Subscribe to BCA Journal Know More

December 2008

The beginning of the end of US GAAP

By Uday Chitale, Murtuza Vajihi, Chartered Accountants
Reading Time 3 mins

Accountant Abroad

The International Federation of Accountants (IFAC) has voiced
strong opposition to what it sees as attempts to radically change or suspend the
use of fair value accounting without proper due process.

The federation warns against making changes at a national or
regional level which would worsen reporting differences and further confuse
financial markets, resulting in a lessening of confidence in financial
reporting. This would be exact opposite of what is required in current
circumstances. Reducing transparency is not the answer . . . . and it will not
serve the interests of investors.

IFAC believes the additional guidance from the International
Accounting Standards Board (IASB) and the United States Financial Accounting
Standards Board, as well as the International Auditing and Assurance Standards
Board in its Staff Audit Practice Alert, Challenges in Auditing Fair Value
Accounting Estimates in the Current Market Environment
, has been very
valuable and will contribute to the public interest through more consistent
application of the standards.

Investors require a single set of accounting rules but a
current European Commission review of fair value accounting threatens to
undermine transparency and comparability. The Commission is due to host a
meeting in Brussels to discuss accounting reform, including further relaxation
to fair value.

Transparency, comparability and consistency in financial
reports is of utmost importance to the investor. In the view of the Investment
Management Association, making changes suggested by the Commission by the end of
October poses a risk that this may not be maintained and that such changes could
result in unhelpful reporting. Even though the current credit crisis requires
swift measures by governments and regulators, fundamental changes in accounting
should be implemented only after due process and the involvement of all

The International Accounting Standards Board agreed to rush
through changes that allowed some valuations of some financial instruments —
securities — to duck a fair value calculation by being reclassified from ‘held
for sale’ to ‘held for investment. The European Commission eventually endorsed
this move in mid week, but only after considering pushing through changes that
would have allowed financial institutions to reclassify a much wider spectrum of
financial assets, including derivatives.

The US Securities and Exchange Commission is to take
mark-to-market accounting to task in a series of roundtables that will examine
the role fair value played in the current market turmoil.

The first roundtable takes place on 29 October and consists
of two panels, one discussing the relationship between fair value and the
financial crisis that has enveloped the major banks and the second examining
potential changes to the current accounting models.

Fair value has been lambasted by financial figureheads and
politicians in the US, UK and Europe for intensifying the effects of the credit
crunch, with many calling for the model to be suspended during the current

(Source :

You May Also Like