The IFRS or the International Financial Reporting Standards are one element of the globalization of the world economy. The stated objectives of the IASB or the International Accounting Standards Board are: (a) "to formulate and publish in the public interest, accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance, and (b) to work generally for the improvement and harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements". In other words, the main objective is to achieve a degree of comparability that will help investors make their decisions while reducing the costs of multinational enterprises in preparing multiple sets of accounts and reports. In July 2002, the European Union took a regulation deciding that by January 2005, the first European companies that are listed on the stock markets have to publish their accounts under the IFRS. We look into more details of this regulation in this document.
[...] In order to evaluate if the fair value principle and its implementation did contribute to accelerate the credit crisis, we are going to proceed in three steps: -First we are going to test on our sample if there is more volatility in fair value than in historical cost. In fact without volatility there is no pro-cyclical effect. In order to do so we decided to compare the net income evolution between two years under French GAAP and under IFRS. We decided to use the net income to measure volatility based on Mary E. [...]
[...] The amendment also permits an entity to transfer from the available-for-sale category to the loans and receivables category a financial asset that would have met the definition of loans and receivables (if the financial asset had not been designated as available for sale), if the entity has the intention and ability to hold that financial asset for the foreseeable future Analysis of the impact of the fair value principle in relevant sector At that point we have seen in section two how the sub-prime crisis has led the world economy into the credit crisis and linked it to the IFRS fair value principle. [...]
[...] Therefore we are going to challenge Tobias Adrian and Hyung Song Shin's finding in our case analysis in order to find evidence that the fair value principle accelerated the credit crisis Fair value in the perspective of accounting fundamentals The debate about the fair value principle in accounting raises a fundamental question about accounting itself. What is the purpose of accounting and what should be taken for granted or not? Although the aim of this project is not about questioning accounting itself the following part will enable us step back and have more perspective about this debate. [...]
[...] In August 2008 in the article “closing the GAAP” in The Economist the Security and Exchange Commission chairman Christopher Cox hailed the move to an “international language of disclosure, transparency and comparability.” It is interesting to notice that concerning the measurement of “financial asset” with the fair value principle the US GAAP and the IFRS are similar with the exception of some detail differences in application The debate about the fair value principle From an historical point of view in Europe the accounting law emerged from the requirement to be able to prove trade between traders in case of bankruptcy. [...]
[...] One hypothesis suggests that the fair value did contribute to accelerate the credit crisis and the two others suggest no relationships. To give a final word to this project we can say that it was highly complicated to operate a test based on a case analysis. Indeed if the fair value contributed to accelerate the credit crisis it did not use simple and logical ways because the world economy is much more complex than what the theory suggests. Different economical strengths at the macroeconomic and microeconomic level are at stake at the same time and interact with each other. [...]
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