On social media, everyone is talking about banking crisis especially Silicon Valley Bank crisis and the causes of it. Everyone views the problem from their angle and so does Altobooks.
What we have understood is that the entire problem is an accounting and reporting problem.
We have accounting standards – be it US GAAP or IFRS, requiring companies to do accounting for Held to Maturity (HTM) Securities on amortized basis. The purpose of the same is that the short-term volatility of the instruments does not have the same volatile effect on the financial statements of the entity, when the instruments are supposed to be held till maturity and cashflows would not have effect of the temporary volatility.
In case of SVB, their balance sheet was loaded with HTM securities and the same were amortized. This made their financial reports not reflecting the real losses they were sitting on.
And suddenly, they made marked to market accounting for HTM securities thereby accounting for huge losses on their HTM securities. Of course, they were not willing to do this. They had to do this because of accounting standards.
The very purpose of the accounting standards for HTM securities has turned against the SVB.
High time FASB and IASB deliberates on this.
This article is brought to you by Altobooks research team.
Altobooks is a global accounting and offshoring firm providing offshore staffing solutions to CPAs. Altobooks also provides services to individuals and corporates for accounting, tax, finance. For more information, stay tuned to Altobooks blogs section.