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(DOC) Financial Accounting Assignment

   

Added on  2020-03-16

7 Pages2130 Words37 Views
Running head: FINANCIAL ACCOUNTINGFinancial AccountingName of the StudentName of the UniversityAuthor’s Note

1FINANCIAL ACCOUNTINGIntroductionGlobal Financial Crisis (GFC) refers to the financial crisis of 2007-2008 that majorlyaffected the financial condition of the countries all over the world. For this reason, most of theeconomists all over the world consider GFC as the world financial crisis after the greatdepression of 1930 (Frankel & Saravelos, 2012). The beginning of GFC could be seen from thefall of the United States mortgage market. The GFC contributed to the development of majordebates about the use of Fair Value accounting as this accounting process has been heldresponsible for the root cause of GFC (Chor & Manova, 2012). The aim of this report is todiscover the role of accounting in GFC and the actions of various financial authorities towardsthe solution of GFC.Part AFrom the above discussion, it can be seen that fair value accounting process had a majorcontribution towards the GFC. On an overall basis, it can be seen that the accounting standardshad major contributions towards the happening of GFC. At the prior period of Global FinancialCrisis, with the help of special purpose, the banks scrutinized their loans and they sold them onthe capital market. The banks took this step in order to maximize their profitability. At that time,the process of fair value accounting was developed based on the current accounting practice andrequirements. The year of 2008 was considered as the year of prosperity for the United Statemarket and at that time, wealth was considered as one of the major prosperity (Kothari & Lester,2012). However, it has been seen that at that time, the companies used to generate wealth withthe help of poor lending practice and poor accounting regulatory practices. However, theaccounting standards at that time could not enable the financial institutions to record the inflatedrevenues related to the home loans. It has been seen that the use of fair value accounting allowthe banks to increase their financial leverage at the time of financial boom and later, this reasonmade the financial statements of those banks more vulnerable. Thus, this whole processcontributed to the development of the Global Financial Crisis of 2007-2008. Thus, from theabove discussion, it can be seen that the accounting standards and policies played a huge role inthe manipulation of financial statements of the banks regarding the home loans. Later in the year,the companies started to blame the accountants of the companies to manipulate the financial

2FINANCIAL ACCOUNTINGstatements and it can be considered as the beginning of Global Financial Crisis. As the results,people of America started to consume less, the companies started to lay off the employees thatled to major unemployment. From the above analysis, it can be seen that the accountingstandards were majorly responsible for Global Financial Crisis.In response to the Global Financial Crisis, the International Accounting Standard Boardhas taken some actions to avoid this kind of issue further. They are mentioned below:IASB has taken initiative for the improvements of off balance sheet items. On a moreprecise note, IASB has published some specific proposals in order to improve andstrengthen the requirements to identify the control entities.IASB and US Financial Accounting Standard Board have taken joint initiative to includenew disclosure requirements regarding impairments in order to come to the commonoutcomes (Mala & Chand, 2012).Both IASB and FASB have taken joint initiatives for the addressing of braider accountingissues of impairments on a global basis.IASB has also taken step to ensure the fact about treating the credit-linked investmentsbetween the principles of IASB and Generally Accepted Accounting Principles (GAAP).IASB has also ensures that embedded derivatives are assessed for the reclassification offinancial assets (Mala & Chand, 2012).From the above-discussion, it can be seen that IASB has taken some of the major steps inresponse to the Global Economic Crisis. In this process, IASB has also has also madecoordination with US Financial Accounting Standard Board. All these steps have utmostimportance in avoiding the further occurrence of Global Economic Crisis. As per the earlierdiscussions, it can be seen that accounting standards were majorly responsible for the occurrenceof Global Financial Crisis. In this situation, it needs to be mentioned that the steps undertaken byIASB will be able to diminish the loopholes in accounting standards. In addition, there are someof the provisions of IASB that will make sure that this type of financial crisis never happen in thefuture (Erkens, Hung & Matos, 2012).

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