Political Nature of Setting Accounting Standards
Introduction
After the Great Financial Crises (GFC), an analysis focused on the role financial accounting played in contributing to this phenomenon. Interested parties suggest that financial accounting was key when it came to understanding of what caused GFC. Immediately after the signs of GFC, The European Parliament made official its concerns in Feb, 2008.
A report was presented about the International Account Standard Board (IASB) in which it was urged to reduce the scope that fair-value principle covered (Bengtsson 2011). The global financial crises placed a great amount of pressure on the IASB and the Financial Accounting Standards Board (FASB) to come up with new standards.
European Union and Financial Accounting Standards Board on International Account Standard Board
European Union had been dis-engaged when it came to its influence on International Accounting Standards Board. However, an interest arose; first as disharmonic individual politicians grunts then graduated to serious questions of the standards. Contention arose from the principle of fair valuation of financial instruments. Fair value refers to the revenue that would be realized if a business asset were to be sold. This principle requires that all financial institutions to quote certain financial instruments at market price and if the market price is lower than historical cost, Write-down results. This leads to constant changes in the fair value of financial assets which in return affects the balance sheet as a tool of financial accounting (Bengtsson 2011). The global financial crises of 2007 – 2009 broke out and the debate on financial reporting standards intensified. Some people claimed that the principle contributed to the difficulties that were experienced in the financial institutions. This principle was seen to have been contributing to losses as banks were selling their assets at low prices to avoid contradicting capital requirements. Other people claimed that the principle allowed regulators and marketers to better assess the position of financial institutions. There was little confidence in the value of assets reported as historical cost.
The European Commission went ahead to set up a review of the strengths and weaknesses of the standards set by the International Financial Reporting Standards (IFSR),The Review was being conducted by a team known as Mazars and the ICAEW. The team had been tasked to; after eight years, take stock of IFRS reporting determining whether the switch to these standards of reporting has yielded effective comparability and transparency of the financial reports of the European companies (Bengtsson 2011). There has been tension between European policy makers and the IASB. The review was being done when there existed heightening disharmony between the two bodies. European Policy makers felt that IASB standards on lease accounting was skewed towards United States interests and proposed change to the conceptual framework.
The commission set up by the EU was also looking into Maystadt’s recommendations. Maystadt points out that the financial crises raised account holder’s awareness on what impact a financial reporting is can have on the results of companies and also the economy as a whole (Bengtsson 2011). He recommended the setting up of structures that will allow for the carrying out of a strategic analysis on the impact of the standards on the economy to better coordinate the European position.
Maystadt suggests three-prolonged approach. He says that the European Union should maintain a standard-by-standard procedure adoption. This allows for the law makers to accept or refuse specific standards outlined by the IASB. Amendments on the standards to make it more flexible should be controlled strictly so as to maintain the purpose of uniformity of the standards of reporting. He proposes that the EU should be allowed to amend its IFRS to add adoption criteria. Maystadt recommends a reorganization of the European Financial Reporting Advisory Group (EFRAG) to improve its legitimacy and representativeness (Bengtsson 2011). Transfer of responsibilities to European Securities Markets Authority (ESMA) is his other proposition. He proposes that a new agency that to represent the European Union can be created. Maystadt however advices that restructuring the existing EFRAG is the best option among all his recommendations due to the aspect of a first implementation.
Maystdt proposes that the Accounting Regulatory Committee (ARC) work closely at an earlier stage in the process with EFRAG. The influence of EU has greatly been felt resulting into banks reclassifying financial instruments from trading to the banking book to avoid recognizing unrealized losses.
Asset classification was a prime focus point after the GFC, European Union put pressure on the IASB to limit the types of assets subjected to fair value accounting .September 2008 saw the fall of Lehman Brothers (Bengtsson 2011). This led to the soaring of controversies of on IASB’s standards of financial account. Politicians reacted to this by giving pressure on the IASB to ease the rules used to value financial instruments.
The G20 summit was done in November 2008. IASB Foundation had sent a letter to the summit chairperson; President Bush, defending fair valuation. The letter stressed the need to maintain a separate standard setting process. During the meeting, leaders of G20 called for immediate steps by accounting standard setters to address guidance for valuation of securities and weaknesses in accounting and disclosure standards (Bengtsson 2011). EC established an expert group that further pushed IASB to be open to views of supervisory, regulatory and business communities. These ended up in IASB confirming that it would replace IAS 39 and the Chairman of IASB promised that the body would ensure that financial institutions in Europe would be in a position to use the new IFRS (Bengtsson 2011). IASB however, voiced its concern over this pressure claiming that there was excessive force on the two boards to make fast, uncoordinated and prescribed changes.
