Impact of IFRS and Fair Value Accounting on Financial Crisis: Report

This report examines the impact of International Financial Reporting Standards (IFRS) on financial crises, focusing on the complexities introduced by fair value accounting. The report highlights the confusion surrounding fair value, potential legal concerns, and implementation challenges. It discusses how fair value accounting can lead to market instability, manipulation of net income, and increased taxation complexities. The analysis suggests that while fair value accounting offers advantages over historical cost accounting, its application requires careful consideration and simplification to prevent market depreciation and financial crises. The report concludes that both companies and authorities share responsibility for ensuring the stability of the financial market and the need for consistent application of IFRS to mitigate the risk of financial turmoil. This report is a valuable resource for students seeking to understand the implications of IFRS in the financial world.

Accounting
Assignment

Prepared By
Student Name:
Date: 20th January 2019
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Abstract
Financial crisis is a situation which affects the growth of the companies. In recent times there
have been many such situations and many authorities feel that the adaptation of IFRS is highly
responsible for such a situation. IFRS are a set of accounting standards and policies that aims to
attain uniformity in the accounts of the companies around the globe. But it is said that such
changes have made severe impact on the growth of the companies as due to complexity involved
there have been major failures that have led to a financial crisis like situation. In the given
assignment the same has been discussed and highlighted.
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Table of Contents
Introduction.................................................................................................................... 4
Main Body..................................................................................................................... 5
Current requirements of IFRS that has contributed to the financial crisis-........................................5
Conclusion..................................................................................................................... 6
References..................................................................................................................... 7
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Introduction
Financial crisis can be defined as a situation in which the companies suffer major economic
losses as we see that a major part of the assets of the companies loses their overall economic
value. Many reasons contribute to such situations like the fall in the overall GDP, scams and
economic challenges and recession being the biggest reason of such economic challenges. There
have been many theories that have been developed to deal with such financial crisis and take
decisions accordingly (Vieira, et al., 2017).But still there are reasons, because of which such
financial crises keep happening. It is one of the greatest economic disasters that can occur and
has led to lose of income around the world and many companies have gone bankrupt because of
the same. In the recent times, the authorities are fearing that similar situation of financial crisis
might occur again and recently a huge financial turmoil has occurred, and the authorities fear that
the biggest reason behind the same is the method of fair value accounting of IFRS. IFRS seems
to have its own share of pros and cons and that has been discussed in this assignment in brief.
IFRS are standards that have been issued by the IFRS board so that there is uniformity in the
business language that is used all over the globe with respect to the accounts of the company and
the way they are prepared. This will help in making it easy to compare among the different
companies as uniformity in the books would be maintained. It aims to reduce the complexity and
make it easier for companies that operates across the international boundaries. It has become
mandate for the companies to apply IFRS to prepare their books of accounts in many countries.
IFRS requires use of fair value accounting to value many its assets and disclosures regarding the
same should be there in the annual reports of the company, so that users have knowledge about
the same (Boghossian, 2017). It is said that this adoption of fair value accounting has led to lot of
difficulties in preparation of the financial statements and have been the reason of the latest
financial turmoil that the companies around the globe are suffering from. Few of the reasons
behind the same has been discussed in brief below-
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Main Body
Current requirements of IFRS that has contributed to the financial crisis-
In case of use of fair value accounting as the basis of valuation of the assets of the companies
there are few issues that the authorities have identified-
 Fair value accounting has been in operation before IFRS came into the picture, but with
the new IFRS standards, the companies are having a lot of confusion on this matter on
what is new and different about this fair value accounting, and thus this increases the
overall complexity in the adoption of the same (Kaufmann, 2017).
 There are a lot of legal concerns on applying the formula of marking to market or using
the pure form of fair value accounting in the specific times of financial crisis, it is not
