Corporate Reports

Part 1 – Consulting Report 1

Executive summary

The dispute against the merits and use of mark-to-market (MTM) accounting vs. historical cost accounting for financial institutions has gained a lot of attention of the regulators, accountant, investors, security traders and government.

This issue intensified for banks and other financial services during the financial crisis of 2008. The proponents viewed MTM accounting use to be the most practical estimate of fair value of asset while the others suggest the use of MTM in financial crisis situation where market prices do not reflection true value cause serious misrepresentations.

This report explains the mark-to-market accounting method to verify the risk and benefits of fair value accounting method. The report discusses the MTM accounting method effectiveness for reporting of asset values in corporate general purpose financial statements.

This consulting report will provide information to the accounting information users like regulators, banks and financial investors with an understanding on how adoption of MTM in terms of benefit/risks affects the asset valuation for the members of the Australian Shareholder’s Association (ASA).


Mark-to-market accounting is a method to value the asset under the current market price to know how much it will sell in prevailing market conditions thus, it refers to accounting of fair value for assets.

The current market value of asset/liabilities is shown in balance sheet and changes/ adjustments in the market valuation in income statement in this accounting method.

Since 1997, the use of MTM accounting method was popular among the security traders in borrowing money and future price contracts and to seek tax advantages to alter and adjust the capital earning to ordinary losses or gains on year end (Cascini and DelFavero, 2011).

For past many years, the mark-to-market accounting method has become a standard practice to record financial assets on balance sheet.

However in recent years, the attempt from the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) to standardize accounting standards led to the controversial issue on the benefits and drawbacks of adopting a complete MTM accounting system for financial institutions and financial services (Amel-Zadeh et al., 2014).

To move the financial originations such as banks and financial service to an inclusive mark-to-market accounting system has different view.

Evidence section

According to Makar et al. (2013), the advantages of the mark to market (MTM) accounting to security traders are for favorable tax purpose as income is taxed at a lower rate than capital earnings and exclusion from self-employment tax as capital gains are ordinary gains.

It is also stated that capital losses are taken as ordinary losses and fully deductible losses provide significant tax advantage to traders. However, Cascini and DelFavero (2011) argues that use of MTM accounting will produce a disadvantage on future price contracts through loss of long term capital gain.

The proponents of mark to market accounting emphasize on its pricing advantage for providing true value of asset.

The proponents claim the asset fair value offers more transparency, reliability and credibility of a financial status of institutions. The benefit of the MTM accounting lies in its reflection of fair and relevant value of assets in the balance sheet of financial institutions.

This true value in accounting information is useful for bank regulators and financial investors to have a better assessment of the current risk profile of the financial institutions like banks. Moreover, under this accounting, the advocates believe that it will encourage a higher discipline in the market such as bull and bear market and financial instruments as a result,

lead to better allocation of capital from relevant information reflected in corporate financial statements. The market-oriented model thus, is believed to reflect the authentic financial status to the outside market as compared to book value system.

In addition to this, market-oriented model of MTM is a self-adjusting mechanism in low market conditions to reduce the firm risk and provide leverage in value of assets for firms in growing market conditions.

Under MTM accounting, in falling market condition, the asset valuation drops in left side of balance sheet and on right side of balance sheet an equal reduction in equity capital and retained earnings thus, its ratio of debt to equity capital of firm is reduced to adjust with firm capital requirements.

In growing market condition, the ratio will leverage due to increase in asset value in balance sheet of financial institutions. As the bank assets valuation is from current market perspective the benefit of MTM accounting keep the organization in less risk position with a better comparability by allocation of similar value to comparable financial internally generated assets or externally bought assets and consistent accounts.

The proponents also draw attention relative to traditional method of historic cost accounting which do not reflect precise financial transparency and delay information causing information asymmetry in financial institutions as it record securities value at liquidation during maturity and sale in the financial statement (Ellul et al., 2015).

