This research focuses on analyzing about the impact of just value accounting on the recent fiscal crisis during 2006 and 2011. After analysing and measuring different arguments over clip sing the pros and cons of just value the research tried to understand the disparity between the two ideas and acknowledge with the aid of literature if just value accounting did so impact the recession. By analyzing eight fiscal establishments around the universe and understanding the execution of just value in their fiscal statements and comparing the displacements in their assets, liabilities, net incomes and losingss the survey aimed to deduce the consequence just value accounting had on their efficiency and if it caused jobs for the establishments wellbeing. The research showed that the just value accounting did hold a partial consequence on the statistics of the fiscal establishments but this was limited to the earnestness the organisation implemented just value and its geographical location.
Chapter 1: Introduction
Lhaopadchan ( 2010 ) asserts that a displacement in accounting criterions occurred during the last 10 old ages whereby organisations around the universe started to value their assets on the bases of just value instead than historical value. Fair value denotes the coverage of fixed assets on its current market monetary value instead than valuing the plus when it was purchased. Lhaopadchan ( 2010 ) further suggests that the execution of just value costing has become increasing celebrated in accounting criterions around the universe as most houses now wish to maximise their plus value when it is being traded in the liquid market. Barth and Landsman ( 1995 ) province that in this epoch fixed assets are n’t the lone assets that tend to derive hard currency influxs for houses but the range of intangible assets such as good will has created great sale monetary value maximization chances for organisations wishing to merchandise their assets. This chapter aims to analyse the reviews of historical cost accounting and place how just value accounting system was developed to get the better of costing jobs for organisations.
Application of Fair Value Accounting over Historical Cost Accounting
Critics of just value accounting argue that it has been one of the major factors that triggered the fiscal crisis and failed to supply investors with utile information on plus values, particularly on assets of fiscal establishments, to investors which finally led to the prostration of the lodging market and debut of alien and complex fiscal instruments.
On the other manus, its protagonists believe that is has been the victim of the recent fiscal crisis ( Jaggi, Winder & A ; Lee, 2010 ) . The chief allegations are that just value leads to excessive write downs in flops. The write downs due to falling monetary values deplete bank capital and set off a downward spiral, as Bankss are forced to sell assets at “ fire sale ” monetary values, which in bend can take to contagious disease as monetary values from plus fire gross revenues of one bank become relevant for other Bankss. These statements are frequently taken at face value, but grounds on jobs created by just value accounting is seldom provided ( Laux and Leuz, 2010 ) .
Background Research: Historical Cost Accounting
Before the coming of just value accounting system organisations used the historical cost attack for the rating of their assets for the completion of their fiscal statements. Elena ( 2008 ) discussed the application of historical cost accounting prior to the 1980 ‘s and stated that this accounting attack was used to value assets and liabilities whereby the assets were recorded at the sum of hard currency or hard currency equivalents paid or the just value of the consideration given to get them at the clip of their acquisition whereas the liabilities were recorded at the sum of returns received in exchange for the duty, or on some circumstance at the sums of hard currency or hard currency equivalents expected to be paid to fulfill the liability in the normal class of concern ( Elena, 2008 ) .
Oncioi ( 2012 ) talked about the disadvantages of utilizing the historical cost history method saying that the method took into history the acquisition value therefore it was impossible to specify its relevancy every bit good as any displacement in chances that related to the current life of the plus. As the plus did non reflect the current economic benefits every bit good as the clip constituent it was impossible for houses to specify the assets bing worth to the organisation and any benefits incurred by keeping it.
Diana and Ighian ( 2009 ) further argued that one time an plus entered the company, the value of that plus was taken as the historical cost and so recorded in the accounting books. This accounting method besides leads to the undervaluation of the organisations assets as it does non take into history any important alterations in the market monetary values.
Historical cost accounting was ab initio questioned at the clip of rising prices where inaccurate values were reflected of the existent state of affairs. These inaccurate values were the under valuated assets which reflected the overvalued net incomes. Hence the public presentation of the company in such instances can non be assessed accurately with the configured irrelevant information ( Cascini & A ; Delfavero, 2011 ) .
Meaning of Fair Value Accounting
Ryan ( 2008 ) states that just value accounting attack is a fiscal coverage system adopted by organisations around the universe in which houses report their existing assets and liabilities on the prevailing established monetary values in the economic system and so acknowledge the likely monetary value they would have if they either sold the plus or paid the liability. Furthermore IASB ( 2006 ) studies that the the term just value seemed to be introduced by the accounting criterion compositors in the U.S followed by its acceptance in the U.K and defines just value accounting as “ the sum for which an plus could be exchanged, a liability settled, or an equity instrument granted could be exchanged between knowing and willing parties in an arm ‘s length dealing ” .
Comparing Historical Cost Accounting and Fair Value Accounting
Emerson et Al ( 2010 ) provides four grounds for why just value accounting is better in many ways than historical accounting. First they say that over clip, historical values do non denominate the right monetary values of the plus therefore it becomes immaterial when measuring an entity ‘s current fiscal place. Furthermore they argue that in the eyes of an economic expert carnival values reflect true economic substance of the plus and liability. Third the just value accounting system studies economic income. It delivers a solution faced by comptroller when mensurating net assets as a alteration in the just value of net assets yields income in the balance sheet. Finally, just value accounting is an impartial step which remains consistent over clip across entities.
Fair value is used as an option to historical cost accounting for the same plus or liability but at different times. It is fundamentally established from historical accounting to a fresh start accounting wherein the assets are valued at their replacing cost, with the unfulfilled additions and losingss recorded in the income statement therefore turn outing it to be a better index of the hereafter as it would supply a greater impact on the net incomes of the house than supplying undependable information by sing merely the cost of the plus. It is treated the same manner when the issue value of the plus is calculated, the value being different from its historical or cost monetary value. If historical monetary value is taken into history, the investors would construe false information on the house ‘s profitableness ( Penman, 2007 )
Penman ( 2007 ) further continues his research by stating that the pick to utilize either just value accounting or historical accounting depends on the users of the fiscal studies. Stockholders of an entity prefer the just value accounting attack as they would cognize the true value of the stock but on the other manus bankers would describe sedimentations of clients at a value lesser than the just value in order to guarantee their clients are happy and would prolong with their bank.
