Global Financial Crisis - Essay Example

Running head: INTERNATIONAL ACCOUNTING International Accounting [Writer’s name] [Institutions name] International Accounting Part A Global Financial Crisis is considered by various experts as the most terrible financial crisis after the Great Depression of the 1930s. Due to it a risk of total collapse from huge financial institutions took place. It even resulted in the fall of global stock markets. In a lot of regions, the housing market also was at risk, due to which evictions, foreclosures and many remained unemployment. Because of this numerous key businesses failed consumers no longer had buying power and this resulted in the 2008–2012 global recession (Bengtsson 2011). The Global Financial Crisis changed a lot of accounting standards by setting international economic policy designing a schedule. Throughout the global financial and economic chaos in about 2001, accounting standards were also carefully evaluated. Whereas a lot had been implemented in the interim to help with the weak areas regarding governance and to adjust to the momentum of globalization, by making sure that the International Accounting Standards (IAS) were according to global or near-global acceptance, various important IFRS are still unchanged, particularly those which are related to financial instruments like IAS 39 Financial Instruments: Recognition and Measurement The downfall of the market ultimately led to global financial crisis, the International Accounting Standards Board has been enthusiastically responding to the crisis, they have started number problems which identified via the Financial Stability Board (FSB. IASB as part of its response to the GFC The IASB as part of its response to the GFC implemented various strategies to address recommendations made by the G20 as they had taken assistance from the G-20 to resolve the ongoing issues (Patricia 2009). Consolidation and Improved Accounting For Off Balance Sheet Items The IASB’ recommended a detailed evaluation of the balance sheets and its items so that the GFC could be controlled To the response it also recommended special structures be utilized by reporting entities, especially by financial institutions like banks, to deal with securitizations and other more difficult financial measures were highlighted via the FSF and the G20. However, this response was criticized by financial experts who highlighted the fact that financial statements do not communicate the extent to which reporting entities may face danger from the before mentioned types of structures (Bengtsson 2011). Derecognition Another response to the GFC was that off balance sheet items, regarding the derecognition of financial assets and liabilities, are made compulsory to be published at the end of the first quarter. Financial Instruments. Improving Financial Instruments The exposure draft recommended modifications in the disclosure requirements which comprised of a three level fair value hierarchy. The suggested changes needed disclosures regarding the level of the fair value hierarchy by this the fair value measurements were classified in their entirety, the fair value measurements due to which the utilization of important unobservable inputs to assessment methods and the movements among diverse levels of the above mentioned hierarchy (Alnoor 2008). The improvement in the measurements also helped to simplify the definition of liquidity risk, enhance quantitative disclosures regarding liquidity risk, and the association among qualitative and quantitative disclosures regarding liquidity risk . Fair value Due to the required valuation of assets and liabilities, Fair Value Accounting was implemented. Fair Value Accounting is a method of accounting which used to measure assets and liabilities at values which signify their fundamental values, and therefore provides a fair analysis of an entity’s financial situation. It may be said that the , the primary benefit of Fair Value Accounting is that via evaluating assets at their fundamental values, that give an over view of the current market situation, Fair Value Accounting gives appropriate and objective information, increases precision and encourages quick corrective measures before a comparatively small degree of stress develops into a grave problem (Lauxa & Leuzb 2009). The continuing utilization of Fair Value Accounting provides a small number of concerns nevertheless, the most important is the procyclical impact on banks’ balance sheets and promulgation of contagion effect. Procyclicality Procyclicality may be defined as any element which increases an reaction , instead of reducing it. . Fair Value accounting rules as based on the notion of pro-cyclical thus, they are may be vital for the systemic disappearance of liquidity, resulting in the suggestion that mark-to-market accounting must be prohibited during a crisis.. The assumption that Fair Value Accounting is procyclical relates to both flourishing and stressed phases (Carrasco 2010). in the improvement of the cycle, Fair Value Accounting permits businesses to enhance their control by marking-up the values of their assets, while in downturns, assessment based on market prices result in margin calls, due to which deterioration in collateral values takes place , putting extra downward stress on asset prices. Nevertheless, it may also be noted that Fair Value Accounting gives early warning signs for an future crisis and