Question

During the Global Financial Crisis of 2008/9, it was claimed that IFRS fair value accounting techniques used in corporate reports had misleading financial reality and caused the crisis.

(a) Describe those alleged problematic fair value accounting techniques and standards, and state if you agree with the criticisms and why.

(b) In the period 2009-2020, do you think IFRS fair value standards have improved? State your reasons and evidence.

Answer 1

a) International Financial Reporting Standards (IFRS) are the standards which are designed for reporting business affairs which are understandable all over the world for the purpose of establishing global accounting language. Because of unique way of reporting these standards, companies can be compared at global level... International Accounting Standards Board (IASB), is the standard-setting body of the IFRS. It was founded on 1^st April 2001 and it was the successor to the International Accounting Standards Committee..

IFRS

- IFRS are flexible in nature

- No provision for reporting extraordinary items

- It sets the standards for the first-time adoption

Advantages of using IFRS : -

1. Due to the implementation of International Financial Reporting Standards, companies would be better understood in global markets.

2. Companies will be able to tap global capital markets and may reduce their cost of capital.

3. At the international level, benchmarking would be easy

The costs are dependent on the size and nature of the business. However basic costs include staff training, IT support, implementation of International Financial Reporting Standards. Opportunity cost also has a role to play here. As of November 2008, the Securities and Exchange Commission estimated that the largest companies which adopt IFRS early experience around $32 million per company in additional costs..

b) Companies would be required to provide three new profit subtotals, including ‘operating profit’. Operating profit is commonly reported by companies but is currently not defined by IFRS Standards, making meaningful comparisons between companies difficult. The new subtotals would give better structure to the information and enable investors to compare companies...

Investors sometimes find it difficult to unpick a company’s reported information because items may be lumped together with insufficient labelling or explanations. Therefore, the Board has proposed new guidance to help companies disaggregate information in the most useful way for investors. Companies would also be required to provide better analysis of their operating expenses and to identify and explain in the notes any unusual income or expenses, using the Board’s definition of ‘unusual’. These requirements would help investors analyse companies’ earnings and forecast future cash flows.

The proposals would result in a new IFRS Standard that sets out general presentation and disclosure requirements relevant for all companies, replacing IAS 1 Presentation of Financial Statements. The Board is also proposing to amend some other IFRS Standards.

Access the Exposure Draft below. The comment letter period is open until 30 Sep 2020.. The deadline has changed to 30 September 2020 because of the covid-19 pandemic - previously it was 30 June 2020.

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