Accounting in and for the Subprime Crisis

Abstract

This essay describes implications of the subprime crisis for accounting. First, I overview the institutional and market aspects of subprime lending with the greatest accounting relevance. Second, I discuss the critical aspects of FAS 157's fair value definition and measurement guidance and explain the practical difficulties that have arisen in applying this definition and guidance to subprime positions during the crisis. I also raise a potential issue regarding the application of FAS 159's fair value option. Third, I discuss issues that have arisen regarding sale accounting for subprime mortgage securitizations under FAS 140 and consolidation of securitization entities under FIN 46(R) associated with mortgage foreclosures and modifications. Fourth, I indicate ways that accounting academics can address the implications of the subprime crisis in their research and teaching.

Keywords: Subprime crisis, credit crunch, fair value accounting, securitization

JEL Classification: G21, M41, M44