therefore can result in the implementation of corrective measures at early stage. Just a modification in accounting rules might not essentially deal with the matter of procyclical lending in banks (Carrasco 2010). however, a grouping of Fair Value Accounting with dynamic prudential regulations, helps to d businesses to increase their reserves in boom periods for surviving in periods where there is a downfall of the market. Thus, it may could be an useful approach for method counteracting the procyclical impact of Fair Value Accounting Part b It may be noted that IAS 39 is perhaps the most difficult and challenging standard implemented by the International Accounting Standards Board. The implication handbook is quite detailed and highlights even the most minor issue . Thus, this may be due to the fact that financial instruments are becoming more and more complex . the complexity in this instrument may be because of the fact that financial experts and the accountants come to a specific option regarding the “new” financial instrument, one more complex instrument is designed , this is what may have happened in the case of IAS 39 it’s amendments to the standards became more complicated with time. It may be highlighted the most major issue with this instrument is hedge accounting, this still is an extremely challenging issue. The argument has two sides , it may be said that it the instrument in question is flexible and thus may permit organizations manipulate financial reports. However the fact that it’s rules at times are so difficult to manage that they interfere with risk the management (Accounting, International Accounting Standards Board 2007)). The fact that the instrument is extremely complex and not fit from hedge accounting is what needs to changed before implementation of the instrument. . Changes Innovative, easier directions for classifying and asessesing financial assets IFRS 9 replace maybe a substitute for the recognition approaches and measurement processes which are utilized in IAS 39. At initial recognition, all financial assets are measured at fair value. Later assessment is may be carried out at amortized cost or fair value. Due to this, assets will be divided into 2 categories: they are Amortised Cost or Fair Value. A few categories present in IAS 39 have been changed , i.e. ‘ AFS’ and ‘HTM’ are not applicable anymore.( International Accounting Standards Board 2008). Currently IAS 39 the financial asset will be chosen for the category Amortised Cost’ and shall also be measured in the before mentioned category if both of the below given circumstances occur : : The purpose of the entity’s business model is to keep the financial asset in order to gather the contractual cash flows. The contractual conditions on which a financial asset is based may be implemented on particular day to cash flows that are only costs of the principal and interest on the principal outstanding. In principle, this does not entail a change in the existing measurement approaches. Fair Value Option It may be pointed out that even if IAS 39 fulfill all the conditions for amortized cost, IFRS 9 is still better as it even permits entities to select financial instruments as at fair value by evaluating it’s profit or loss , this may remove or drastically lessen a measurement or recognition unpredictability which may otherwise take place via measuring assets or liabilities or recognizing the profit and losses related to them at different levels (Veron, 2008).. When IFRS 9will IAS 39 replace it is to be kept in mind that it consists of a de facto right to \ implement the fair value option in its entirety for financial assets and liability. Equity Instruments Each and every investments in equity instruments that come which are apart of the scope of IAS39 are to be documented on the balance sheet at fair value; modifications in value are categorized by means of profit or loss. Exceptions are funds in equity instruments which the entity has determined to recognize at fair value by means of other inclusive income . Even though the fair value requirement for each and every one equity investments, IFRS 9 may be an better option as it consists of guidance on when cost could be the best approximation of fair value and furthermore when it may not be courier of fair value. Derivatives All derivatives, as well as those associated to unquoted equity investments, can be measured at fair value. Modifications in Value are recognized in profit or loss if the entity is determined to cater the derivative as a hedging instrument along with the IAS 39. As per the circumstances the guidelines set by in IAS 39 apply ( Wilson 2008 a). Embedded Derivatives An embedded derivative is a part of a hybrid contract that too consists of non-derivative host, due to the fact that its effects the various cash flow of the combined instrument which is different in a manner like to a stand-alone derivative. A derivative which is associated to a financial instrument nevertheless is contractually transferable independent, or has a diverse counterparty, may not be considered as an embedded derivative, it may be considered as a separate financial instrument. The embedded derivative notion of IAS 39 may not be found in IFRS 9. As a result, embedded derivatives in IAS 39 may have separately been responsible for at fair value by means of profit or loss as they were not intimately associated to the host contract shall not be