Harmonizing to Trussel and Rose ( 2009 ) , just value accounting is to be used for claims that are short term, liquid and junior while historical cost for claims that are long term, illiquid and senior. Nowadays it is seen that just values are reported as footers on the fiscal study in order to supply a true statement which provides relevant and dependable information to the users, nevertheless, one can non merely concentrate on the manner the investors would wish to see their company ‘s fiscal study. Companies need to follow some kind of uniformity in fixing fiscal studies that would be compatible and would pattern the bing criterions set by the FASB & A ; the IASB.
Differences in the Concepts of Fair Value Accounting Harmonizing to IASB and FASB Regulations – U.S Perspective
IFRS differs from the U.S. GAAP with respect to the constructs of just value accounting. While the IFRS reflects the exchange between a willing purchaser and marketer in its definition, the U.S. GAAP confides its definition to the issue value attack, therefore taking into consideration merely the merchandising monetary value of the plus. While the IFRS takes into history damage charges, reappraisals of assets and liabilities and write ups ; this grade of flexibleness is non found in the U.S. GAAP ( Graziano & A ; Heffes, 2008 ) .
Graziano and Heffes ( 2008 ) further asserts that companies following IFRS usage carnival values to mensurate assets/liabilities on their initial acknowledgment at the balance sheet day of the month and to enter damages. The IFRS requires companies to utilize just value accounting to mensurate derived functions, equity investings ; defined benefit program assets, other fiscal assets held for trading, some biological assets and the list goes on. Under IFRS, loans and progresss are measured at amortized cost theoretical account and non utilizing just value as damage charges are hard to gauge.
Fair value accounting theoretical account is said to convey approximately high net incomes to the company if the economic system is booming and frailty versa. During the economic downswing capital is destroyed which consequences in inordinate write downs which in bend leads to plus gross revenues that leads to more falling monetary values. This is one of the grounds for which the U.S GAAP wanted to meet with the IASB because of the IAS 39 which excluded certain fiscal instruments from just value accounting. Some of the accounting criterions are amended due to political force per unit area in order to run into the economic aim of the country/state ( Olsen and Weilrich, 2010 ) .
While companies await the fiscal criterions to meet with IFRS, Holthausen ( 2009 ) argues that even if the criterions go unvarying throughout the universe, yet the studies would non be comparable because of the different market conditions and economic factors predominating in different economic systems.
1.2 Research Aims
The research aim for this survey is to understand the “ Impact of Fair Value Accounting after the Financial Crisis of 2007 ” . The basic purpose behind this research is to foremost place old literature that defines the range of just value accounting and any statements prevalent about its execution and version. Apart from that the research will take to analyze fiscal statements of eight fiscal establishments in order to see what has changed after the fiscal crisis based on the just value accounting attack. The whole survey will go around around how the recognition crunch affected houses around the universe and the impact of just value accounting methods on their fiscal appraisals.
1.3. Motivation of the Research
Prior to the coming of the planetary fiscal crisis, it was normally agreed that just value accounting would go the method to mensurate fiscal assets ( Fiechter, 2011 ) . Critics of just value accounting argue that it has been one of the major factors that triggered the fiscal crisis and failed to supply investors with utile information on plus values, particularly on assets of fiscal establishments, to investors which finally led to the prostration of the lodging market and debut of alien and complex fiscal instruments. On the other manus, its protagonists believe that is has been the victim of the recent fiscal crisis ( Jaggi et. Al, 2010 ) .
The chief allegations are that just value leads to excessive write downs in flops. The write downs due to falling monetary values deplete bank capital and set off a downward spiral, as Bankss are forced to sell assets at “ fire sale ” monetary values, which in bend can take to contagious disease as monetary values from plus fire gross revenues of one bank become relevant for other Bankss. These statements are frequently taken at face value, but grounds on jobs created by just value accounting is seldom provided ( Laux and Leuz, 2010 ) .
In this research, a reappraisal on the assorted arguments with respect to fair value accounting on the fiscal crisis have been analysed so as to place the function of just value accounting on the fiscal crisis. The just value attack is believed to be more relevant than historical cost accounting and to better the entities fiscal coverage ( Allen and Carleti, 2008 ) .
Significance of the Research
This research is likely to profit research workers who would desire to heighten their cognition on the impact of just value accounting over the old ages. The findings that were discovered in this survey was foremost, the attack to fair value accounting differed with the accounting criterions adopted by different states. Second, the alterations with respect to fair value accounting after the fiscal crisis was adopted by most of the states in a similar mode and it is besides seen that companies are now expecting the convergence of the IASB and the FASB in order to follow similar attack in describing financials of the company.
Structure of the Research
The 2nd chapter provides a reappraisal on the arguments with respect to fair value accounting and its impact on the fiscal crisis has besides been analysed in order to acquire a general overview of the research subject. The 3rd chapter focuses on the research methodological analysis wherein the attack followed in carry oning the analysis has been put away. The 4th chapter discusses the analysis on the eight Bankss that have been researched upon on the footing of just value accounting, before and after the fiscal crisis. Last, the thesis will incorporate a decision that discusses alterations that can be implemented to the just value accounting attack in order to supply a better coverage system.
Chapter 2: Literature Reappraisal
This chapter delivers a comprehensive survey on the impact of just value accounting in the class of the fiscal crisis. The intent of this chapter is to analyze literature that shows the impact just value accounting had on the fiscal crisis and farther more discuss the usage of just value accounting in fiscal coverage. The criterions that have fashioned the base of just value accounting and the alterations executed by the criterion compositors have besides been deliberated in order to see how just value accounting has advanced over the old ages.
The first subdivision in this chapter concentrates on the development of just value accounting and its patterned advance over the old ages. The 2nd subdivision so argues against and for just value accounting. Following this subdivision, an assessment of just value accounting on the latest fiscal crisis is provided so as to grok the concerns with just value accounting that directed to the crisis and an analysis of the changes that have been executed after the fiscal crisis is besides undertaken. After this, the following subdivision discusses the jobs sing IAS39 have been assessed and the alterations that were made after the fiscal crisis have correspondingly been indicated. With the establishment of IFRS 9 in 2009, the amendment IAS39 has brought about has likewise been conferred so as to measure the betterments of this criterion after the crisis.
