Accounting essay on IASB amendments
Introduction
It is very clear that during the time of financial crisis in Oct 2008, the IASB made some amendments to IFRS 7 and IAS 39 for relaxing the accounting of fair value. These changes made commercial banks reporting throughout IFRS with the option to reclassify the financial assets which were previously calculated at the fair value in groups that need measurement at the amortized cost. The purpose of IAS 39 is to form principles for measuring and recognizing financial liabilities, financial assets and few contracts to buy and sell the non financial components. IAS 39 is not applicable to the financial instruments formulated by entity which fulfill the description of the equity instruments which are needed to be grouped as instruments of equity by issuer in relation to IAS 32. It is viewed that IASB reviewed the issues of the accounting arising from the global crisis, comprising those recognized by G20 and various global bodies like Board of Financial Stability. IAS 39 typically needed that the entity will not reclassify the financial instrument in or out of fair value through loss or profit category as it is issued or held. The IASB formed the external Advisory Panel expert in year 2008 to refer issues associating to calculating fair value in markets of illiquid. This essay indicates why the IASB amended IAS 39 during the crisis. Alterations in the IAS 39 permits financial instruments reclassification in particular situations. It is significant that standards of accounting move promptly to enhance and restore the confidence of the investor in the accurate direction. This essay also indicates the potential problems associated with IAS 39 for e.g. in year 2008, politicians specifically from European Union hugely enhanced the emphasis on accounting body to change IAS 39 in the way which permitted banks to minimize those losses. At last it can be said that the IASB’s actions are likely to have an impact on global financial stability. 
Body
IAS 39 Financial Instruments: Measurement and Recognition
The purpose of IAS 39 is to form principles for measuring and recognizing financial liabilities, financial assets and few contracts to buy and sell the non financial components. Requirements for providing information about the financial instruments are offered in IAS 32 and requirements for disclosing the information about the financial instrument in IFRS7 (Dechow, Patricia & Meulbroek, 2001). IAS 39 does not relate to employers obligations and rights under the plans of employee benefit to which IAS Worker Benefits relates and does not relate to financial contracts, instruments and obligations throughout the transactions of share-related payment to which the IFRS 2 relates, except for restricted exceptions which are deemed throughout the range of the IAS 39. IAS 39 is not applicable to the financial instruments formulated by entity which fulfill the description of the equity instruments which are needed to be grouped as instruments of equity by issuer in relation to IAS 32.
Response of the IASB to the Global Financial Crisis
The FASB and IASB announced some steps in reaction to financial crisis. Both the boards have decided to work expeditiously and jointly towards the accounting standards which transact with off financial statements activity and accounting for the financial instruments (Spooner & Andrew, 2007). They will work towards in evaluation of loan loss accounting throughout the project of financial instruments. These kinds of steps confirmed the commitment to the combined approach to the global financial crisis and the overall objective of viewing convergence among US GAAP and IFRS explained by MOU first issued in 2006 and upgraded in 2008. Both the boards shall work together towards the standards by forming the projects of IASB on de-recognition and consolidation as combined projects and executed short term changes to the existing standards. During this project, both the boards shall evaluate loan loss comprising the expected and incurred loss models.
It is viewed that IASB reviewed the issues of the accounting arising from the global crisis, comprising those recognized by G20 and various global bodies like Board of Financial Stability. Dedicated to the international approach, the IASB is operating closely with the United States FAS board. The high stage of the advisory group formed by the FASB and IASB will refer issues of financial reporting prevailing from the global crisis. IASB offers update on reaction to the issues of the credit crises prepares report from the advisory panel expert on disclosure and measurement of the fair value when the market is no longer dynamic. IASB has created the update on the variety of projects which collectively resolve issues pointed out by the crisis of the credit. It has published the draft report also on the discussions of the advisory panel expert formed by the IASB to refer the fair value application when markets are no active longer. IASB has controlled the execution of the IFRS and moved swiftly to transact with issues pointed out by the crisis of the credit. IASB has created excellent progress to the objectives positioned in the Forum report of the Financial Stability (Spooner & Andrew, 2007). Accelerating the project’s completion explained by the MOU agree with the FASB shall further help capital markets by minimizing the probability of the accounting arbitrage with the formation of the single group of superior quality standards implemented across the capital markets of the world. The IASB shall improve its standards to get best disclosures about methodologies, valuations and risks related with the valuations. The global crisis has increased concerns which it might be complex to predict fair value in the illiquid place of the market. The IASB formed the external Advisory Panel expert in year 2008 to refer issues associating to calculating fair value in markets of illiquid. Suggestion on how to calculate fair value is scattered through standards& in few cases inconsistent (Dechow, Patricia & Meulbroek, 2001). The creation of the single standard simplifies how to calculate fair value whereas current standards allow or require fair value.
