Ias and Global Financial Crisis

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					 The Lebanese Association Of Certified
         Public Accountants
       the 17th International Congress 22 and 23 April 2009
          2008 : Turbulent Year, Repercussions On 2009


Global Financial Crisis and Accounting Profession

                   Naim Saba Khoury
                       CHAIRMAN JACPA




                                                              1
           Global Financial Crisis
- Mortgage loans in U.S.A.
-S     iti ti      d
  Securitization and cycling of such mortgage loans.
                         li   f    h    t     l
- Inadequate regulatory supervision of banks and financial institutions:
       • Asset quality.
                q    y
       • Liquidity.
       • Capital adequacy.
                      profession.
       • Accounting profession
       • Corporate governance.
       • Risk management .
       • Derivatives .
       • Corruption.
       • Ineffective due diligence .
       • Non prudent expectations.
                                                                   2
- Lack of regular supervisions of rating agencies .
- Global capitalist system .
      • Acted in contradiction of corporate social
        responsibilities.
                 forces
      • Market forces.
      • Lack of trust .
      • Uncertainty in market .



                                                      3
Global Financial Crisis And Accounting
Gl b l Fi    i lC i i A dA         i
              Standards
                             g
 The factors that led to the global financial crisis were
 attributed to economic causes and not to accounting
 standards i.e. Fair value accounting




                                                            4
    Questions Raised As A Result Of
        Global Financial Crisis
- Can we blame the accounting setting standards
  for d ti       ff i    l           ti f
  f adoption of fair value accounting for
  financial instruments?
- Has accounting contributed to spreading and
  deepening the crisis in the global arena?
- Does the return to the use of historical cost
  method instead of fair value method provide
  more benefits for financial reporting purposes?
                                                    5
   Answers In Response To Questions
                Raised
- Arguments on fair value estimate and measurement
   have taken place before the crisis and are still
   ongoing however the debate did not at all address
   ongoing,
   rejection or suspension of fair value accounting.
- Fair value accounting responses to economic value
   which provide more meaningful and beneficial
   information for the users of the financial statements.



                                                       6
- Historical cost method shall not reflect fair value and
   thus the financial statement shall fail to reflect full
   transparency. In addition, management can manage the
   profit according to its intention, Also financial
   statements shall not disclose all risks involved in the
             instruments
   financial instruments.
- Fair value accounting is reflecting what is occurring in
                                   g             p
   the market and therefore recognizes and reports losses
   incurred.
- Without using fair value accounting, losses can not be
         l d d           d hi h            h f i
   revealed and reported, which means that fair value  l
   accounting leads to a fair and true view of the financial
   statements

                                                           7
                        IFAC Efforts
-   Promote educational programs and awareness among
                           g             g
    auditors for accounting and auditing statements related to
    financial instruments.
-   Strengthen global convergence for financial reporting and
    establish joint committee with U.S.A for the crisis.
-   Develop debates on best practice to the audit of financial
    institutions.
-   Increase t
    I                      i fi      i l     ti
              transparency in financial reporting
-   Audit of estimates and valuations in the case of market
               y
    uncertainty.
-   Audit Alerts.
-   Accounting and auditing amendments.
-   R           d i       G
    Recommendations to Group of T  f Twenty - G20
                                                                 8
                 The Crisis And IFRS
              g
- Accounting standards amendments due to the crisis
• IAS No. 39
   - Reclassification of financial assets out of trading category
   in particular circumstances.
   - Transfer from available for sale category to the loan and
                                           g y
   receivable category financial asset that met the definition of
   loans and receivable, if the entity has the intention and
   ability to hold for foreseeable future.
• IFRS (7)(7
    in response to amendment of IAS 39
                                                             9
                 IFRS Amendments
1.   Amendments of May 2008 resulting from the improvement
                                       2009.
     project, effective date January 1 2009.

           (5
     IFRS (5) Non. Current asset hold for sale and discontinued
     operation.
         (1
     IAS (1)             Presentation Of Financial Statements.
         (16)
     IAS (16)            Property, Plant And Equipment.
         (19)
     IAS (19)            Employee Benefits.
         (20)
     IAS (20)            Governments Grants.
         (25)
     IAS (25)            B       i C t
                         Borrowing Costs.
         (27)
     IAS (27)            Consolidation and separate financial
                                statements.

