22 December 2008

EDHEC survey - changes in accounting standards lead to new problems

A new EDHEC study shows that the majority of international investors doubt that the recent amendments to IAS 39 and IFRS 7 will be effective in attenuating the financial crisis. Less than a quarter of the respondents to the international survey believe that these amendments are necessary and well suited to resolving the problems of bank solvency. Moreover, three-quarters of respondents believe that they are likely to lead to new problems. 

These published study and the responses made show that the measure of fair value and the choice of accounting treatments made by the IASB are highly debatable but do not necessarily mean that fair value accounting itself must be rejected.

EDHEC even considers that a return to accounting at historical cost would be mistaken; it would only prolong the crisis, much as it prolonged the Japanese banking and financial crisis.

The EDHEC study shows that the amendments to the standards are counterproductive. By making it possible, under certain conditions, to report at historical cost transactions that had previously been reported at fair value, these amendments reduce the amount of information contained in financial reporting. These changes are likely to hide the real risks to which companies are exposed and to increase the mistrust of the financial community. In addition, only 44.2% of those who respond to the call for reaction think that these amendments are likely to reduce pro-cyclicality.

Even if fair value accounting leads to a cyclical weakening justified by the crisis of the fair value of the equity of financial institutions, it is not the accounting standard setter's job to estimate the amount of additional capital needed or to call for a curtailment of business activity. That is the role of the prudential regulators.

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EDHEC study on fair value

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