The accounting for fiscal assets and liabilities is a complex issue that has been germinating towards the usage of just value. Both FASB and IASB provide the option of utilizing just value accounting in describing fiscal assets and liabilities and certain other points. This move is non without any contention. Many have estimated as it is seen in the old chapter that the usage of just value accounting as opposed to historical cost accounting, has helped do the convulsion in fiscal markets ( Trussel and Rose, 2009 ) . Research indicates that the sole usage of one accounting method may non be efficient for fiscal establishments which are discussed in the subdivision ‘issues on just value accounting on the fiscal crises ‘ .
Development of Fair Value Accounting
In this subdivision the development of just value accounting from the historical accounting attack has been appraised, besides its enlargement over the old ages has besides been acknowledged. With the debut of just value accounting it is seen that the historical accounting attack is non diminished by the standard compositors as it provides possible information in certain state of affairss ( FASB, 2010 ) .
Further to the attack to historical accounting, the FASB had created new accounting criterions in this respect that is known to us by Statement of Financial Accounting Standards no.157 ; Fair Value Measurements.
Fair value accounting was developed every bit early as in 1930, but in 1938 President Roosevelt abolished it as he believed that taging to market was the cause of depression during that clip. However in 1975 FASB issued FAS 12 known as Accounting for Certain Marketable Securities. Here in, companies were to describe the unfulfilled additions and losingss on marketable securities on the income ( Cascini and Delfavero, 2011 ) .
The restrictions of historical accounting became evident in the crisis in the late 1980s which was known as the U.S. Savings and Loan Crisis. As the involvement rates rose in the 1980s the longer continuance fixed rate mortgage loans held by many Bankss experienced diminution in the plus values. To retain sedimentations, higher involvement rates were provided to depositors which farther hindered their economic public presentation and fiscal viability. Banks incurred farther losingss by increasing their investings in hazardous assets. This action along with increasing the involvement rates, created conditions that led to the failure of more than 1000 Bankss ( Linsmeier, 2011 ) .In 1984 arguments continued over plus rating with the issue of SFAC No. 5. This statement entitled “ Recognition & A ; Measurement in Financial Statements of Business Enterprise that provided a list of five alternate method for rating ( FASB, 1984 ) i.e. , ( I ) historical cost, ( two ) current cost, ( three ) current market value, ( four ) cyberspace realisable value & A ; ( V ) nowadays value ( Emerson et al, 2010, p. 80 ) .
Following this, the FASB did non govern out when these methods were to be used but believed that each method is appropriate depending on the fortunes. The board adopted the term just value alternatively of market value so that estimations can be used as values for the fiscal instruments which can non be traded in active markets ( Dumitru and Giorgina, 2009 ) .
Following this in 1991, FAS 107 ; Disclosures about just value of fiscal instruments was introduced. In 1992 organisations with over $ 150 million assets had to enter their fiscal instruments in just value. In 1993 ; FASB issued SFAS 115 ; Accounting for Certain Investment in Debt & A ; Equity Securities. This statement guides in valuing assets and all investing in debt securities at readily determinable just values wherein debt securities that were held to adulthood were to be recorded at amortized cost. Those that were being traded were to be reported at the readily available market values. The staying that was non designated to the above two was deemed to be available for sale and was recorded at the just value. In 1994 ; FASB disclosed FAS 119 wherein derived functions were to be reported at just values. It was called Disclosure about Derivative Financial instrument and Fair Value of Financial Instruments. Then recently in 2006 FASB added the SFAS 157 & A ; 159 i.e. “ Fair Value Measurements & A ; The Fair Value Option for Financial Assets and Financial Liabilities ” severally. The SFAS 157 provided a model to fair value accounting and requires newsmans to unwrap all information sing measuring of the just value obtained by them.
FASB though has introduced assorted alterations to the accounting theoretical account in mensurating the fiscal values over the old ages ; they propose non to make off with the historical cost theoretical account as it helps in supplying utile information on the possible hard currency flows. The difference between this theoretical account and the just value accounting theoretical account would capture the expected impact of the current economic status on bing fiscal instruments. Hence FASB 2010 recommends that both these theoretical accounts to be used while describing in the fiscal statements as both these steps would be given equal attending by the Bankss and their hearers.
Arguments For And Against Fair Value Accounting
The FASB & A ; IASB supported the idea of just value accounting saying that historical cost accounting lacked transparence and was out dated and that a move towards just value accounting was really much necessary ( Leone, 2008 ) . Therefore in just value accounting the balance sheet satisfies the rating aim and the income statement provides information about hazard exposure and direction public presentation.
Dumitru and Giorgiana ( 2009 ) have supported just value accounting and have commented that this method of valuing assets and liabilities is non to be blamed for fiscal jobs within an entity. It is the best step to understand the current standings of the company and helps the investors to derive an up- to- day of the month information about the company and step its public presentation consequently. It besides represents and mistake of rating in the eyes of the investor in a short interval of clip. It even claims to hike transparence to investors ( Cherry and Hague, 2009 ) . Though just value accounting is crystalline to investors, it does non supply the intrinsic value of the house or assist in measuring future hard currency flows.
As just values make fiscal studies more dependable to the users, the comparison of this study may decrease due to uninterrupted accommodations and impairing of the assets and liabilities value. Harmonizing to Flegm ( 2005 ) , just value accounting was a cause of the largest frauds that have happened boulder clay day of the month which includes Enron. Enron ‘s comptrollers used accounting devices to describe hard currency flow from operations instead than funding and to otherwise cover up just value exaggerations and losingss on undertakings undertaken by directors whose compensation was based on just values ( Benston, 2006 ) . While historical value accounting provides a base to do judgements and sentiments for the hearers, just value accounting studies are non easy auditable.
