The Causes of the 2008 Financial Crisis
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characteristics. IASB believes that this is a forward-looking expected credit loss model that applies to all financial instruments subject to impairment accounting and will result in the more timely recording of loan losses on the books. Also, IFRS 9 was designed to address the so-called own credit issue, which can be described as a chain of events triggered when financial institutions choose to measure their debt at fair value. In this case, when the value of their debt declines, they record their gains in the profit and loss account, impacting creditworthiness of financial institutions. The IFRS 9 also includes an improved hedge accounting model to better link the economics of risk management with its accounting treatment. In particular, the initial measurement of the financial instruments under IFRS 9 is consistent with IAS 39. To simplify the subsequent accounting treatment for financial instruments, IASB eliminated available or held for sale securities (assets). This category of securities had a combined valuation approach, i.e., the change in the normal value of these securities was required to be recorded in either other comprehensive income or income statement, depending on whether the security itself was realized (sold) or not. Thus, with the elimination of the available or held for sale securities, all assets would be recorded at either fair (trading securities) value or historical cost (held-to-maturity securities). In other words, a financial instrument would be measured at its fair value unless it meets two criteria: (1) it has only “basic loan features” (contractual cash flows of principal and interest) and (2) it is “managed on a contractual yield basis” (an issuer’s credit quality triggers a pre-specified loan rate reset).14 Also, the IASB emphasized that “occasional sales of instruments with basic loan features would not trigger a wholesale switch to fair value accounting for all such instruments as long as these sales were consistent with a general ‘originate and hold’ business model.”15 This change triggered financial executives’ concern that some assets will be reclassified under the new regulation and will be moved into the trading securities category, changing the fair market value of those assets, and hitting companies’ income statements.
IFRS v. US GAAP: To Adopt or Not to Adopt? That Is the Question Among professionals and academics alike the question about the future of accounting is worded straightforwardly: Should the US Stay US GAAP or Go IFRS or become financially bilingual? The July 2012 Final Staff Report, issued by the Office of the Chief Accountant at SEC, included an IFRS work plan. The staff provide no provision for adopting IFRS as an accounting regulation in the US. However, they did show a lot of optimism and opportunities for exploring other means of incorporating IFRS. They also demonstrate a substantial commitment to the “objective of a single set of high-quality, global accounting standards.” Specifically, while communicating the opinion of the broad-spectrum investor