The MTM accounting benefit adds in to provide a timely disclosure of financial information such as securities at fair values which is realizable market prices and integrate the price information on time in earnings and balance sheets to reduce this information asymmetry.

On the opposing side, the opponents of the mark to market accounting points to the risk associated owing to asset value variation by market surge. The opponents underline the accounting method consequences for artificial volatility in financial instruments.

The financial institutions balance sheet does not reflect long-term value of assets/liabilities as it is driven by short-term fluctuations in MTM accounting. This accounting method is also criticized by bank regulators and rating agencies to be responsible of failure of banks during the financial crisis of 2008.

The rules under the MTM were responsible for the losses in banks for reduced value of security holding, rules in accounting method and decline in the credit rating of the financial institutions. This has also limited the borrowing capacity and directed the bank into directing into liquidation (Bhat et al., 2011).

According to Amel-Zadeh et al. (2014), financial organization specifically, experiences policy of procyclical risk due to MTM accounting model to enhance its ratio in economic bloom and reduces the leverage in down markets for hedge funds and evaluation of economic performance.

This fair values model creates systematic risk for balance sheet when the market will experience recession, economic downturns, or even in natural disaster situations (Magnan et al., 2015).

This accounting method also place financial risk on the high value assets along with volatility risk of the monetary related asset market. During economic crashes, the accounting method does not have the capacity to provide true value or selling price of securities for banks in its balance sheet.

The lower asset value as compared to actual value of bank asset, low liquidity condition, decline in shareholder equity have an impact on the investor confidence and trust.  The effectiveness for reporting of asset values in corporate financial statements brings more transparency and relevance and reliability factor to the information in balance sheet.

The current valuation of bank assets is providing accuracy in general purpose financial statements which can be useful for capital resource allocation and to guide for current risk profile to banks.


It can be summarized that the benefits of mark to market accounting method is majorly supported for providing the valuation of most financial assets of financial institutions and reflecting the true value of the balance sheets of banks by its proponents.

The opponents hold the rules under the MTM accounting method to intensify the financial crisis of 2008 and banks failure. It is claimed to bring financial risk and artificial volatility and to induce procyclical risk in banks.

However, the shortcoming historic cost accounting has increased the relevance of mark to market accounting for its long-term benefits as an accounting standard and financial reporting of assets true value despite its risk in market contractions situations.


Amel-Zadeh, A., Barth, M. E., & Landsman, W. R. (2014). Procyclical leverage: bank regulation or fair value accounting?. Rock Center for Corporate Governance, Working Paper, 147.

Bhat, G., Frankel, R., & Martin, X. (2011). Panacea, Pandora’s box, or placebo: Feedback in bank mortgage-backed security holdings and fair value accounting. Journal of Accounting and Economics, 52(2), 153-173.

Cascini, K. T., & DelFavero, A. (2011). An evaluation of the implementation of fair value accounting: Impact on financial reporting. Journal of Business & Economics Research, 9(1), 1.

Ellul, A., Jotikasthira, C., Lundblad, C. T., & Wang, Y. (2015). Is historical cost accounting a panacea? Market stress, incentive distortions, and gains trading. The Journal of Finance, 70(6), 2489-2538.

Magnan, M., Menini, A., & Parbonetti, A. (2015). Fair value accounting: information or confusion for financial markets?. Review of Accounting Studies, 20(1), 559-591.

Makar, S., Wang, L., & Alam, P. (2013). The mixed attribute model in SFAS 133 cash flow hedge accounting: implications for market pricing. Review of Accounting Studies, 18(1), 66-94.

Part 2- Consulting Report 2

Executive summary

The increase awareness of the concept of sustainable development and pressure from regulators, government, NGO’s, environmentalist has pressurized the companies to realized the importance of sustainability accounting and reporting as an integral part of corporate accountability.

This requires the need for the companies to publish a transparent reporting of financial, governance and sustainability aspects i.e. social, economic and environmental positive and negative contributions for its internal and external stakeholders.