As the stock markets grow the income statement is more viewed at than the balance sheet by the users. Reviewing this statement, FASB had implemented just value accounting in order to demo the users the company ‘s hereafter. But this adds on to the force per unit area faced by the comptrollers and hearers to do judgements on the just values implemented without any base for an rating. McCarthy ( 2004 ) besides favored historical accounting by stating that it is better than utilizing chances for just value estimations and hence shall be more valuable to the users of the study.
The following unfavorable judgment that evolved was that just value accounting helps newsmans to pull strings Numberss in order to reflect coveted net incomes. This is normally done to run into one ‘s personal demands. Even with a coveted hard currency flow theoretical account values can be understated or overstated as per the demands of the direction. The chief aim of fiscal coverage is to supply utile information to the users in order for them to do rational determinations. The information therefore has to be dependable, relevant, and comparable. Though relevancy of information is more of import than its dependability, some grade of dependable information demands to be considered for it to be relevant. So far just value accounting has been based on indifferent market monetary values. But when market monetary values become biased or when the values are taken based on factors other than the indifferent monetary values, so these values become less relevant and dependable therefore misdirecting the investors and other users of the fiscal study.
Third, in developed economic systems fair value accounting seems to be the best attack as markets are efficient in order to accomplish accurate values. But in an emerging economic system following just value accounting is really ambitious because of the absence of a well functioned market. And as investors find such markets a good investing ; they are doubting in puting because of the historical accounting attack that these economic systems follow as they find it to be irrelevant and deceptive ( Peng and Bewley, 2010 ) .
Issues on Fair Value Accounting On the Recent Financial Crisis
Following are some of the many unfavorable judgments that were made on the function played by just value accounting on the recent fiscal crisis. Chea ( 2011 ) stated that just value accounting boosted the fiscal crisis by coercing the write down of “ good ” assets because of decreased market monetary values.
This accounting method forces bank to cut down capitals without sing the hard currency flow or the loan public presentation ( Fahnestock and Bostwick, 2011, ) . It has even been criticized that just value accounting causes contagious disease due to overreacting investors and creditors. Therefore if just value accounting was crystalline as it claims to be, contagious disease would non hold occurred. Magnan and Thonton ( 2010 ) argued that just value accounting was brought approximately by standard compositors in order to orient the entity with the information demands of the investors particularly stockholders and other fiscal statement users.
Net income is by and large seen as a forecaster of the hereafter hard currency flows. In the traditional system of accounting, alterations that occur in the market values were non recorded. Hence how could one be right about the hereafter hard currency flows? Unfulfilled additions were realised in the signifier of hard currency and were traded presuming they were same as accomplished additions. Due to this, when the economic down bend occurred, the entities did non hold sufficient capital to cover for the losingss. The consequence of this downswing resulted in contagious disease. But in just value accounting these alterations are recorded and therefore the unrecognized additions and losingss are recognised in the income statement therefore supplying accurate informations ( Fahnestock and Bostwick, 2011 ) .
Of the 140 U.S. Bankss that went through the fiscal crisis in 2009, 120 Bankss reported informations demoing positive net worth on their balance sheets. Four to six months subsequently the fiscal crisis had a hit on these Bankss. These Bankss were considered adequately capitalised by the regulators. Their fiscal statements were prepared in conformity with the U.S. GAAP, and gave merely a small indicant on their deteriorating status.
Twenty old ages ago when bankers used to describe values on the footing of historical values, this theoretical account so failed to reflect the worsening values of the assets and the arising degrees of recognition hazard was being assumed across the banking industry and the failure to acknowledge the losingss and loans had led to detain acknowledgment in understanding the implicit in economic job which were some of the grounds for the crisis back so. Fair value information warns investors and regulators of the hazard degrees and the worsening plus monetary values due to alterations in the market conditions ( Pozen, 2009 ) .
In 2007, as the collateral endorsing residential and commercial existent estate loans plunged into value ; it drove down the value of the related loans and debt securities in the portfolio of the U.S and other planetary Bankss. The current coverage system failed to mensurate these altering values and therefore led to worsen in the value of the assets which resulted into the fiscal crisis. Hence the defect of the bing accounting theoretical account was blamed for in this respect.
The historical accounting theoretical account was said to capture the impairment of the capital strength really slow which were of no usage to the investors and regulators. The Bankss were really deteriorating manner prior to the fiscal crisis. But merely few months prior to this crisis the capital ratios slipped to the undercapitalized class and by so it was excessively late for the Bankss to make something about this impairment or for the regulators to assist them with this or for the investors and depositors to salvage themselves from this at hand crisis. Historical accounting is non designed to measure the alterations in the involvement rates as and when they occur. It does non supply any commissariats for these alterations. Even if these alterations are recorded, they are merely estimations made by the direction which are by and large undependable ( Linsmeier, 2011 ) .
Banks are involved in doing or having payments. These are by and large done by agencies of a fiscal contract. The values of these contracts can lift and fall quickly depending on the altering involvement rates, economic conditions, deregulating and other factors. In 2007, as the collateral endorsing residential and commercial existent estate loans plunged into value ; it drove down the value of the related loans and debt securities in the portfolio of the U.S and other planetary Bankss. The current coverage system failed to mensurate these altering values and therefore led to worsen in the value of the assets which resulted into the fiscal crisis. Hence the defect of the bing accounting theoretical account was blamed for in this respect.
The historical accounting theoretical account was said to capture the impairment of the capital strength really slow which were of no usage to the investors and regulators. The Bankss were really deteriorating manner prior to the fiscal crisis. But merely few months prior to this crisis the capital ratios slipped to the undercapitalized class and by so it was excessively late for the Bankss to make something about this impairment or for the regulators to assist them with this or for the investors and depositors to salvage themselves from this at hand crisis.
Historical accounting is non designed to measure the alterations in the involvement rates as and when they occur. It does non supply any commissariats for these alterations. Even if these alterations are recorded, they are merely estimations made by the direction which are by and large undependable ( Linsmeier, 2011 ) . Surveies have shown that just value accounting provides more information about the public presentation of a company every bit compared to any other accounting theoretical account. It even provides a better word picture of the economic place and provides accurate values of the assets and liabilities put down in one ‘s balance sheet. Furthermore Koonce ( 2009 ) an accounting professor stated that just value accounting communicated the effects of the bad determinations as granting subprime loans and composing recognition default barters by maintaining those loans at the original value would merely be supplying irrelevant information and disregarding the world.
