Adoption of Ifrs

For the past two decades, fair value accounting- the practice of measuring assets and liabilities at their current value- has been on the ascent. And has become a lightning rod issue in financial reporting debates. While the debate dates back to the 1990s it was unsettled. The recent financial crisis flared the debate again. It made the critics argued that fair-value accounting exacerbated the severity of the 2008 financial crisis.

The fair-value accounting involves reporting assets and liabilities on the balance sheet at fair value and recognizing changes in fair value as gains and losses in the income statement. During subprime crisis, under mark-to-market accounting, financial institutions were required to recognise losses on their subprime investments and related securities which led to a dramatic decrease in stock prices. Citigroup’s stock declined by 69%, UBS by 70% and Merrill Lynch’s by 75%.

Even IAS 39 (and its successor IFRS 9) and the relevant provisions under US GAAP were based on a mixed measurement model: some financial instruments were supposed to be measured at fair value, but others were supposed to be measured at cost. For example, any instrument held for trading (FAS 115, FAS 133 and FAS 159) was measured at fair value through the income statement, but an instrument such as a bond that was held to maturity was measured at cost (FAS 115). A further category (‘available for sale’) required assets to be measured at fair value but movements in fair value were reported through other comprehensive income rather than through the income statement (FAS 115, FAS 133). As a result for traditional commercial banks and for loans, leases, and securities that were held to maturity, the argument went, fair-value accounting could be inappropriate and misleading, especially in a time of crisis and when markets were illiquid.