                                                          10
    (28)
IAS (28)   Investment In Associates.
    (29)
IAS (29)   Financial Reporting In HYP
           Economies.
           Economies
    (31)
IAS (31)   Interest In Joint Venture.
IAS (32)
    (32)    Financial Instruments – Presentation
    (36)
IAS (36)   Impairment Of Assets.
    (38)
IAS (38)   Intangible Assets.
    (39)
IAS (39)   Financial Instruments, Recognition
           Measurement.
    (40)
IAS (40)                Property
           Investment Property.
    (41)
IAS (41)   Agriculture


                                               11
2.   Other Amendments
     IFRS 1      First – Time Adoption of IFRS.
     IFRS 2      Share Based Payment.
     IFRS 3      Business Combinations.
                 B i        C bi ti
     IFRS 7                 Instruments-
                 Financial Instruments- Disclosures
     IAS 1                                 Statements
                 Presentation Of Financial Statements.
     IAS 27      Consolidated And Separate F/S.
     IAS 28      Investments In Associates.
     IAS 31      Interest In J.V.
     IAS 32      Financial Instruments, Presentation.
     IAS 39      Financial Instruments, Recognition
                 Fi      i lI            R      ii
                 Measurement.


                                                         12
    Global Financial Crisis And Auditing

- IFAC issues two alerts as follows:
   • Challenges in auditing fair value accounting estimates.
   • Audit consideration in respect of going concern.
                               p       g g
- The crisis key audit and accounting discussions are
  focused on various topics including: Valuation,
  impairment, liquidity, market confidence, risk
  management, transparent disclosure.
- Madoff Case
- IFAC indicates opposition to a more radical change of
                                               process
  the use of fair value accounting without due process.
                                                               13
Key Auditing Issues C
K A diti I                   t To
                    Consequent T
           The Crisis

-            assets goodwill
  Intangible assets, goodwill.
- Going concern.
- Impairment of assets.




                                    14
                   Assets
        Intangible Assets, Goodwill
- Goodwill accumulated in the boom as a result of
   merger and acquisition transactions.
- As the economy deteriorated g
                  y               goodwill values declined,,
   and impairment losses were incurred.
                             (       500)
- Goodwill book values in (s & p 500) are valued at 2.6
               10%
   trillion or 10% of their total assets i.e. shall absorb
   equity value (Gold Man Sacks).
                                       $100
- Goodwill at AOL Time Warner is $100 billion, in
                                              $6
   Royal Bank of Scotland amounted to $6 billion.

                                                          15
                   Going Concern
- Going concern assumption is a fundamental principle in
   the preparation of financial statements.
- Assessment of the validity of such assumption is the
   responsibility of management (BOD).
           i         f h         f i
- Appropriateness of the use of going concern assumption  i
   should be considered by the auditor.
- The financial crisis led to lack of funds to entities, which
   may affect the entity ability to continue as a going
   concern.
  Disclosures required
- Disclos res req ired in the financial statements are
   driven by management.
- A need to include an emphasis of matter in the auditors
                            p
   report should be considered.
                                                           16
        Impairment Of Financial Assets
- Prolonged decline or other than temporary decline.
            factors
- Specific factors.
- Other factors:
   - Intent and ability to hold investments for a sufficient
        period to recover or to decline.
                                     p y
   - Financial condition of the company.
   - Matters that affect operations of the company.
   - Length of the time the carrying amount was less than cost.
   - Materiality of the decline.
   - Evidence to reach conclusion.

                                                           17
   IFAC Recommendations To
                     (G.20)
     Group Of Twenty (G.20)
Accountancy profession plays an essential role in resolving
the financial crisis and in building a reformed international
financial system:
IFAC, in helping to strengthen this role, provided the
                                                       (G.20):
following recommendations to the Group Of Twenty (G.20):
- To adopt ISAs where they have not already been followed,
in order to strengthen transparency and accountability, in
audit of F/S and to help national and jurisdictional regulatory
                        p               j              g      y
system.
- To adopt OECD principles of corporate governance.


                                                             18
- To develop implementation guidance for all global standards
   such as IASs, IFRS, OECD’S principles and FSF.
                           principles-
- Establish international, principles-based threshold
   competencies for senior financial officers in public interest
               ie                        ethics
   companies i.e. training in corporate ethics, knowledge and
   applications of financial reporting standards, CPE, rules and
   regulations.
- Reform of enterprise risk management systems and senior
   remunerations.
- To adopt IPSAS


                                                         19
- To acknowledge the importance of SMEs.
  To               ld b k d h i              i l
- T support world bank and other international
  institutions to assist countries to strengthen the
  financial implementation of high quality models
  fi     i li l           i    f hi h     li     d l
  of reporting infrastructure. To establish and
          h       i l       f i l b di
  strengthen national professional bodies .
- To support (ROSC) – Report on observance of
  standards and codes.


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