completely clear that these problems apply to Fair value accounting that have been
adopted by the IFRS or the US GAAP.
 There are lot of issues that are associated with historical cost of accounting hence that is
not a solution to the issues that the companies are facing with the issues of IFRS and
FVA. There are large number of concerns with respect to that and that can be bigger than
the use of fair value accounting as it fails to show the correct position of the financial
status of the company through the valuation of its books of account.
 There are high chances that more than fair value accounting methods being wrong in their
overall terms and policies, there are chances that there are implementation issues that are
associated with them (Knechel & Salterio, 2016). Implementation issues are due to the
complexities involved and given the fact that companies are not so trained that they can
easily apply such standards, they need to have proper knowledge with respect to that for
that to be properly applied.
 There are potential issues with the way accounting is done in countries across, as they
have different methods based on which they are making their valuation and then
switching to IFRS is not an easy task to be done and this requires a lot of time and
understanding and this may be the situation because of the overall under ability of the
authorities in applying the standards easily and implementing the same across the nations
(Charles H, et al., 2015). The companies also find it difficult to completely switch from
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historical method of accounting to fair value of accounting suddenly and thus they suffer
from such downfall. So, it cannot be said that the companies are at fault or the IFRS is
not correct enough.
 The adoption of fair value of accounting can affect a market very adversely. For example,
if there is a revaluation of the asset based on the downward price of the market, it will
end up causing an increase in the overall selling of the asset at a price that is more
depressing than the already value. If the valuation is done with the use of fair value of
accounting the companies will never value, the product at such low prices to sale it off
again at a very low price again. In case there is no selling pressure the overall market will
stabilize with time and help in maintaining the value of the asset overall (Cundill, et al.,
2017).
 It can also lead to a lot of scams, as we see that it can help the companies in manipulating
its overall net income. The management can take advantage of the loophole in the fair
value method of accounting and take decisions based on that. The can use the gain or loss
from the sale of the assets to show the overall net income at increased or decreased price
for an asset or liability that is reported in their books of account (Pamela & Tamara,
2013).
 It can also lead to increased work in terms to more taxation complexities both for the
company and the authorities and in case they fail to do this correctly, it can lead to a high
chance of market depreciation and market downfall, and thus they are said to the major
reasons of the recent financial crisis that companies around the globe are experiencing.
Conclusion
Based on the overall analysis it can be said that companies are suffering from such financial
crisis because of the complexities that are associated with the use of fair value of accounting and
the way the market diggers leading to a depression that lead to a financial crisis. The companies
can also be blamed for the same as they are trying to use the loopholes in the policy to make
unnecessary profits and gains that will not lead to correct valuation and ultimately will lead to a
scam like situations. Thus, it is important that companies should also try to understand the
process and then apply it correctly so that overall consistency is maintained. It can also be seen
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that authorities should also provide more simplification in the policies so that undue advantage of
the same cannot be undertaken. The onus to make sure that such situation of financial crisis does
not occur falls both on the companies and the authorities and the government should try to
handle the same so that overall stability is maintained. Fair value accounting as a method is far
better than historical method of accounting and thus care must be taken that current valuation is
done and the overall market remain stable that in case of financial crisis is not established.
References
Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic
responsibility. Educational Philosophy and Theory, 50(3), pp. 244-253.
Charles H, C., Giovanna, M., Dennis M, P. & Robin W, R., 2015. CSR disclosure: the
more things change…?. Accounting, Auditing & Accountability Journal, 28(1), pp. 14-
35.
Cundill, G., Smart, P. & Wilson, H., 2017. Non‐financial Shareholder Activism: A
Process Model for Influencing Corporate Environmental and Social Performance.
International Journal of Management Reviews, 20(2), pp. 606-626.
Kaufmann, W., 2017. The Problem of Regulatory Unreasonableness. First ed. New
York: Routledge.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York:
Routledge.
Pamela, K. & Tamara, Z., 2013. Attaining legitimacy by employee information in
annual reports. Accounting, Auditing & Accountability Journal, 26(7), pp. 1072-1106.
Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance
Management Systems. SAGE Journals, 30(1), pp. 23-48.
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