The fourth quarter of 2008 witnessed a stock market crisis without precedent, perhaps the most violent ever known in the history of capitalism, as its aftereffects rippled throughout world economy. The implosion of the ‘sub-prime' mortgage market in the US caused major stock market crashes and the collapse of banking behemoths like Lehman Brothers, Bear Stearns and AIG, which until then had been considered as “solid”. As every crisis requires scapegoats, the banking crisis has been put back on the front of the stage and the extensive debates now rage regarding the critical updated international accounting system of IFRS set up in 2005 by the IASB, including the fragility of the concept "fair-value" governed by IAS 39 which calls for an assessment of the trading portfolio of banks to the "brand to market" market value which led to the deepening of the crisis.
It would have worsened the financial crisis, partly due to the evaluation of the loan portfolios to the market value by "pro-cyclical" instrument which is sensitive to conditions. Critics have also brought about the inability to measure financial instruments when markets become illiquid. For some, this standard should be abolished purely for the benefit of historical cost. Others, however argue that it is not "making the temperature rise [1]” and that one can not accuse the concept of fair value alone of being at the root of all evil. While IAS 39 has aggravated an already dire situation, it is mainly the lack of economic regulation and the poor risk management that are responsible for this situation. Thus, may we conclude that the financial crisis a perverse demonstration of the use of fair value, particularly in bank accounts?
In the first part, we will try to explain the origins of the economic crisis whose source was the allocation of mortgage loans to borrowers "at risk" and the securitization of the receivables transforming these complex financial instruments. The new IFRS requires accounting for certain financial assets at fair value. Therefore, we will look into this concept of fair value and the traditional principles it faces. This will allow us to assess its real role in contributing to worsen an already fragile economic situation. Finally, we will analyze the answers given by the IASB to remedy the shortcomings of the fair value.
Tags: IFRS, financial crisis, role of IFRS in the financial crisis
[...] The fault therefore also lies with other risky and destabilizing mechanisms that have been introduced in the system such as poor risk management, a shift of financial practices helped by the very complex standard accentuating the effects of changes in market value . Can the rule changes advocated by the IASB be enough to restore confidence in the market? Only time will tell. Bibliography Ø Elisabeth Combes Thuelin “Financial market development and evaluation of bank assets: historical cost vs. fair value, the example of securitization. [...]
[...] Bordenave emphasize that this standard provides "transparency and discipline" Fair value is an essential tool for investor information; its purpose is to ensure transparency and to describe the reality of the market Contrary to what is described today, this concept is effective in reducing the volatility of the valuation of companies by providing a true and fair society.The crisis of the 1990s in Japan would have not been extended had not distressed assets remained significant hidden in bank balance sheets, as stated at historical cost. [...]
[...] Thus, the risks were diluted in the stock market and purchased by players eager to return but at the cost of risk A liquidity crisis The problem is the economic downturn that led to a decline in the value of these securities activated at a time when the IAS 39 requires to assess the financial assets at fair value or market value. The fear generated by these risk products led to a crisis of confidence leading to stock market panic. [...]
[...] Meunier, "IFRS in the market turmoil", in French accounting, No March 23-27 2009.pp Robert Obert, "Is IFRS the cause of the financial crisis? "Journal of Accounting French No November 2008, PP 43-45 JC. Rochet, "Procyclicality of financial systems: is it necessary to change the accounting rules and regulations now?" Banque de France, Financial Stability Review No October 2008. "Evaluation of financial assets at fair value in inactive markets", Accounting RF, November 2008, No D. Tweedie, "Bringing transparency in financial reporting: towards an improved accounting framework after the credit crisis," Banque de France, Financial Stability Review No Valuation and financial stability, in October 2008. [...]
[...] The second feature of the Anglo-Saxon accounting is the recognition at fair value which opposes the precautionary principle dominant in the Continental model as we have seen previously.This concept became "model" of evaluation in 1998 with the standards on financial instruments and their application becoming mandatory. In 1984, the standard (SFAS 80) already indicated that the change in market value of a contract for "future" should be recorded as a gain or loss in the income statement. To summarize this part, we can make the comparison chart below: Models Anglo-Saxon Continental Investors Address the need for information Intended of a set of stakeholders, user ð Shareholder including creditors, suppliers, Vision state tax . [...]
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