considered as separated. as a substitute, the contractual cash flows of the financial asset are assessed in their entirety, and the asset as a whole is measured at fair value through profit or loss if any of its cash flows do not represent payments of principal and interest apply ( Wilson 2008 b).. Even if the future approach leads, in theory, to a more simplified procedure, many financial institutions will be confronted with the task of combining a host contract and embedded derivative, which are stored and processed in different transaction processing systems, for valuation purposes. This will place even more weight on the importance of the Flex Finance Product Builder which is available at present. Reclassification For the above mentioned instrument, reclassification is necessary among fair value by means profit or loss and amortized cost supposedly the entity’s business model purpose for its financial assets alteration so its prior model assessment may not apply. If reclassification is suitable, it should be done prospectively from the day of reclassification. An entity will not repeat any earlier recognized gains, losses, or interest Disclosures IFRS 9 changes a number of requirements of IAS 39 Financial Instruments: Disclosures. It may even consist of additional disclosures regarding investments in equity instruments selected as at fair value by means of comprehensive income (Veron,2008) Financial Liabilities IAS 39 does not take into consideration the financial liabilities. The IASB has stated to provide further reflection to the classification and measurement of financial liabilities regarding Credit Risk in Liability Measurement. Part c The AASB believes that it must help to complete the provision of this information by means of a policy of international convergence and international management of Australian accounting standards. As per this perspective, “international convergence” is regarded as working with other standard-setting entities to extend new or improved standards that will help in the development of a distinct set of global accounting standards. “International harmonization” of Australian accounting standards may be defined as method which results in compatibility of standards with the standards of international standard-setting entities to the degree that this may lead to high quality standards. Both the before mentioned methods are meant to assist in the growth of a distinct set of global accounting standards.. The AASB’s international convergence purpose is to provide , t by menas of participation in the actions taken by IASB and the PSC, the growth of an internationally established distinct set of accounting standards which may successfully be adopted in Australia and somewhere else for domestic and global purposes so that they may receive the benefits forth in set this Policy Statement (Carrasco 2010). A distinct set of internationally established accounting standards is not expected to be attainable in the short term. therefore, the AASB’s international harmonisation purpose is to work for the progress of accounting standards in Australia which may easily relate with IFRSs and International Public Sector Accounting Standards (IPSASs) issued by the PSC, here they may state thet such standards are expected to be beneficial of both the private and public sectors. It may also be pointed out that IFRSs and/or IPSASs are regarded via the AASB to not signify best international practice, the short-term purpose is to work for implementing standards that are regarded by AASB to be best international practice and to work to manipulate the consideration of the IASB and the PSC to implement what the AASB thinks to be best international practice. References Bengtsson Elias (2011) Repoliticalization of accounting standard setting—The IASB, the EU and the globalfinancialcrisis Volume 22, Issue 6, , Pages 567–580 Patricia J. Arnold (2009), Global financial crisis: The challenge to accounting research Accounting, Organizations and Society Volume 34, Issues 6–7, August–October 2009, Pages 803–809 Lauxa Christian & Leuzb Christian (2009), The crisis of fair-value accounting: Making sense of the recent debate Accounting, Organizations and Society Volume 34, Issues 6–7, Pages 826–834 Alnoor Bhimani (2008), The role of a crisis in reshaping the role of accounting Journal of Accounting and Public Policy Volume 27, Issue 6, Pages 444–454 Carrasco, Enrique R (2010)., The Global Financial Crisis and the Financial Stability Forum: The Awakening and Transformation of an International Body Transnational Law & Contemporary Problems, Forthcoming; U Iowa Legal Studies Research Paper No. 10-06 Accounting, International Accounting Standards Board(2007), Exposure draft of proposed amendments to IAS 39, Financial instruments: recognition and measurement : exposures qualifying for hedge accounting, International Accounting Standards Board International Accounting Standards Board (2008) amendment to IAS 39 Financial instruments : recognition and measurement ASC Foundation Publications Dept Veron, Nicolas. (2008). “Fair Value Accounting is the Wrong Scapegoat for this Crisis.” European Accounting Review, 5(2): 63–69. Wallison, Peter J. 2008a. “Fair Value Accounting: A Critique.” American Enterprise Institute for Public Policy Research Outlook Series, July. Wallison, Peter J. 2008b. “Judgment Too Important to be Left to the Accountants.” Financial Times, May 1. Read More