One of the main reasons that contributed to the Financial Crisis that began during
2006-end and became a full blown crisis on 15 Sep 2008, with the collapse of
Lehman Brothers, can be traced to some of the Accounting Standards followed
then, especially IAS 39. This is what critics says. By the end of 2008 , such accounting
practices, along with other economic factors, resulted in the
collapse of numerous commercial and investment banks, including several high
profile institutions such as Bear Stearns, Merrill Lynch, Wachovia, etc.
The Financial Crisis resulted in a near collapse
of the US banking sector. Most
agree the crisis started due to the bursting of the housing bubble in the US,
traceable to the hike in interest rates by Ben Bernanke. The near collapse of the financial sector has
resulted in the greatest economic contraction that the US and Europe have seen
since the end of the Second World War.
After the dust settled, there were
legislative and regulatory changes to address the underlying causes of the
housing bubble and the Financial Crisis. Such initiatives to prevent a repeat
of the Financial Crisis demanded suitable amendments to Accounting Standards. In
this regard, fair value accounting that was a considered as a major
contributing factor to the pro-cyclical fluctuations in the value of financial assets,
financial instruments and liabilities demanded a revisit.
Accordingly, Accounting Standard setters began
to pay more attention to IAS 39 that might have played a significant role in
contributing to the Financial Crisis. Now, IAS 39 is no longer in existence. It
is replaced by IFRS 9 that provides guidance on Financial Instruments:
Recognition and Measurement.
Many believe that IFRS 9 affects just banks
and financial institutions. It is not true. It affects non-financial
institutions as well, especially , if you have a substantial trade debtors
portfolio. Such entities will have to start providing for possible future
credit losses much earlier. Please refer to the attached presentation for more
details. Please click the following link.