Changes Implemented after the Financial Crisis
As discussed earlier that just value accounting was criticized for conveying about the crisis, the IASB so introduced an amendment to IAS39- Financial Instruments: Recognition & A ; Measurement and to IFRS 7: Disclosures as on 13th October 2008. These amendments permit non derivative fiscal plus held for trading to be reclassified as either available for sale, or held to adulthood in rare fortunes and as loans and receivables if they would hold met the definition at initial acknowledgment and if the entity has the purpose and ability to keep the fiscal plus for the foreseeable hereafter or until adulthood.
This reclassification gives companies the chance to avoid future just value losingss on reclassified assets once classified as held for trading. Following the amendments made were the unfavorable judgments that were brought by many companies. Some of them were that it favours the IFRS over the rivals that apply US GAAP. From the investors point of position the new alterations reduced consistence, comparison and transparence of fiscal statements. JP Morgan ( 2008 ) pointed out that these amendments were adopted during the economic crisis with fiscal establishments in head and therefore would impact accounting and investors in non-financial establishments.
IFRS 9 was introduced in 2009 to replace IAS39 wherein the purpose was to simplify the bing accounting criterions with respect to fiscal instruments. Some of its aims are to amortise cost computation, better depreciation rating & A ; just value option. IFRS 9 uses a simplified attack to specify whether or non a fiscal plus should be measured at just value or at amortised cost, replacing the different regulations in IAS39. If a fiscal plus is being held within a concern theoretical account whose aim is to keep assets for the intent of roll uping contractual hard currency flows and its contractual footings produce hard currency flows on specified day of the months that are solely payments of chief and involvement, on the principal outstanding, so it is measured utilizing amortised cost. If the plus does non fall in the above class, just value measuring has to use. In IFRS 9, it calculates effectual rate the same manner as the IAS39. However alterations have been made to place any possible loss on the future exchequer hard currency flows used to work out the effectual rate. Merely those assets that are measured at amortised cost are to be depreciated.
This chapter shed visible radiation on the application and development of just value accounting prior to the start of the fiscal crisis of 2007 and farther discussed its effects later after the crisis has simmered down. Several research workers discussed the degree of uniformity and conformance in mensurating the assets and liabilities of a house. Furthermore the literature assessed besides provided ample statement that reasoned the fact that the just value accounting did non convey about the fiscal crisis as different thoughts about the deficiency of cognition of the fiscal newsmans every bit good as the just value losingss that were recorded or the low value of the assets measured with the just value accounting attack that forced bankers to maintain their plus which led to composing down of the plus that led to the crisis were discussed with respect to the application of just value on the crisis.
Measuring these statements with relation to fair value accounting it can be seen that fiscal study preparers have non followed any uniformity in entering their assets/liabilities at just values which had led to amendments in the criterion, IAS 39 wherein assets were reclassified in order to avoid future economic losingss. Further to this criterion, a reference of the IFRS9 has besides been stated in order to recognize the alterations it would convey approximately in the coverage system.
In the following chapter, we therefore look into the eight samples of Bankss drawn and understand the alterations in categorizations of the fiscal assets before and after the fiscal crisis.
Chapter 3: Research Methodology
This chapter will discourse the basic attack used to carry on the research for this subject. To place and understand the impact of just value accounting on the recent fiscal crisis, a elaborate analysis of eight Bankss would be done with the aid of their one-year fiscal statements. The impact of just value accounting on their patterns will be seen and this is done in order to understand the impact just value accounting has on planetary position.
To understand the impact of just value accounting on the fiscal crisis an analysis of eight Bankss and their fiscal statements will be done. Besides any alterations implemented by them with regard to fair value accounting after the crisis simmered down will be seen. Eight Bankss from around the universe have been chosen for this survey and has been done in order to understand the impact just value accounting has on a planetary position.
The first subdivision of this chapter discusses the research design in order to understand how this research has been conducted. Following this subdivision, the research methodological analysis and its doctrine will be assessed. The following subdivision discusses the informations aggregation and analysis which is followed by the sum-up of this chapter.
3.2. Research Design
Harmonizing to Love ( 2000 ) it is of import for the success of any survey to hold a proper and stable research design. For an effectual research design it is of import for the research to correlate the research job and research inquiries with methods that would give the most positive consequences. For this research survey, ab initio eight fiscal Bankss from around the universe were selected to understand the planetary consequence of fiscal crisis on their activities. After this their fiscal statements will be reviewed to compare the impact of just value accounting on their activities and public presentation and eventually analyse if the just value method altered their public presentation in any possible manner.
3.3. Research Methodology
Weiss and Sirbu ( 1990 ) place the usage of qualitative methodological analysis as a perfect attack that places the survey towards invention and the complete apprehension of what procedures have been traveling on. Harmonizing to them the research provides a descriptive analysis of the chosen variables and with inside informations gives the research worker a perfect in-depth apprehension of the given content and its procedures.
Qualitative informations refers to all non-numeric informations or informations that have non been qualified and can be a merchandise of all research schemes. It can run from a short list of responses to open ended inquiries to more complex informations such as full policy paperss. This allows developing theory from the informations obtained.
Fiscal studies of companies contain qualitative every bit good as quantitative informations. The analysis in this research was based on the footers that were available on the fiscal studies which provided with information to the just value accounting attack that was used by these establishments. The information recorded is strictly qualitative in nature. There are two positions that underpin the impact of qualitative analysis i.e. the deductive and the inductive attack ( Saunders at Al, 2009 ) .
3.3.1 Research Doctrine
For this research paper an inductive logic attack has been used. This attack begins by look intoing appropriate of import events and their comparative informations ; our state of affairs negotiations about the fiscal crisis severally. Once the information is assessed the research worker so recognizes larger sections of the false variables that are purportedly evaluated and therefore comprehends their relationship. As given in the doctrine, one time the information is calculated the relationship between the fiscal crisis of 2007 and just value accounting will be analyzed to deduce the being of a relationship.
