The International Accounting Standards Board has quickly taken the centre stage concerning Europe and many other countries as being the premier standard-setting body in charge of establishing the International Financial Reporting Standards. These have been regarded as principle-based and effective, providing quality and ensuring a reliable accounting language for companies.
This has been supplemented by cooperation with FASB and initiatives to bring the US GAAP in line with IFRS over some years which bears testament to the remarkable use of the IFRS. A good example of this was the case of Enron in the US which was able to “cook the books” to make the figures look attractive whereas many argued that it would have been significantly more difficult in the principle-based IFRS. However, the recent financial crisis has served to question the role of the standard-setting body.
With the world being engulfed in one of the biggest financial crises ever seen, most pointed to the mortgage market as the principal contributor to this end. However, many are now questioning the wisdom of the standard-setting bodies concerning some of their rules. These center a lot on off-balance sheet items and the concept of fair value accounting which allows a lot to be put on the balance sheet in less liquid times (WebCPA 2009). In the wake of much political pressure to adopt the IFRS, some in the EU are even pushing for scrapping the rules and taking up individual reporting. The IASB has taken measures to restore confidence which is of great need in times.
The IASB came out with draft guidance to deal with the issue of fair value measurement in financial reporting. This seeks to provide a unified definition of the term “fair value” and guidance on this to be applied in the case of inactive markets when fair value measurement becomes more difficult as well as controversial (WebCPA 2009). There was a need for the boards to come out in greater unison and make the necessary changes that would reflect on the investors as providing greater confidence in the statements that are released by companies.
This has been done by the IASB as their draft incorporates suggestions regarding fair value measurement as meted out by the FASB as well as the report published in 2008 by the IASB’s advisory panel regarding fair value measurement in illiquid markets. It is furthermore consistent with the recommendations of the G-20 leaders (Web CPA 2009).
This shows a crucial role to be played by standard-setting bodies such as the IASB. They need to come out in unison in times of economic crisis to give a combined front on which to base mediatory measures. As the economic crisis hurt the credibility of some of the standards such as IAS 29 and thereby the decision-making ability of business and investment users, this combined front is necessary to restore confidence in the accounting language the standard-setting bodies lay down (Sigrid 2009).
Furthermore, by taking measures on standards that have been seen to be at the bottom of the economic collapse, it creates an aura in the markets that the damaging part has been addressed. In the case of the current financial crisis, the standards for valuing illiquid assets like mortgage-backed securities and collateralized debt obligations led many to believe that the rules of the IASB have exacerbated the financial crisis (Rehman 2009).
This is a prestigious unit comprising some very influential and senior names from a variety of industries such as banking and insurance. The FCAG has been considering how improvements to financial reporting may help to enhance investor confidence in the financial markets. It further seeks to identify and provide input and advice on, significant accounting issues that require the boards’ immediate attention or consideration in the long term. There is a strong need to go over the regulations to make sure they are not too prescriptive which could backfire in times of crisis as has recently been illustrated (Zwaniecki 2008).
One of the beneficial effects of the financial crisis concerning the field of financial reporting has been the rise of awareness among the international community of experts and politicians relevant to the financial markets regarding the need to reform accounting regulations (Mathiason 2009). Some standards had been challenged for a long time and the conceptual basis behind other measures has been questioned but could not be addressed on account of lobbying by other groups. One such feature was fair value measurement which was vociferously backed by many companies from different industries until it resulted in adverse consequences.
Now that a financial crisis has struck, the time may be ripe for standard-setting bodies to address other measures as well and make the lobbyists cave in on other financial reporting rules. One such area mentioned in the article relates to the treatment of leasing (Williams 2008). This has been manipulated to keep billions of dollars in aircraft, fixed assets and rolling stock off the balance sheet whereas the concept dictates that it shouldn’t. A change in the standard may be better to bring about now than at any other time which is an opportunity presented to standard-setting bodies like IASB which should not be allowed to pass.
Thus we can see that standard setting is very effective by IASB and other standard-setting bodies in times of economic crisis. It has helped to restore some level of confidence among the investors, for example through dealing with the fair value measurement problem. It had been a long-existing one and the IASB has now approached the issue by providing a more clear definition of fair value and providing guidelines for its dealing in illiquid markets.
The economic crisis has also opened the gate for more emphasis on other rules experts have been critical about such as those relating to leasing. Off-balance sheets item will be directly addressed as well making the users of the statements put greater trust in the financial statements as true representations of the state of a business, allowing them to make more informed decisions and hopefully get involved in the market again.
Finally, the economic crisis has been seen to bring together different bodies to bridge differences and provide a united front which is good from many perspectives. In this case, the IASB and FASB have accepted their responsibility through the creation of the FCAG which advises on more standard-setting to tackle the problems that are being faced as well as analyze the roles of the standards in aggravating the problem of the financial crisis. Seeing that investor confidence is on the way up again and markets seem to be recovering a bit, it is safe to emphasize that these measures are working and that standard-setting does have a positive effect in times of financial uncertainty.
ACCA Global, (2009). How should the EU respond to the financial crisis?. Web.
Mathiason, Nick (2009). Accounting board could lose power to set rules. Web.
Rehman, Atiar (2009). The Role of Iasb and Fasb on the Global Financial Crisis. Web.
Sigrid (2009). Fair Value Accounting in Retreat?. Web.
Webcpa, (2009). IASB Tries to Simplify Fair Value Measurement. Web.
Williams, Peter (2008). Accountants and the crisis: standard setters – troubled waters. Web.
Zwaniecki, Andrzej (2008). Large Economies Move to Get at Roots of Financial Crisis. Web.