RECOGNITION AND MEASUREMENT The impact of the global financial crisis on IAS 39 (Financial instruments Recognition and Measurement) The financial crisis of the late 2000s resulted in the collapse of many large financial institutions, the bailout of banks by national governments and downturns in world stock markets Among the scapegoats blamed for the crisis was fair value accounting rules The argument was that companies were forced by fair value accounting to write down their assets to what they hoped was temporarily irrational prices These write downs supposedly exacerbated market downturns Possibly in response to these arguments and to threats by the European Union to over ride international accounting standards, the International Accounting Standards Board changed its rules in IAS 39 on balance sheet classifications so that companies could shift many of their financial assets out of categories where fair value accounting was required This meant a company holding 'dodgy' bonds could delay recognition of future losses on those bonds by simply changing their category on the balance sheet Such an action is possible because the changes to IAS 39 meant that financial assets could be classified four ways as fair value through profit or loss as available for sale as held to maturity and as loans and receivables The first two classifications require financial assets to be marked to market, with those classified as the first category requiring changes in value to go through the income statement, while changes in value for those classified as available for sale would not impact on the income statement The other classifications allow companies to avoid using fair values on the balance sheet In 2009, the Financial Accounting Standards Board also changed its comparable standard to allow companies to keep losses on impaired financial instruments out of net income QUESTIONS 1 Suppose you are a company holding large quantities of financial instruments the market value of which had declined markedly since purchase How would you classify those instruments and why 2 Compared to the pre change IAS39, what are the likely impacts of the changes to IAS39 on balance sheet values of companies holding large amounts of financial instruments 3 Will companies with large holdings of dodgy financial instruments be motivated to disclose information about those instruments Give reasons for your answer 4 What types of companies are likely to be affected greatly by the changes to IAS39 5 How would the changes impact the truthfulness of financial reporting 6 How do the changes impact on the comparability of financial statements 7 Would you expect the 'market' to look through the changes How can you empirically verify your answer 8 Argue whether the changes to IAS39 represent a form of sanctioned earnings management

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RECOGNITION AND MEASUREMENT  The impact of the global financial crisis on IAS 39 (Financial instruments  Recognition and Measurement)  The financial crisis of the late 2000s resulted in the collapse of many large financial institutions, the bailout of banks by national governments and downturns in world stock markets  Among the scapegoats blamed for the crisis was fair value accounting rules  The argument was that companies were forced by fair value accounting to write down their assets to what they hoped was temporarily irrational prices  These write downs supposedly exacerbated market downturns  Possibly in response to these arguments and to threats by the European Union to over  ride international accounting standards, the International Accounting Standards Board changed its rules in IAS 39 on balance sheet classifications so that companies could shift many of their financial assets out of categories where fair value accounting was required  This meant a company holding 'dodgy' bonds could delay recognition of future losses on those bonds by simply changing their category on the balance sheet  Such an action is possible because the changes to IAS 39 meant that financial assets could be classified four ways  as fair value through profit or loss  as available for sale  as held to maturity  and as loans and receivables  The first two classifications require financial assets to be marked to market, with those classified as the first category requiring changes in value to go through the income statement, while changes in value for those classified as available for sale would not impact on the income statement  The other classifications allow companies to avoid using fair values on the balance sheet  In 2009, the Financial Accounting Standards Board also changed its comparable standard to allow companies to keep losses on impaired financial instruments out of net income  QUESTIONS 1 Suppose you are a company holding large quantities of financial instruments the market value of which had declined markedly since purchase  How would you classify those instruments and why  2 Compared to the pre change IAS39, what are the likely impacts of the changes to IAS39 on balance sheet values of companies holding large amounts of financial instruments  3 Will companies with large holdings of dodgy financial instruments be motivated to disclose information about those instruments  Give reasons for your answer  4 What types of companies are likely to be affected greatly by the changes to IAS39  5 How would the changes impact the truthfulness of financial reporting  6 How do the changes impact on the comparability of financial statements  7 Would you expect the 'market' to look through the changes  How can you empirically verify your answer  8 Argue whether the changes to IAS39 represent a form of sanctioned earnings management

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RECOGNITION AND MEASUREMENT: The impact of the global financial crisis on IAS 39 (Financial instruments: Recognition and

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