Question

During global financial crisis of 2008/9, it was claimed that IFRS fair value accounting techniques used in corporate reports had distorted financial reality and caused financial crisis. In the event of a major economic downturn in 2020 or later, do you think assets will be appropriately measured by IFRS fair value accounting standards? Explain. 400 words

Answer 1

Question:-  In the event of a major economic downturn in 2020 or later, do you think assets will be appropriately measured by IFRS fair value accounting standards?

Answer:

What is IFRS

IFRS standards are International Financial Reporting Standards (IFRS) that consist of a set of accounting rules that determine how transactions and other accounting events are required to be reported in financial statements. They are designed to maintain credibility and transparency in the financial world, which enables investors and business operators to make informed financial decisions.The purpose of IFRS is to create an accounting framework that all companies in the world can follow in order to increase comparability of companies located in different countries.

IFRS standards are issued and maintained by the International Accounting Standards Board and were created to establish a common language so that financial statements can easily be interpreted from company to company and country to country.

Explanation:

The coronavirus 2019 (COVID‑19) pandemic is affecting economic and financial markets, and virtually all industries are facing challenges associated with the economic conditions resulting from efforts to address it. For example, many entities in the travel, hospitality, leisure, and retail industries have seen sharp declines in revenues due to regulatory and organisational mandates (e.g. “shelter in place” mandates, school closures) and voluntary changes in consumer behaviour (e.g. “social distancing”).

If there is a major economic downturn, more companies will be reporting their assets at fair value simply because those who elected that practice at the beginning must continue following it and companies that have their assets at amortized cost might need to mark down to fair value due to impairment testing in an economic downturn. Therefore, it can be summarized that the risk of misleading fair value accounting is naturally lower in a major economic downturn that during a time of prosperity since fair values are lower.

As the outbreak continues to evolve, it is difficult, at this juncture, to estimate the full extent and duration of the business and economic impact.Consequently, these circumstances have presented entities with greater challenges when preparing their interim and annual IFRS financial statements.

Throughout 2020, companies will need to review all areas of the accounts that are subject to judgment and estimation uncertainty. The use of forecast information is pervasive in assessing a range of effects in addition to going concern including the impairment of financial and non‑financial assets, expected credit losses, and the recoverability of deferred tax assets.

Fair value measurements (IFRS 13 Fair Value Measurement - FVM)

A change in the fair value measurement affects the disclosures required by IFRS 13, which requires companies to disclose the valuation techniques and the inputs used in the FVM as well as the sensitivity of the valuation to changes in assumptions. Disclosures are needed to enable users to understand whether COVID-19 has been considered for the purpose of FVM. A key question is what conditions and the corresponding assumptions were known or knowable to market participants at the reporting date.