The sustainability reporting by companies is done in reference to guidelines provided by frameworks such as global reporting initiative (GRI), ISO 26000, UN Global Impact etc. Among these, global reporting initiative (GRI) is the most widely accepted and used guideline framework for sustainability reporting.

The aim of this report is to examine the cost and benefits associated by adoption of GRI standards for sustainability reporting in context of sustainability accounting and financial reporting.

This report will be a consultation to the company board of directors to understand the positive and negative impact of using reference of GRI standards for sustainability accounting and financial reporting system for fulfillment of its sustainable development goals.


Since last decade, the companies are taking vital steps towards publishing a transparent and more reliable sustainability reporting to enhance its corporate accountability.

The information of sustainability accounting is used by investors, creditors, government and regulators to access the positive and negative impact on the economy. Companies are using the sustainability reporting to attract potential investors and other financing alternatives, identify the risk factors and to enhance its ethical reputation in the market for its future growth and success.

The GRI guidelines for sustainability reporting include the rule and indicators to measure and account for the impacts of social, economic and environmental on the economy. The GRI framework the majorly emphasize on the standards for materiality (G4 guideline), verification and assurance (G3 Guideline) and stakeholder engagement/management (Zhang and Liao, 2015).

Evidence section

The supporters of the GRI framework reveal the advantage of GRI standards that add value to the sustainability reporting in terms of achieving transparency in non-financial and financial performance, building investors trust, improved decision making, lessening the reputational risks, reducing compliance cost and enhancing stakeholder engagement.

The adoption of GRI guidelines provide the companies in achieving discipline in financial reporting of the performance for economic, social and environmental aspects.

According to Fernandez-Feijoo et al. (2014), the benefits in GRI based sustainability reporting is to draw the attention of the company management towards the sustainable goals and for progressing towards long term sustainable goals, strategy and vision. Under the GRI reporting, it requires the companies to conduct an inclusive review of strengths/weaknesses.

Moreover, reporting under GRI reference focus on stakeholder engagement which directs the company towards defining a more robust business strategies and vision to improve level of sustainable practices across the company.

The verification and assurance aspect in this reporting framework encourage effecting sustainability accounting to carefully measure the social and environmental cost and benefit leading to improvement in internal system and processes such as effective monitoring of material use, energy consumption, waste generation along with cost reductions and effective decision making in resource allocation (Zhang and Liao, 2015).

The proponents of GRI referenced reporting highlight the benefit to reduce compliance cost in meeting regulatory requirements and avoid legal obligations.  Moreover, Alonso‐Almeida et al. (2014),  viewed the reporting under GRI can lead to competitive advantage to attract financing options, negotiating contracts and encouraging innovation for cost saving practices and to develop new markets.

The fulfillment of disclosure requirement in GRI will enhance ethical reputation in the market and employee retention. The sustainability accounting in companies with GRI reporting standards has enhanced the stock prices and access to capital and transparently reflects information in the balance sheet for cash flow and return on assets for use of investors and creditors (Vigneau et al., 2015).

It can be stated that GRI standard allow the company management to monitor the sustainability efforts through a better communication plan for its stakeholders as the GRI structure follow top down approach and to take effective decision for market opportunities and business risk (Alonso‐Almeida et al.,2014).

The transparency in financial reporting and sustainability accountability build trust and open up dialogue among the internal and external stakeholders. The proponents also reveal the GRI benefits in terms of improvements in corporate social responsibility (CSR)

reporting with more reliable and accurate financial and non-financial and to monitor the development aspects of economic, social, environmental and governance to continue its contribution in fulfillment of sustainable development goals.

On the other hand, the adoption of the GRI standards can also contain some weaknesses that affect the standards of the reporting system. According to the Knebel and Seele (2015),

the sustainability accounting contains some weakness that affects on the goals of the reporting and also provides challenging duties for promotion the sustainable goals. It is because sustainability accounting focuses on the accountability of the company only that interact the social system and external factors.

