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Causes of the Global Financial Crisis

The financial crisis of 2007 and 2008 is seen as the worst financial crisis after the  great depression of 1929. The financial decline in the mortgage market in United States is considered as the starting point of the financial crisis (Erkens, Hung & Matos, 2012). The accounting rules and principles had a role to play in this crisis. Many accountants all over the world believe that the process of fair value accounting was the root cause of the financial crisis. The present study makes an effort to analyze and evaluate the various aspects of global financial crisis in related to International Accounting Standard Board and Australian Accounting Standard Board.

Many factors can be blamed as the causes of the global financial crisis. Among all the factors, various accounting standards and principles are the main reasons for the global financial crisis. Many of the accountants all over the world consider that various accounting practices were involved in the causes of global financial crisis (Frankel & Saravelos, 2012). Hence, it can be said that the accounting standards had a important role to play in the 2007 and 2008 global financial crisis. One of the major accounting factors that can be made responsible for global financial is the requirement of financial reporting that governs the assessment of assets and off-balance sheet entries (Fratzscher, 2012). The survival and solvency of a business organization largely depend on how the accountants treat the assets and liabilities of the organization in the books of accounting. In this regard, another major accounting issue that came from the global financial crisis is the quality of the auditors. It is the responsibility of the auditors to examine the financial and accounting documents of the business organization. In the time of global financial crisis, it was seen that the auditors of the companies did failed to convey accurate audit report. One of the major accounting controversy at the time of global financial crisis was the debate about the use of fair value method of assetvaluation. Most of the accountants all over the world consider the adoption of fair value method was the root cause of the global financial crisis (Taylor, 2013). These are the major roles in of accounting standards and policies in the global financial crisis.

  However, the International Accounting Standard Board (IASB) has well responded to all these accounting failures and has taken some actions. In the year of 2008, IASB made some major proposals to strengthen and improve the requirement for the identification of the control entity of the organizations (Erkens, Hung & Matos, 2012). In addition, IASB also made some additional proposal on the items of off-balance sheet including the de-recognition of the assets and liabilities of the organizations. Another major step  jointly taken by IASB and US Financial Accounting Standards was to bring changes in the requirements for disclosure for asset impairment in order to come to a common outcome. In addition, both IASB and Financial Accounting Standards Board (FASB) jointly took step to address the broader asset impairment issues all over the world. Apart from this, the IASB has clarified the various accounting treatment for collateralized debt obligations. Later, IASB ensured that the embedded derivatives are assessed and separated. On the other hand, the financial assets must be reclassified. It can be seen that all these implemented rules and regulations of IASB have been mostly successful in stabilizing the current situation of global financial condition. All these implemented principles and regulations have become crucial tools to minimize the accounting disparities in a major extent. Hence, it can be said that the taken steps of IASB are almost successful to regain the financial stability.

Role of Accounting Standards in the Financial Crisis

At the time of prior accounting standards, there are some major accounting issues or problem mostly associated with the asset valuation method of fair model (Board & Standard, 2012). One of the major problem is the pre-emption of the project of conceptual framework. As per this problem, there is some major fundamental problem in the process of fair valuation. After the occurrence of this problem, the change in the meaning of the fair value in IFRS was proposed to address the particular issue. After that, the next potential problem is the failure to justify choice of the exit value. At that time, the choice of the exit market or the entry market was not properly justified. This was a major problem in the process of accounting. The next problem was the lack of clarity in the market assumptions. All the necessary market assumptions were not clearly clarified in the accounting standards. Due to this, the investors had to face many kinds of investment related problems. Another problem was transaction cost. At that time, in the process of fair value method, the transaction costs were not clearly estimated. One of the major problems is the initial re-measurement (Bell & Griffin, 2012). Due to the problem in the process of fair valuation, many faults found in the process of initial re-measurement. The last problem was about the market. At the time of world financial crisis, the money market had to face many problems.

Fair value method is one of the major and popular models of asset valuation. It can be seen that most of the companies around the globe has adopted the fair value method of asset valuation (Hodder, Hopkins & Schipper, 2014). In the process of fair valuation model, the assets of the business organizations use to be revalued on a frequent basis. One of the major advantages of this fair value method is that it provides the correct and appropriate vale of the assets of the organization that matches the market price of the assets. These are the reasons that forced IASB to take corrective actions to improve the measurement of fair value. It can be seen that there are many importance of the fair value of asset valuation. At world financial crisis, almost all accountants all over the world were blaming the fair value method as the root cause of world financial crisis. All these reasons forced the IASB to take corrective actions to improve the measurement procedure of fair value method (Blankespoor et al., 2013).