The purpose of this research is to qualitatively measure the affect just value accounting had on the planetary economic crisis and for this to be seen it is of import that a qualitative analysis be conducted to critically measure the cause and consequence relationship. As our research is qualitative, the inductive attack is the best possible attack to use when concluding with the research method as it provides the research with inspiration to foremost roll up the informations and so measure it with the chosen variables to place any affect either one had on the other.
3.3.2 Research Approach
The research attack provides ground to the research worker for taking his peculiar maneuver. Schadewitz and Jachna ( 2007 ) place two attacks for a survey ; deductive and inductive. The deductive attack is a hierarchical method of achieving decision by foremost developing a theory so placing an hypothesis and after that one time the observation is done the hypothesis verification is identified. This attack is preferred for quantitative surveies but for qualitative surveies the inductive attack is considered faultless. This works wholly oppositely than the deductive method as the initial measure is to carry on observation and one time a noticeable expression or form is derived the research worker so develops a hypothesis and consequences it with a theory.
In this survey the inductive attack has been used as analysis of different Bankss with regard to their fiscal statements and accounting methods will be analyzed ab initio and after that a logical account will be given to place if the just value accounting method did hold an consequence on the fiscal crunch.
3.3.3 Research Strategy
The just value accounting attack of eight Bankss will be analysed based on their fiscal studies. A comparing of the attack adopted in the twelvemonth 2006 and 2011 has been provided with in the following chapter to understand the impact just value accounting on the fiscal studies of these establishments. By utilizing this impression we will acquire the comparing of the organisations working between two different clip and economic periods ; 2006 market the initial epoch of the crisis whereas 2011 can be considered as a apparently station crisis clip period. The footers on the one-year studies provided the necessary information in analyzing the information.
3.3.4 Data Collection
The information collected in this research is qualitative. Qualitative information refers to all non-numeric informations or informations that have non been qualified and can be a merchandise of all research schemes. It can run from a short list of responses to open ended inquiries to more complex informations such as full policy paperss. This allows developing theory from the informations obtained. Fiscal studies of companies contain qualitative every bit good as quantitative informations. The analysis in this research was based on the footers that were available on the fiscal studies which provided with information to the just value accounting attack that was used by these establishments. The information recorded is strictly qualitative in nature.
22.214.171.124 Secondary Data
Secondary informations refers to utilizing information antecedently collected that relates to your survey. In this survey the lone secondary informations collected are the different fiscal statements of two clip periods ; 2006 and 2011 and this has been done via the cyberspace and the official web sites of the eight chosen Bankss.
Sampling techniques provide a scope of methods that enables to cut down the sum of informations needed to be collected by sing informations merely from a subgroup instead than all possible instances or elements ( Saunders et al, 2007 ) . In this survey the sample size is eight and the information has been collected from the one-year studies of banking establishments. Banking establishments have been chosen because the fiscal crisis has had a high impact on their sector.
Non-probability sampling was preferred for this survey. Non chance trying provides a scope of alternate techniques to choose samples based on subjective opinions ( Saunders et al, 2007 ) . There are assorted trying techniques under non chance trying but the most outstanding in the purposive sampling technique which has been used in this survey.
Professionals and Cons of the Sampling Technique
Purposive sampling enables to utilize 1s opinion to choose instances that will outdo enable to reply the research inquiries and run into the aims ( Neuman, 2000 ) .
This trying method fundamentally enables 1s judgement to choose instances that will outdo enable to reply the research inquiry and to run into the aims. This signifier of sample is frequently used when working with really little samples wherein instances are selected that are peculiarly enlightening ( Saunders et al, 2009 ) . The research uses primary informations i.e. self-administered fiscal studies of Bankss located in different states to carry on this survey.
126.96.36.199.2 Target Sample
BANKS CHOSEN FOR THE ANALYSIS
JP MORGAN CHASE
WELLS FARGO CO.
ICICI BANK LIMITED
AMP BANK LIMITED
NATIONAL BANK OF PAKISTAN
These Bankss are selected indiscriminately. The chief ground for choosing these Bankss is because they all belong to a similar industry, i.e. the banking industry and a comparing can be done based on its location. As different states follow different accounting rule, this survey is done so as to acquire an overall perceptual experience of the just value accounting policy adopted and to besides look into if active or inactive markets in the states where these Bankss are located affect the accounting patterns followed with respect to fair values. Thus the Bankss that have been analysed are taken from developed every bit good as developing economic systems. These Bankss selected provide fiscal services to corporations, persons and the authorities. Based on the one-year studies of the company for the twelvemonth 2006 & A ; 2011, the information has been analysed.
3.3.5 Data Analysis
The information collected in this research contains merely the fiscal studies of the eight Bankss mentioned above for the old ages 2006 and 2011. These Bankss were selected based on their location so as to cover the accounting patterns with respect to fair value accounting runing from one corner to the other corner of the universe. These Bankss were besides selected on the footing of the economic system they fall under in i.e. either developed or developing economic system, in order to look into whether it plays any function on the fiscal studies of the banking establishments. The information collected is based on primary observation of the fiscal studies and the information provided is obtained largely from the footers of the fiscal studies wherein an luxuriant informations on the just value attack is provided by the Bankss.
3.4 Validity and Reliability
The informations collected for this survey has been through valid and dependable methods. The Bankss official web sites and their published fiscal statements have been reviewed for the dependable appraisal of the survey. The cogency is high as the information collected is direct and comes directly from the company instead than an intermediary beginning such as a database or website supplying organisational statistics. The chosen Bankss are besides a dependable pick as they are celebrated Bankss that have been spread around the universe hence this gives us the benefit of measuring the planetary consequence of just value accounting on fiscal crisis instead than concentrating chiefly on one part of the universe and its fiscal establishments. Plagiarism has merely been conducted when the house ‘s direct statistics have been numbered but they have besides been referred and with regard to the survey all the research workers that helped or contributed to this survey with their literature have been acknowledged and referred.
