Role of IASB and Auditing Standards †Free Samples to Students

Question: Discuss about the Role of IASB and Auditing Standards. Answer: Introduction: Australian Accounting standards are issued by the Australian Accounting Standard Board. AASB follows a policy of transaction neutrality which means that that similar or like natured events and transactions are treated in the similar manner among the profit sector and the non-profit sector. These standards are aimed at the development and maintenance of high quality in the financial reporting practices for all the Australian reporting entities. The accounting standards have been amended on time to time basis in response to problems like Global financial crisis which was occurred in year 2007-2008 and is considered as the worst disaster of the worlds economy. There were various reasons that led to the crisis. The methods that were used to account for the financial instruments and also the requirement for their fair valuation as per the accounting standards have actually contributed to the financial crisis. At the end of year 2007 the crisis began to raise, the professional accountants and the financial directors were forced to account for the main reasons behind the remarkable decline in the earnings of company, primarily because of the excessive losses that were being recognized after the re-measurement of derivative instruments fair value and also to make good the losses existing in special purpose vehicles (Anamaria M?d?lina, 2014). The same directors were paid considerable amount of bonuses on the basis of increased fair values shown in the financial statements (Jarolim ppinger, 2012). In the initial days of emergence of subprime crisis during late 2007, home loans which were housed in securitized special purpose vehicles were not able to clear their debts due to sudden decline in house prices (Shiller, 2012). Resultantly, the financial institutions having low credit ratings especially the subordinated loans in those securitization vehicles started reporting huge losses. In earlier years these low quality subordinated loans had confined to limited markets and there were higher demands for the same as these papers were yielding high returns. As a result of which the positive adjustments of fair values were being recognized in the profit statements. But, when the decline in prices of housing industry started gaining momentum, the market for the low quality debts started disappearing and therefore it led to swift reduction in fair valuation of these debts (Pozen, R.C., 2009). The effect of subprime crisis had reach the various economies all over the globe, which purchased those low quality debt papers in order to make benefits from the lucrative market (Mishkin, 2011). These financial institutions had already securitized the mortgages of their own and due to financial pressures from all over the world, these special purpose vehicles also started making defaults and thus resulting in reporting of further losses (Ojo, M., 2010). During the global financial crisis, the credit losses on the loans and other financial instruments were being recognized lately and this approach was identified as the severe limitation of the already existing accounting standards (GAA Accounting, 2017) Moreover, the stakeholders believed that the financial statements did not make sufficient disclosures on various elements of fair value measurement. The serious impact of global financial crisis on the worlds economy coupled with the extensive political interference has made IASB revise the accounting standards in relation to the financial instruments. Therefore, the international accounting standard board has now issued the relevant IFRS in response to the global financial crisis. In response to the severe issue of financial crisis the IASB has established a Financial Crisis Advisory Group. The FCAG has by far concluded that the revised standard should also consider a review on impairment recognition, fair value recognition guidance and hedging provisions. It also opined that applicable standards did not consider different business models which were adopted by such entities. Further, the fair value recognition should not be considered a suitable basis for recognition of every financial instrument. It was also concluded that the biggest setback was the attitude of the companies to just legally comply the accounting standards and ignoring the principles contained in the standards up to a certain extent. It also reached to the conclusion that detailed understanding is needed in illiquid markets for recognition of fair value instruments. Furthermore, a series of actions were also taken by IASB in response to the crisis such as the proposals for improving the accounting of off balance sheet items were made and the possible difference between the approaches followed in IFRS a nd GAAP were clarified by issuing the guidance thereupon (Australian Accounting Standard Board, n.d.) The IASB through its remarkable efforts has been able to control the severity of the global financial crisis on the world economy but the fact that accounting for recognition of financial instruments needs to be changed from time to time, its responsibility has not ended there. It needs to develop the more simplified and high quality standards on financial instruments so as to satisfy all the stakeholders including investors of the companies and political bodies influencing their existence. Amendments to the accounting standards in response to Global Financial Crisis IAS 39 was highly criticized especially by the banks because of its complexities and the possible consequences of the use of mark to market methods of measuring the financial instruments. The banks have suggested that the market to market valuation would not always help in reflecting the fair value of some assets and thereby contributed to the credit crisis by weakening the balance sheet of banks. In order to deal with this problem IASB has introduced amendments to IAS 39 to reclassify the financial instruments. This revision was made with the motive of simplifying the financial instruments classification. The new approach followed by IASB constitutes primarily merely two classes of financial instruments: instruments measured on the fair value basis and the others which are valued at amortized value. The earlier IAS 39 prescribed the complex classification of financial instruments which included four classes of financial assets