax position that is still open needs to have a reserve setup. 7 oct,2012.

References:
http://blogs.law.harvard.edu/corpgov/2012/03/02/the-role-of-accounting-in-the-financial-crisis/

Andreoli, Brian E., David Colker, and Michael S. Lebovitz. "Legal and Practical Issues in Applying FIN 48." Tax Executive 59.1 (Jan-Feb 2007): 43-47. University of Florida Health Science Center Libraries. Web. 17 Sept. 2010.

<http://galenet.galegroup.com.lp.hscl.ufl.edu/servlet/BCRC?vrsn=unknown&locID=gain40375& srchtp=art&c=123&ste=25&tab=2&tbst=tsAS&atp=SG&docNum=A177266079&art=FIN 48&bConts=0>.

Bakale, Anthony S. "FIN 48 and Tax Return Disclosure." The Tax Adviser (2010). The Business and Company Resource Center. Web. 15 Sept. 2010.

<http://galenet.galegroup.com.lp.hscl.ufl.edu/servlet/BCRC?vrsn=unknown&locID=gain40375& srchtp=glb&c=1&ste=25&tab=2&tbst=tsAS&mst=FIN+48&docNum=A234920051&bConts=0.