3.5 Restrictions of the Study
As just value accounting is adopted for most of the fiscal assets and liabilities of the Bankss, an analysis based merely on the fiscal instruments are provided in this research. For the exclusive ground that the Bankss chosen largely trade in fiscal instruments and because these fiscal instrument keep a later immense value in the Bankss. Another restriction would be that, merely a general thought is provided about the Bankss. A elaborate description of the Bankss is non provided in the survey because the focal point here is chiefly on the just value accounting patterns adopted by these Bankss. Besides the informations collected is restricted merely to the fiscal studies of the Bankss.
A concluding restriction that can be considered while analyzing the information from the studies would be to correlate the information from the two studies. As a batch of clip would hold been passed the construction and design of the studies would be changed which would in bend make it hard for the research to analyze two variables based on the same context.
This chapter therefore focuses on the methods adopted in carry oning the research. As discussed the Bankss selected for the analysis were at random which has covered the developed every bit good as the developing economic systems in order to analyze whether markets in such economic systems play a function in the fiscal studies of the Bankss. The sampling technique used was purposive sampling. The information collected is strictly qualitative which are obtained from the footers of the one-year studies. The old ages 2006 & A ; 2011 have been selected in order to place the alterations in the fiscal studies with respect to fair value accounting which would assist in comparing the information with the statements discussed in the old chapter.
Chapter 4: Analysis
This chapter discusses the findings gathered from reexamining the fiscal statements of the eight chosen Bankss. The statements provided by research workers in the literature reappraisal have been kept as benchmarks and so the Bankss have been reviewed on their given statements and decisions. The survey aims to analyze the consequence just value accounting had on the fiscal crisis and by reexamining the alterations brought approximately by banking establishments around the universe it will be easy for us to concentrate on the displacement in their fiscal statements in during the two specific clip periods.
4.2. General Overview
As discussed in the old chapter, this research chose eight different banking establishments from different parts of the universe ; U.K, USA, India, Australia, Pakistan and Africa. By taking different states the survey implements the factor of globalisation and besides the single economic systems runing in the development and developed states. These Bankss use just value accounting in mensurating most of their assets and liabilities and in this research we have focused on placing the alterations adopted by these banking establishments on the just value accounting attack over their fiscal instruments. As these Bankss deal with fiscal instruments on a big graduated table, the impact of just value accounting would therefore be more in this country. The undermentioned subdivision will supply the findings that have been achieved through the analysis of the informations collected.
4.3. Findingss from Financial Reports of Assorted Banks: 2006
This subdivision will concentrate on the fiscal activities of the undermentioned Bankss during the twelvemonth 2006 and this initial information will so be compared to the 2011 informations to see the consequence just value had on organisational public presentation during the crisis.
As defined by the Goldman Sachs Annual Report ( 2006 ) the just value accounting method is damaging to their fiscal statements and is besides the most “ critical ” accounting policy. For their fiscal public presentation, Goldman Sachs divides their fiscal instruments into three basic constituents ;
Cash ( A Non-Derivative ) trading instrument.
The following information has been collected from the Goldman Sach ‘s Annual Report ( 2006 )
( Goldman Sachs Annual Report, 2006 )
The above graph taken from the Goldman Sach ‘s study adheres to Dumitru and Giorgiana ‘s claim about just value accounting supplying the exact information about the company and its public presentation. Without this method the investors in Goldman Sach ‘s would n’t be able to integrate the current monetary value of the establishment ‘s fiscal assets. If these assets were reported at historical cost there monetary values would be deficient to pull investors but as they are priced with mention to the quoted monetary values in active markets the investors can see the displacement in 2005 and 2006 assets that are presently owned and un-owned.
The organisation stated that its hard currency non-derivatives were valued on current active market monetary values quoted by agents or trader monetary value citations. The derivative contracts were based on just values defined by the current market monetary value. The chief investings in Goldman Sachs are aberrant from monetary value transparence and the just value is identified by cost estimate with the aid of inputs such as fiscal public presentation of companies in the sector and besides the comparative tendencies prevalent in the sector along with operating hard currency flows of corporations ( Goldman Sachs, 2006 ) .
In the twelvemonth 2006 ; the fiscal assets and liabilities for JP Morgan were measured at just value as shown by its Annual Report ( 2006 ) . Depending on the trading activity of these assets, the monetary values were so determined. Fair value of these assets was documented at quoted monetary values and these assets were traded actively in the market.
In instances where the quoted monetary value was unavailable for certain assets the direction so made a judgement on the rating theoretical accounts to be used. It was seen that in 2006 around 83 % of its securities were valued on quoted market monetary values. 13 % adopted the discernible market monetary value as the market was inactive for them and eventually the 4 % assets left were valued by the Market Approach described by ( Zacharski, Rosenblat, Wagner and Teufel, 2007 ) . As there was no sufficient informations available in the market sing the monetary value of the plus JP Morgan so had to take the monetary values of similar assets to value their fiscal assets at the just value.
( JP Morgan Annual Report, 2006 )
In 2006 the derivative receivable market to market value or just value of the JP Morgan Co. was $ 56 million.
( JP Morgan Annual Report, 2006 )
Wells Fargo and Co
Harmonizing to the Wells Fargo and Co. 2006 Annual Report, they implemented they FAS 155 “ Accounting for Certain Hybrid Financial Instruments ” . This is contains fiscal instruments that contain embedded derived functions. Wells Fargo in their Annual Report hence recorded the derived function at just value. Wells Fargo, as employed in USA did non achieve the right to use just value accounting on its assets until January 1 2008 hence in 2006 it was still seeking to analyze if it needed to use the FAS 157 earlier than required. They besides stated that with the employment of FAS 157 they did non anticipate a drastic alteration in their fiscal statements. The company measured just value as the monetary value that the company would have after selling an plus or had to pay after transportation of a liability.
In 2006, Wells Fargo held debt and marketable securities that were chiefly for the usage of increasing liquidness and involvement rate hazard direction and these were valued at Fair Value.
