How far did the fair value principle contribute to accelerate the credit crisis in France?

Résumé du document

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.

Extraits

[...] So it led to a demand for innovative, and inevitably riskier, financial instruments and for greater leverage. And the financial sector responded to the challenge by providing ever more sophisticated ways of increasing yields by taking more risk.” This high demand combined with the fact that sub-prime risk was mispriced was explosive. In fact originators were willing to sell and investors to buy those complex products because of the attractive returns. The risk related to those assets was mispriced assuming that the house price would continue to grow with low interest rates. [...]

[...] Further we go in depth trying to unveil the rationale of a possible circle twenty-two and an unfavourable effect of the “fair value” implementation under certain circumstances. To begin with a wider insight of “fair value” in accounting can be better seen when starting from the very beginning The purpose of financial statements Indeed it seems there is little theoretical concern in the point of fair value. Since the time when accounting was born in the shape we now know it, it has been keeping the same objectives and 28/28 led to somewhat uniform practices. [...]

[...] Although the Basel II impact is explained in this project future studies may try to evaluate the impact of the Basel II ratio on the credit crisis and how the regulation should evolve accordingly. Another field of study concerns financial reporting complexity. A lot of criticisms arise from the fact that financial reporting becomes more and more complex A study carried out by Mazars “L'information financière des établissements de credit en période de crise” (page 23) show that the information concerning the credit crisis in European financial statement is not easy to find 37 Juste Valeur : le rôle des nouvelles normes comptables dans la crise financière (page 46/46 and cannot be compared between the different financial institutions. [...]

[...] This is reflected in accounting terminology. The return based on figures published as ‘true and fair' in the accounts is described as the ‘accounting return' in order to distinguish it from the return actually earned which is described as the ‘true yield' (Solomon 1971) or the ‘true rate of return' (Kay 1976). Possible causes of the discrepancy between what is actually earned and what is reported in the accounts are: Technical accounting problems (like the depreciation of fixed assets, the valuation of stocks and work in progress, and the treatment of expenditure on research and development) Practical difficulties (like risk, uncertainty, and changing prices) And human failings (like dishonesty, negligence, or simple error).” There is no doubt that the present circumstances of the financial crisis (2007-2009) are an excellent field of experimentation for the concepts and analyses put forward in this book around the main concern of truth and fairness in accounting. [...]

[...] 34/34 The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, an entity shall estimate cash flows considering all contractual terms of the financial instrument (for example, prepayment, call and similar options) but shall not consider future credit losses. [...]