The push by G20 resulted in Basel Committee of Banking Supervisors. They came up with a set of guiding principles that were meant to see to it that issues relating to procyclicality and systemic risk are considered in the reform agenda.
Conclusion
In conclusion, Global Financial crises were a game changer and yes it resulted into so many changes in the International Account Standards Board Principles which were attributed to immense political pressure exerted in the body from government agencies. After this phenomenon, accounting standard setting were re-politicized unlike earlier times when IASB succeeded in maintaining independence from the influence of politics. Political players have gained influence over the stakeholders. Political bodies like the EU have succeeded in changing the IASB’s standards.
References
Bengtsson, E 2011. Repoliticalization of accounting standard setting The IASB, the EU and the global financial crisis, Critical Perspectives on Accounting, Volume 22, Issue 6, p.567-580.
Bernanke, Ben. 2013. The Federal Reserve and the financial crisis.
Blinder, Alan S. 2013. After the music stopped: the financial crisis, the response, and the work ahead. New York: Penguin Press.
Crump, R, (2014), EC launches review of IFRS in the EU, Accountancy Age, 23 January
Geithner, Timothy F. 2014. Stress test: reflections on financial crises.
James, Harold. 2001. The end of globalization: lessons from the Great Depression. Cambridge, Mass: Harvard University Press.
Morris, Charles R. 2008. The trillion dollar meltdown: easy money, high rollers, and the great credit crash. New York: PublicAffairs.
Paulson, Henry M. 2010. On the brink: inside the race to stop the collapse of the global financial system. New York: Business Plus.
Soros, ge. 2008. The new paradigm for financial markets: the credit crisis of 2008 and what it means. New York: PublicAffairs.
WesselGeor, David. 2009. In Fed we trust: Ben Bernanke's war on the great panic. New York: Crown Business.
Introduction
After the Great Financial Crises (GFC), an analysis focused on the role financial accounting played in contributing to this phenomenon. Interested parties suggest that financial accounting was key when it came to understanding of what caused GFC. Immediately after the signs of GFC, The European Parliament made official its concerns in Feb, 2008.
A report was presented about the International Account Standard Board (IASB) in which it was urged to reduce the scope that fair-value principle covered (Bengtsson 2011). The global financial crises placed a great amount of pressure on the IASB and the Financial Accounting Standards Board (FASB) to come up with new standards.
European Union and Financial Accounting Standards Board on International Account Standard Board
European Union had been dis-engaged when it came to its influence on International Accounting Standards Board. However, an interest arose; first as disharmonic individual politicians grunts then graduated to serious questions of the standards. Contention arose from the principle of fair valuation of financial instruments. Fair value refers to the revenue that would be realized if a business asset were to be sold. This principle requires that all financial institutions to quote certain financial instruments at market price and if the market price is lower than historical cost, Write-down results. This leads to constant changes in the fair value of financial assets which in return affects the balance sheet as a tool of financial accounting (Bengtsson 2011). The global financial crises of 2007 – 2009 broke out and the debate on financial reporting standards intensified. Some people claimed that the principle contributed to the difficulties that were experienced in the financial institutions. This principle was seen to have been contributing to losses as banks were selling their assets at low prices to avoid contradicting capital requirements. Other people claimed that the principle allowed regulators and marketers to better assess the position of financial institutions. There was little confidence in the value of assets reported as historical cost.
The European Commission went ahead to set up a review of the strengths and weaknesses of the standards set by the International Financial Reporting Standards (IFSR),The Review was being conducted by a team known as Mazars and the ICAEW. The team had been tasked to; after eight years, take stock of IFRS reporting determining whether the switch to these standards of reporting has yielded effective comparability and transparency of the financial reports of the European companies (Bengtsson 2011). There has been tension between European policy makers and the IASB. The review was being done when there existed heightening disharmony between the two bodies. European Policy makers felt that IASB standards on lease accounting was skewed towards United States interests and proposed change to the conceptual framework.