Alteration in IAS 39 by the IASB during the crisisDuring the time of financial crisis in 2008, the IASB altered IAS 39 to allow companies the alternative of leaving recognition of fair value for picked financial assets. Implementing the comprehensive international sample of the publicly registered IFRS banks and searched that banks implement the option of the reclassification to leave the losses of the fair value loss and finally the regulatory expenses of the intervention of the supervisory. The analyses of the associated disclosures footnote indicate that 2/3 of the reclassifying banks have not complied with accompanying requirements of IFRS7 (Frankel & Richard, 2004). Alterations in the IAS 39 permits financial instruments reclassification in particular situations. It is significant that standards of accounting move promptly to enhance and restore the confidence of the investor in the accurate direction. During the financial crisis it was observed that entities which implemented IFRS were at the disadvantage in contrast to their counterparts of US, the board formulated the changes to the IAS 39 for permitting financial assets reclassification in specific situations. While starting US GAAP and IFRS standards more in coordination, distinct scope, impairment and transition requirements intended that variations in the treatment would remain exist (Dechow, Patricia & Meulbroek, 2001).
After the starting recognition, there are 5 kinds of possible assets reclassification computed at the fair value. The real IAS 39 had permitted the reclassification out of the category of the AFS into the category of HTM. The alterations from Oct 2008, initiates 4 extra kinds of reclassifications. Since then, assets of the trading may be reclassified into the HTM, AFS and L&R category and assets of the AFS may be reclassified into the category of the L&R. It is yet not permitted for reclassification of assets for which the IAS 39 option of fair value is implemented and not possible for reclassification of the financial derivative (Schipper &Katherine, 2007). All 5 kinds of reclassifications are applicable in rare situations but they vary in their impacts of the accounting. On the whole, 3 distinct consequences on the measurement may be distinguished. First, reclassification from the trading account in L&R and HTM category impact both equity and net income, because losses and gains of fair value stop to be established in P&L and in equity. Second, reclassifications from the trading account in AFS category impact only net income not the equity because losses and gains of the fair value referred in the reserve of the revaluation as the portion of the entity equity but they are not shown in P&L. Third, reclassifications from the AFS category in HTM or L&R category impacts only equity not the net income because losses and gains of the fair value have not referred previously in the financial statements, only in the reserve of the revaluation as the part of the equity of the entity.
The Role of Accounting Standards in the GFC
It is observed that global crisis had led to the significant argument about the use of fair value in accounting .Various critics have claimed that fair value in accounting has considerably resulted to financial crisis and weakens its severity (Frankel & Richard, 2004). In several report and researches, the experts analyze these arguments and evaluate the function of the fair value in the accounting in financial crisis by implementing empirical proof and descriptive data, there is small support for arguments that fair value in accounting directs to extreme write down of the asset of the bank (Dechow, Patricia & Meulbroek, 2001).
Based upon several evaluations and the wide appraisal of empirical proof to date, it is improbable that fair value in accounting contributed to financial crisis severity in the major path, either by enhancing leverage of the banks in the period of boom or by strengthening problems of the banks in downturn (Schipper &Katherine, 2007). Whereas downward spirals and sales of asset-fire occurred throughout the crisis, there is small proof that these incidents happened as the direct consequence of fair value in accounting or that obstacles would be less rigorous under the historical cost of accounting. Banks were greatly levered throughout the boom period and dependent greatly on agreements of collateralized repurchase. But the debt amount which could be obtained by the collateralized borrowing relies on the assets market value implemented as collateral. Besides, investors could have been more concerned about banks with huge exposure of the mortgage once the obstacles in the market of mortgage were clear, still if the financial institutions had not written down the mortgage associated assets and recorded their historical cost easily (Plumlee & Marlene, 2003). Thus, investment banks, investment funds and bank holding company which dependant greatly on short period borrowing and had huge exposures of subprime would have experienced major obstacles regardless. It is very clear that less accuracy about exposures and losses would have made the situation worse. The function of the fair value in the accounting was restricted precisely because its significance for capital requirements and balance sheets of the banks was limited.