and two classes of financial liabilities. This approach of IASB was extremely difficult to be followed by the reporting entities and the companies were taking undue advantages of fair value accounting. IFRS 13, Fair Value Measurement, issued by IASB in May 2011 and explains the concept of fair value. It provides the framework to measure the fair values and also prescribes the material disclosures in relation to measurement of fair value. IASB wanted to increase the disclosures about the fair value so that the intended users could make better assessment of the valuation techniques which were used in determining the fair value. The IFRS 9, Financial Instruments, was aimed at the replacement of IAS 39, Financial Instruments Recognition and Measurement. IFRS 9 is aiming towards the further developments which are in progress in relation to impairment, derivatives and hedging. There is an increased focus on the fair value accounting as well as reporting as it is important for providing both reliable and relevant information to intended users of financial reports. Also, IFRS 9 has lessened the degree of judgment in classifying and accounting the financial assets, which must support uniform financial reporting in relation to the financial assets and contribute to better understanding and comparison of financial information. The overall impact of this IFRS is that there is enhanced focus on accounting of financial assets on the basis of fair value instead of use of other basis of measurements like amortized or historical cost. AASBs response to the Global Financial Crisis Australian Accounting Standard Board is the regulatory body existing for the development issuance and the maintenance of accounting standards and the related pronouncements in Australia. Like the other economies of world Australian economy was also affected by the financial crisis that occurred globally. In order to respond to the severe issues of credit crisis AASB had promptly decided to revise the Australian accounting standards. The accounting standards formulated by the AASB were amended to ensure their consistency with the new standards that were prescribed by International Accounting Standard Board (PKF Australia, 2015). These amendments were made to ensure that the business entities in Australia are able in using those accounting treatments that are in consistence with those standards that are applicable in other countries (Claessens, 2010). The amendments made by AASB are retrospectively effective from 1st July 2008. AASB then decided to quickly respond to the IASBs action o f amendment to IAS 39 and IFRS 7, AASB issued the amendments to AASB 139 and AASB 7. The biggest challenge for IASB and FASB was to enhance the investors faith and confidence in financial reporting and also to help boards across the world to identify accounting issues that are significant and requires immediate attention of them. In order to discuss these accounting issues IASB conducted various round table meetings in Tokyo, London and New York. Participant countries in those meetings were asked for help to identify significant accounting issues that should be given immediate and long run consideration. At that time the chairperson of AASB also participated in Tokyo Roundtable meeting. IASB through its various initiatives and projects is trying to increase the confidence of investors in financial reporting through: Improving the disclosure and accounting requirements for off balance sheet items. These proposed disclosures are made part of consolidated financial statements ED 171 which are equivalent of AASB to ISAB ED 10 (Hughes Hoy, 2013). Clarifying accounting treatment regarding embedded derivatives in financial statements which needs classification using fair value accounting through the profit statements in accordance with amendments brought in IAS 39 in year 2008. The AASB from time to time has commented upon all these IASB initiatives to ensure that its standards converge with the IFRS and important and relevant improvements are made to Australian standards (Australian Government, 2008). References list: Anamaria, S. and M?d?lina, M., 2014. The Evolution of the Fair Value Accounting-A Response to the Global Financial Crisis.Ovidius University Annals, Series Economic Sciences,14(2). Australian Accounting Standard Board, n.d., How standard setters are dealing with the credit crisis: available at: https://www.aasb.gov.au/admin/file/content2/c7/Article_update_on_credit_crisis_1235697565128.pdf (assessed on: 29.09.2017) Australian Government, 2008, Australian Accounting Standards Amended in Global Action to Address Impact of Credit Crisis: available at: https://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2008/067.htmpageID=003min=njsYear=DocType= (assessed on: 29.09.2017) Claessens, S., DellAriccia, G., Igan, D. and Laeven, L., 2010. Cross-country experiences and policy implications from the global financial crisis.Economic Policy,25(62), pp.267-293. GAA ACCOUNTING: The Journal of the Global Accounting Alliance, 2017, Are Accounting Standards Responsible for the Global Financial Crisis, available at: https://www.gaaaccounting.com/are-accounting-standards-responsible-for-the-global-financial-crisis/ (assessed on: 29.09.2017) Hughes, M. and Hoy, S., 2013. Two Steps Backward and One Step Forward: The IASB's Response to Off-Balance Sheet Financing Through Investments in Other Entities. Jarolim, N. ppinger, C., 2012, ACRN Journal of Finance and Risk Perspectives, Fair Value Accounting in Times of Financial Crisis, Vol. 1, pp. 67-90. Mishkin, F.S., 2011. Over the cliff: From the subprime to the global financial crisis.The Journal of Economic Perspectives,25(1), pp.49-70. Ojo, M., 2010. The Role of the IASB and Auditing Standards in the Aftermath of the 2008/2009 Financial Crisis.European Law Journal,16(5), pp.604-623. PKF Australia: Accountants and Business Advisers, 2015, IASB concludes its response to the global financial crisis, available at: https://www.pkf.com.au/blog/2015/iasb-concludes-its-response-to-the-global-financial-crisis/ (assessed on: 29.09.2017) Pozen, R.C., 2009, Crisis Management, Is it fair to blame fair value accounting for financial crisis? Available at: https://hbr.org/2009/11/is-it-fair-to-blame-fair-value-accounting-for-the-financial-crisis (assessed on 29.09.2017) Shiller, R.J., 2012.The subprime solution: how today's global financial crisis happened, and what to do about it. Princeton University Press.