The commission set up by the EU was also looking into Maystadt’s recommendations. Maystadt points out that the financial crises raised account holder’s awareness on what impact a financial reporting is can have on the results of companies and also the economy as a whole (Bengtsson 2011). He recommended the setting up of structures that will allow for the carrying out of a strategic analysis on the impact of the standards on the economy to better coordinate the European position.
Maystadt suggests three-prolonged approach. He says that the European Union should maintain a standard-by-standard procedure adoption. This allows for the law makers to accept or refuse specific standards outlined by the IASB. Amendments on the standards to make it more flexible should be controlled strictly so as to maintain the purpose of uniformity of the standards of reporting. He proposes that the EU should be allowed to amend its IFRS to add adoption criteria. Maystadt recommends a reorganization of the European Financial Reporting Advisory Group (EFRAG) to improve its legitimacy and representativeness (Bengtsson 2011). Transfer of responsibilities to European Securities Markets Authority (ESMA) is his other proposition. He proposes that a new agency that to represent the European Union can be created. Maystadt however advices that restructuring the existing EFRAG is the best option among all his recommendations due to the aspect of a first implementation.
Maystdt proposes that the Accounting Regulatory Committee (ARC) work closely at an earlier stage in the process with EFRAG. The influence of EU has greatly been felt resulting into banks reclassifying financial instruments from trading to the banking book to avoid recognizing unrealized losses.
Asset classification was a prime focus point after the GFC, European Union put pressure on the IASB to limit the types of assets subjected to fair value accounting .September 2008 saw the fall of Lehman Brothers (Bengtsson 2011). This led to the soaring of controversies of on IASB’s standards of financial account. Politicians reacted to this by giving pressure on the IASB to ease the rules used to value financial instruments.
The G20 summit was done in November 2008. IASB Foundation had sent a letter to the summit chairperson; President Bush, defending fair valuation. The letter stressed the need to maintain a separate standard setting process. During the meeting, leaders of G20 called for immediate steps by accounting standard setters to address guidance for valuation of securities and weaknesses in accounting and disclosure standards (Bengtsson 2011). EC established an expert group that further pushed IASB to be open to views of supervisory, regulatory and business communities. These ended up in IASB confirming that it would replace IAS 39 and the Chairman of IASB promised that the body would ensure that financial institutions in Europe would be in a position to use the new IFRS (Bengtsson 2011). IASB however, voiced its concern over this pressure claiming that there was excessive force on the two boards to make fast, uncoordinated and prescribed changes.
The push by G20 resulted in Basel Committee of Banking Supervisors. They came up with a set of guiding principles that were meant to see to it that issues relating to procyclicality and systemic risk are considered in the reform agenda.
Conclusion
In conclusion, Global Financial crises were a game changer and yes it resulted into so many changes in the International Account Standards Board Principles which were attributed to immense political pressure exerted in the body from government agencies. After this phenomenon, accounting standard setting were re-politicized unlike earlier times when IASB succeeded in maintaining independence from the influence of politics. Political players have gained influence over the stakeholders. Political bodies like the EU have succeeded in changing the IASB’s standards.
References
Bengtsson, E 2011. Repoliticalization of accounting standard setting The IASB, the EU and the global financial crisis, Critical Perspectives on Accounting, Volume 22, Issue 6, p.567-580.
Bernanke, Ben. 2013. The Federal Reserve and the financial crisis.
Blinder, Alan S. 2013. After the music stopped: the financial crisis, the response, and the work ahead. New York: Penguin Press.
Crump, R, (2014), EC launches review of IFRS in the EU, Accountancy Age, 23 January
Geithner, Timothy F. 2014. Stress test: reflections on financial crises.
James, Harold. 2001. The end of globalization: lessons from the Great Depression. Cambridge, Mass: Harvard University Press.
Morris, Charles R. 2008. The trillion dollar meltdown: easy money, high rollers, and the great credit crash. New York: PublicAffairs.
Paulson, Henry M. 2010. On the brink: inside the race to stop the collapse of the global financial system. New York: Business Plus.
Soros, ge. 2008. The new paradigm for financial markets: the credit crisis of 2008 and what it means. New York: PublicAffairs.
WesselGeor, David. 2009. In Fed we trust: Ben Bernanke's war on the great panic. New York: Crown Business.
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