Potential Problems associated with IAS 39
It is viewed that financial crisis weakened constantly throughout 2008. Banks throughout the nation were experienced with huge fair value write-off on the trading and accessible for the sale portfolios. Whereas the similar formation must be viewed in developed market, the consequences of the accounting differed among IFRS and US –GAAP. In U.S the condition has been explained as rare situations under which the SFAS 115 provides the alternative to transfer the securities from trading or accessible for category of sale into the category of held to maturity. In comparison, banks reporting below the IFRS may not avert the fair value reporting (Hannan, Kagel & Moser, 2002). It is viewed that losses from the trading assets which may have missed the marketability throughout the crisis. IAS 39 typically needed that the entity will not reclassify the financial instrument in or out of fair value through loss or profit category as it is issued or held. It is viewed that Lehman Collapse entirely altered the political condition of IASB (Lin & Nichols, 1998). In year 2008, politicians specifically from European Union hugely enhanced the emphasis on accounting body to change IAS 39 in the way which permitted banks to minimize those losses.
The IASB’s actions to improve IAS 39 standard
The IASB clarifies that proposed altered standard is required to enhance the financial reporting by resolving the following
Complexity: This approach is the improvement to the recent model of the de recognition in the IAS 39. This proposed approach is same in various respects, it does not mix components of various de-recognition but concentrates on the single component.
Convergence: This approach is same in certain respects to the proposed alterations to the US Accounting Standard, Accounting for Servicing and Transferring of the financial asset and liabilities extinguishments (Kothari, 2001)
Market environment & requests of users— The IASB thinks that this approach shall be less difficult to apply and understand as compared to the current requirements in the IAS 39.
Divergent views — by concentrating on asset control by transferee and make the boundary if it is not clear which business entity has control, this proposed approach shows the broader aspects on substance of the transfer transaction, specially transfers comprising financial assets which are not accessible and the transferor has constant participation after transfer (Dechow, Patricia & Meulbroek, 2001).
It is viewed that IASB as the part of the response to the GFC, took a group of actions for resolving the recommendations created by the leaders of G20 in Nov 2008. Consolidation and enhanced accounting for items of off balance sheet on 18 Dec, the IASB issued proposals to enhance and strengthen the needs for searching which entity the company controls. The proposals develop portion of the IASB and comprehensive evaluation of off balance sheet actions and resolve the region quoted by the leaders of G20. The proposals reacted to the recommendations comprised in the report issued in the April 2008 by FSF (Frankel & Richard, 2004). The implementation of the special structures by the reporting entity, mainly banks to integrate securitizations and difficult financial compositions was pinpointed by G20 and FSF as the subject of concern. Few commentators have questioned whether the recent needs have resulted in all assets the entity monitors and liabilities brought in balance sheet (Mohd, 2005). Same concerns prevail that the financial statements don’t express the level to which the reporting entity is revealed to the risks from that kinds of structures. At last it can be said that the IASB’s actions are likely to have an impact on global financial stability. The IASB clarifies that proposed altered standard is required to enhance the financial reporting by resolving the following like complexity approach has been adopted by the IASB for improvement to the recent model of the de recognition in the IAS 39 and the IASB thinks that Market environment & requests of users approach shall be less difficult to apply and understand as compared to the current requirements in the IAS 39 (Zhang, 2007).
ConclusionStandards must be formed upon the foundation of the technical value not on the basis of piece meal which fails to get into consideration how the significant change could fit in comprehensive structure of the financial reporting. It is very clear that the enhancement in standards of the accounting could not prevent the global crisis but would increase the transparency and credibility of the financial reporting that would assist to gain the financial market confidence. Effective and efficient financial reporting depends upon the high quality of the accounting standards and depends upon the faithful and consistent application of the standards. The IASB shall improve its standards to get best disclosures about methodologies, valuations and risks related with the valuations. The global crisis has increased concerns which it might be complex to predict fair value in the illiquid place of the market. It is viewed that various actions have been taken by the IASB for the improvement in the IAS 30 such as complexity, convergence, Market environment & requests of users and Divergent views. The SEC examined the function of the fair value in global crisis and assumed that failures of the bank in US emerged to be outcome of developing possible credit losses, worries about quality of the asset and in various cases, eroding confidence of the investor and lender and not marking assets to the market value. This essay indicates the potential problems associated with the IAS 39 such as Lehman Collapse entirely altered the political condition of IASB. In year 2008, politicians specifically from European Union hugely enhanced the emphasis on accounting body to change IAS 39 in the way which permitted banks to minimize those losses. It can be said that the IASB’s actions are likely to have an impact on global financial stability. The IASB clarifies that proposed altered standard is required to enhance the financial reporting by resolving the following like complexity approach has been adopted by the IASB for improvement to the recent model of the de recognition in the IAS 39. At last, it can be said that the alterations in the IAS 39 permits financial instruments reclassification in particular situations. It is significant that standards of accounting move promptly to enhance and restore the confidence of the investor in the accurate direction.
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