IASB Response and Actions

It can be seen that almost every country all over the world has witnessed the effects of global financial crisis on them. Among all those countries, Australia was one. Australia did not escape the effects of global financial crisis. Due to this reason, the Australian Accounting Standard Board, commonly known as AASB, took some key steps and adopted some major strategies to fight the effects of global financial crisis (Stevenson, 2012). One of the major effects of global financial crisis on Australia was the credit crisis. For this reason, the AASB took the pledge that they would support all the international activities of IASB to fight the issues regarding accounting standards caused from the global financial crisis. One of such steps was the reclassification of the financial assets of the business organizations. In this process, the AASB addressed the difference between principles between IFRS and US GAAP regarding the reclassification of the assets. As per the steps taken from AASB, the reclassification of the assets of the companies can be done by issuing Reclassification of Financial Assets. The rules and regulation regarding this is recorded in Amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures. This amendment allows a business organization to reclassify the non derivative financial assets with the help of fair value method. One of the major objective of AASB behind this step was to promote the fair value method as the most reliable method for asset revaluation. Apart from this, the business organizations have to make necessary disclosures at the time of taking any kind of loans (Stevenson, 2012).

It can be seen that the IASB has a great influence on the AASB to pursue an international convergence of Australian Accounting Standard. It is the commitment of the IASB to prepare single set and high quality of global accounting standard to maintain uniformity in the process of Accounting. In this process, the IASB is co-operating with the Australian Accounting Standard to achieve convergence in the accounting process. One of the major objectives of the AASB is to improve the accounting policy of the country. In this process, the adoption of convergence policy is a great milestone for the Australian Accounting Standard Board. Behind this process, the IASB can be named as a major influencer (Mala & Chand, 2012).

Conclusion

The above study sheds light on the various accounting aspects. From the above analysis, it can be seen that fair value method is an important cause of the global financial crisis as per most of the accountants all over the world. In this process, the IASB has taken some major steps to improve the method of fair valuation; and these strategies have been successful to most of the extent. It can be seen that the Australian Accounting Standard Board have taken some major strategies to fight the effects of global financial crisis. One of these steps is the re-classification of assets. The IASB have influenced the AASB to adopt the strategy of convergence. 

References

Bell, T. B., & Griffin, J. B. (2012). Commentary on auditing high-uncertainty fair value estimates. Auditing: A Journal of Practice & Theory, 31(1), 147-155.

Blankespoor, E., Linsmeier, T. J., Petroni, K. R., & Shakespeare, C. (2013). Fair value accounting for financial instruments: Does it improve the association between bank leverage and credit risk?. The Accounting Review, 88(4), 1143-1177.

BOARD, S., & STANDARD, R. (2012). Fair Value Measurement. MEASUREMENT, 9, 90.

Erkens, D. H., Hung, M., & Matos, P. (2012). Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance, 18(2), 389-411.

Erkens, D. H., Hung, M., & Matos, P. (2012). Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance, 18(2), 389-411.

Frankel, J., & Saravelos, G. (2012). Can leading indicators assess country vulnerability? Evidence from the 2008–09 global financial crisis. Journal of International Economics, 87(2), 216-231.

Fratzscher, M. (2012). Capital flows, push versus pull factors and the global financial crisis. Journal of International Economics, 88(2), 341-356.

Hodder, L., Hopkins, P., & Schipper, K. (2014). Fair value measurement in financial reporting. Foundations and Trends® in Accounting, 8(3-4), 143-270.

Mala, R., & Chand, P. (2012). Effect of the global financial crisis on accounting convergence. Accounting & Finance, 52(1), 21-46.

Stevenson, K. M. (2012). Financial reporting: Hearing the GFC message? What message?. Accounting & Finance, 52(1), 9-20.

Stevenson, K. M. (2012). The changing IASB and AASB relationship. Australian Accounting Review, 22(3), 239-243.

Taylor, J. B. (2013). Getting off track: How government actions and interventions caused, prolonged, and worsened the financial crisis. Hoover Press.

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