Job cuts, repossessions, tightening the belt, we've all seen the effects of the 'credit crunch'. But how does this impact on the world of accounting standard setting, and particularly IFRSs which have been compulsory for financial reporting of quoted companies in Ireland, the UK and across Europe since 2005?
Well, IFRSs have not been immune to the 'credit crunch' and subsequent financial crisis either! High profile figures, including the French president, Nicolas Sarkozy have placed part of the blame for the crisis on the International Accounting Standards Board (IASB) for its increased use of the controversial 'fair value accounting', which values certain items, particularly financial instruments, at fair value, ideally by reference to an external market, but otherwise using estimated figures. The recent financial turmoil has caused falling values, volatility and unreliable values from those markets that have 'frozen over'. These have directly impacted banks' and companies' statements of financial position (that's the IFRS term for 'balance sheet' to you and me) and profits exacerbating, some say, the crisis.
So, in the light of this, the IASB recently issued 'emergency' changes giving guidance on how to measure fair values in markets frozen over and allowing certain financial instruments to be re-designated and longer be measured at fair value retrospectively from 1 July 2008.
But memories are often conveniently short! Let us not forget that the banks themselves, spearheaded by none other than the French banks, were asking for more use of fair values just a few years ago, which resulted in standard changes from December 2003 onwards. As one commentator put it, 'They weren't complaining when the prices were going up!' Enough said.
The author, Ben Wheaton, is lecturer and technical writer at BPP Professional Education. He lectures on the ICAI's Diploma in IFRS, which kicks off its course for the 11th sitting on 6th February 2009. More details at www.icai.ie/ifrs