In addition, the firms look difficulties to maintain the requirements of the GRI standards for providing the reflection of the efforts of the sustainability in the reports (Smith and Sharicz, 2011). It can be increase the challenge for the management of the company by enhancement in the standards of the GRI that can develop risky information in the financial system.

Additionally, it can create a threat for the corporate financial reporting and can decrease the reputation in the market. The collation of the information and data can increase the cost of the organization and obtain the cost of environmental and social to get the sustainable accounting with the true value (Mallin, et al., 2013).

The cost of data or information can also increase by the betterment in the CSR reporting and accountability. Mostly, the disclosure of the information can also create competitive disadvantage for the companies during the stock exchange for the investor through the initial offering to the public.

In the same concern of this, Delmas and Blass (2010) stated that the GRI standards is considered as a cost in some companies because it consumes the time and other overheads during generating the repot in referencing and the sustainability reports also consume the time in understanding them effectively in the seeking organizations.

The standards also increase the burden on the company resources because there is a requirement of the fulfillment of the benchmarks for effectively improvement in the period of the transaction.

The interest of the stockholders is very necessary to fulfill the requirements and objectives of the reporting that are based on the GRI. In the words of Samy et al. (2010) the adoption of the GRI reporting standards can also influence on the CSR activity and performance that are related with the choice of CSR activity because it focuses on the approach of the corporate structure that are at the top-down.


It can be summarized that the proponents of the GRI guideline declares the companies have a wide acceptance for the GRI based reporting for sustainability accounting its numerous benefits such as transparency for the different stakeholders, identify risk/opportunities, reliable financial reporting, improvement in internal process, reduction of compliance cost, as growth strategy etc.

Thus, it provides an accurate guideline to evaluate the social, economic and environmental cost and analyze the company governance structure. From the views of opponents, it is clear that the cost of adoption of these guidelines are related to  cost factor, time factor and individual factor such as skills and expertise of the professional to measure social and environmental cost to fulfilling disclosure requirements.

The considerable benefits against its cost of adoption have been the driving force behind the acceptance of the GRI based reporting standards to achieve a reliable and more transparent system of sustainability accounting and financial reporting to fulfill its corporate accountability.


Alonso‐Almeida, M., Llach, J., & Marimon, F. (2014). A closer look at the ‘Global Reporting Initiative’sustainability reporting as a tool to implement environmental and social policies: A worldwide sector analysis. Corporate Social Responsibility and Environmental Management, 21(6), 318-335.

Delmas, M., & Blass, V.D., (2010). Measuring corporate environmental performance: the trade‐offs of sustainability ratings. Business Strategy and the Environment19(4), 245-260.

Fernandez-Feijoo, B., Romero, S., & Ruiz, S. (2014). Effect of stakeholders’ pressure on transparency of sustainability reports within the GRI framework. Journal of Business Ethics, 122(1), 53-63.

Knebel, S., & Seele, P., (2015). Quo vadis GRI? A (critical) assessment of GRI 3.1 A+ non-financial reports and implications for credibility and standardization. Corporate Communications: An International Journal20(2), 196-212.

Mallin, C., Michelon, G., & Raggi, D., (2013). Monitoring intensity and stakeholders’ orientation: How does governance affect social and environmental disclosure?. Journal of Business Ethics114(1), 29-43.

Samy, M., Odemilin, G., & Bampton, R., (2010). Corporate social responsibility: a strategy for sustainable business success. An analysis of 20 selected British companies. Corporate Governance: The international journal of business in society10(2), 203-217.

Smith, P.A., & Sharicz, C., (2011). The shift needed for sustainability. The Learning Organization18(1), 73-86.

., Humphreys, M., & Moon, J. (2015). How do firms comply with international sustainability standards? Processes and consequences of adopting the global reporting initiative. Journal of Business Ethics, 131(2), 469-486.

Zhang, Y., & Liao, L. (2015). Corporate Social Responsibility Assurance: Theory, Regulations and Practice in China. In Social Audit Regulation (pp. 131-154). Springer International Publishing.


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