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Accounting Standard’s Role in GFC Report

   

Added on  2020-04-07

8 Pages2069 Words86 Views
Running Head: Accounting Standard’s Role in GFCResponse to GlobalFinancial Crisis

Accounting Standard’s Role in GFC 1GLOBAL FINANCIAL CRISISA)Role of accounting standards in the Global Financial CrisisGlobal financial crisis was a huge tragedy that has affected most of the countries all over the world. The crisis was initiated in the year 2007 in the US markets. The global financial crisis is believed to be the worst event in the world’s economy. There were various reasons that caused the countries face the adverse impacts of such crisis. Accounting standards prescribed by the regulatory bodies were among the prime reasons that contributed to the occurrence of the critical incident (Kothari & Lester, 2012). The approaches followed by the accounting standard setters were considered to be inappropriate in various situations. To account for the financial instruments various methods were used and those instruments were required to be recognized at the fair value in accordance with the accounting standards and this fact became the one of the main reasons for the global financial crisis. (Laux & Leuz, 2010). At the beginning of emergence of the financial crisis in late 2007 the home loans that covered in special purpose vehicles were unable to meet their debt obligations because of sudden decrease in housing prices. As a result of which the financial institutions holding the low credit quality particularly the subordinated loans covered in the special purpose vehicles began to face huge losses. In the initial years the low quality debts had restricted market and huge demands as they were offering higher rate of returns. Consequently, the positive fair value adjustments were reported in the financial statements. However, with the increased pace of diminution in prices of the housing industry, the low quality debt market initiated disappearing leading to sudden decline in the fair values of these debt papers (Shiller, 2012).The overall impact of the subprime crisis had drastically influenced the several economies of world specially those which had purchased the poor quality debt papers. The institutions of finance had already made the securitisation of their mortgages and hence the special purpose vehicles had begun making losses ultimately leading to the financial crisis at the global level (Mishkin, 2011).International Accounting Standard Board’s (IASB) response to the Global Financial CrisisThe adverse impacts of global financial crisis together with the intense political pressures imposed the serious requirement on the IASB to make revision to its already existing accounting standards and to issue new and relevant standards to as to deal with the severity of

Accounting Standard’s Role in GFC 2the global financial crisis issues. In response to the global issue IASB has formed a Financial Crisis Advisory Group (Ait-Sahalia, 2012). The purpose of FCAG included the consideration of the process used to set the accounting standards. The directions of IFAC also included the possible improvements to be made in accounting standards. Further the group also consideredthe role of accounting standards in the global financial crisis and the adequacy of fair value accounting for the financial instruments. The FCAG has concluded that the standards of the accounting must be kept free from political interference. It was realised by the FCAG that existing accounting standards were not considering the entity’s business model. It was held by the group that the major factor that led to the crisis was the approach of legal compliances in place of adhering to the principles of those accounting standards by the reporting entities. Following actions were taken by the IASB in response to the crisis:The amendments made by IASB in the accounting standards required the disclosures of various important elements of fair value accounting. The amendment of IFRS 7 was brought in this context which required the categorisation of fair value measurement of the financial instruments. IASB also published its proposals to improve the accounting of the off balance sheet items. It also made amendments to the IAS 39 with the intention of reclassifying the financial instruments so as to ensure that the embedded derivatives are separated in the financial assets classification. IASB also attempted to bring the consistency in the accounting treatment between the generally accepted principles of accounting and the IFRS in relation to the credit linked investments. The disclosure requirement with regards to the impairment of financial assets. The IASB is continuously struggling to move rapidly to address the issues of financial reporting as were encountered by the global financial crisis. It is committed to develop the globally accepted approaches to maintain the consistency with the approaches followed in the global world (Ojo, 2010).The above mentioned actions provided the appropriate responses to the global financial crisis and the IASB has so far managed overcome the severity of the issue and thereby promoting the financial stability globally. However, looking to the complexities of world’s economy it can be said that the IASB’s responsibilities in respect of maintaining the global financial stability has not ended here. It is still required to regularly amend and introduce the relevant standards of accounting on timely basis in order to satisfy the investors and the general publicassociated with the company.B)Revision and Introduction of New Accounting Standards By IASB

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