Apart from this Wells Fargo considers its assets as the right to serve mortgage loans for others and these are known as MSR ‘s. During the start of 2006 they implemented the FAS 156 and valued their MSR ‘s at just value. Once the MSR ‘s are launched they are so purchased and so capitalized at just value. After implementing the just value accounting at their given plus of MSR ‘s the company experienced as addition of $ 101 million maintained net incomes in their balance sheets.
( Wells Fargo Annual Report, 2006 )
Besides all the market hazard activities of Wells Fargo that include securities, foreign exchange minutess and derived functions are all carried at just value.
ICICI Bank Ltd.
ICICI Bank Ltd. India did non supply much information on just value as it discussed no notes based on the accounting method. After measuring the company it was found that the company did value some of its assets at just value. ICICI implemented Indian GAAP which is slightly the same as USA GAAP and hence considers all the market monetary values of the given investings. ICICI bank considered that if it used the just value theoretical account of accounting its compensation costs would hold been much higher. Although they did non utilize the just value theoretical account they stated in their one-year study that if they did mensurate their diluted net incomes per portion on that footing so they would utilize the undermentioned premises for measurings ( ICICI Bank Ltd, 2006 ) :
( ICICI Bank Ltd Annual Report 2006 )
ICICI valued its investings on the bing market monetary value and did include the proviso for just value when valuing its investings as shown below ;
( ICICI Bank Ltd Annual Report 2006 )
In 2006 Standard Bank ‘s one-year study focused on fiscal assets being recognised at just value plus dealing cost except for the 1s being carried at just value in the net income & A ; loss history.
The plus is recognised when the plus is purchased and is derecognised when no hereafter hard currency flows come into the company from this plus or when it is sold. In instance of securities, if these are to be transferred, they are recognised as “ available for sale “ assets and the difference between the amortised cost and the just value is accounted for in equity.
Standard Bank besides values all its investings belongingss at just value in the balance sheet. With regard to fair value any accommodations made are included in the income statement under the header of investings additions and losingss incurred. Besides fiscal warrant contracts are besides valued at just value and after than amortized for the remainder of their fiscal life ( Standard Bank, 2006 ) .
In 2006 the just value of Standard Bank ‘s assets and liabilities including all fiscal instruments was
( Standard Bank Annual Report, 2006 )
AMP Bank Limited
AMP Bank Ltd, a wealth direction concern stated that it measures all its assets, liabilities, reviews, disbursals and life insurance contracts on the footing of just value.
Most of AMP ‘s investings are valued at just value and these investing assets are normally held on the behalf of AMP ‘s policyholders. AMP ‘s basic fiscal assets such as hard currency and hard currency equivalents are based on just value that is quoted on the market. Its histories receivables, equity securities and debt securities are all valued at just value. When mensurating equity securities their just value is calculated by happening out the basic cost of the plus without including any initial dealing costs. Debt securities are besides measured utilizing the same procedure. AMP ‘s derived functions are besides valued at just value but on the basic day of the month they were entered into contract with. With regard to derived functions associated as assets, they were marked as positive whereas the liabilities were considered as negative ( AMP Bank Ltd, 2006 ) .
The value of AMP ‘s debt and equity securities in 2006 were as followed and all valued at just value.
( AMP Bank Annual Report, 2006 )
Besides its cyberspace additions by using just value accounting technique on its investing belongings were
( AMP Bank Ltd Annual Report, 2006 )
Besides while ciphering its hard currency flows, AMP realized additions from alterations in just value with regard to hard currency flow hedges reserve and this increased their hard currency flow from $ 3mn to $ 15mn.
When measuring Barclays Annual Report it was seen that, in 2006 adopted the IFRS accounting method. Even though there was n’t much content related to just value in the Annual Report with regard to extra footers it was easy to analyze where Barclays had implemented just value. With regard to its assets Barclays measured all its trading and fiscal assets at just value.
( Barclays Bank Annual Report, 2006 )
Apart from that when ciphering its cyberspace trading income, Barclays once more used just value accounting to deduce the net income from its fiscal instruments.
( Barclays Bank Annual Report, 2006 )
After implementing the just value accounting method Barclays stated that many of its assets and liabilities were valued at just value and these motions were reported within net trading income and net investings income but merely depending on the nature of the given dealing. By utilizing the just value accounting method, Barclays experienced around ?317m addition in investing income. Barclays besides valued its trade good derived functions at just value and by making this they once more experienced an addition in the value of their contracts by the terminal of 2006.
( Barclays Bank Annual Report, 2006 )
Barclays stated that most of its fiscal instruments such as derived functions held for both trading and hazard are valued at just value. Harmonizing to them the just value of any instruments it the sum at which the instrument could be sold or exchanged between willing parties ( Barclays, 2006 ) .
National Bank of Pakistan
Harmonizing to the Annual Report ( 2006 ) National Bank of Pakistan values all its derived functions on the footing of just value at quotes the active market monetary values. In instance the derived functions are non available on the market they are so valued by utilizing Market Approach technique by utilizing the involvement rates as the input for ciphering the exact value. National Bank of Pakistan normally sell their equity once the diminution in just value goes below its cost and hence in non profitable to maintain.
The bank ‘s investings are ab initio recognized at their cost but just value is considered when Inquisition cost is calculated. The derived functions recorded in the fiscal statement consist of foreign exchange contracts, equity hereafters and involvement rate barters. They were measured at just value when ab initio recognized and re measured at just value later. The bank besides reported that when quoted market monetary value was non available so the discounted hard currency flow theoretical account was used to find the just value and any alterations in the just values were recorded in the net income & A ; loss history ( National Bank of Pakistan, 2006 ) .
In 2006, National Bank of Pakistan ‘s fiscal instruments with regard to fair value accounting accounted as
( National Bank of Pakistan Annual Report, 2006 )
4.4. Findingss from Assorted Banks: 2011
( I ) Goldman Sachs
In 2011, Goldman Sachs used just value to value most of its assets such as commercial paper, mortgage and other plus backed loans and securities, bank loans, corporate and debt equities and others as identified below
( Goldman Sachs Annual Report, 2011 )
If we compare this to Goldman Sach ‘s old plus value of debt duty in 2006 we can see that by utilizing the just value hierarchy they increased their value of debt duty from $ 192