Towards the end of 2008, the financial sector across the world was becoming increasingly unstable. Lehman Brothers had been declared bankrupt, Various allegations towards accounting standards have been made in relation to the financial crisis.
A lot of banks worldwide valued most of their financial assets at historic
cost, the cost at which the assets were initially bought at. These figures
were not adjusted to the current market values, and therefore were over
estimated on the financial accounts.
The ‘incurred loss model,’ was also heavily criticised. This model required only those losses
to be recorded which would have a damaging result on future cash flows. The damaging
result would have to be reliably estimated. This model did not permit the effects of future
losses to be acknowledged, which was one of the reasons why losses were being severely
Had these banks valued their financial assets at fair-value cost, then the
accounts of the companies would have been giving a more realistic
Picture of profits & losses, and maybe the crisis would have been
Recognised earlier in time.
Off-balance sheet standards have also been blamed for covering company
losses. Off-balance sheet asset/liabilities are those which are exempt
from appearing on the balance sheet. It has been put forward by the
Financial Crisis Advisory Group that the off-balance sheet standards may
have hidden losses, therefore...
... middle of paper ...
... risk factors.
In response to the financial crisis, the Boards have been advised to emphasise to business
entities how crucial it is that the quality of the data recorded for financial reporting should be
to a high standard.
A global convergence of accounting standards is more imperative than ever, as financial
markets are now global markets. A uniform set of accounting standards around the world would enhance transparency, encourage efficient allocation of resources and would allow risks to be recognised.
At the moment, over 100 countries have adopted to the IFRS (International Financial
Reporting Standards). The Boards have advised that economies that have not adopted the
IFRS, should set a practical timetable for adopting these standards. It is not only vital to converge, but also to maintain common solutions and interpretations between economies.
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