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International investors doubt that accounting changes will help relieve financial crisis

Fewer than a quarter of the respondents to a survey carried out by French business school and investment research institution Edhec believe that am

Fewer than a quarter of the respondents to a survey carried out by French business school and investment research institution Edhec believe that amendments to the IAS39 and IFRS 7 accounting standards are necessary and suited to resolving the problems of bank solvency, while three-quarters of respondents believe they are likely to lead to new problems.

Edhec issued a call for reaction to international institutional investors and asset managers to compare investor views of amendments to the standards not just with the conclusions of an initial Edhec study but with the ambitions of the reforms – prepared and adopted in great haste, the authors note.

The call for reaction received more than 800 responses and, according to Edhec, represents the first international survey on the relevance of the reforms carried out by the IASB under pressure from the European Commission.

While many critics are arguing that fair value is partly to blame for the spread of the financial crisis, especially as a result of its pro-cyclical nature, the Edhec study argues on the contrary that this debate is biased because it is off-target.

When the problem is analysed farther upstream, say the authors of the report, it becomes clear that the amendments to the standards are counterproductive. By making it possible, under certain conditions, to report at historical cost transactions that had previously been reported at fair value, these amendments reduce the amount of information contained in financial reporting.

These changes are likely to hide the real risks to which companies are exposed and to increase the mistrust of the financial community. In addition, only 44.2 percent respondents to the survey to believe that the amendments are likely to reduce pro-cyclicality.

Even if fair value accounting leads to a cyclical weakening – justified by the crisis – of the fair value of the equity of financial institutions, it is not the accounting standard setter’s job to estimate the amount of additional capital needed or to call for a curtailment of business activity. That is the role of the prudential regulators, the authors say.

These two publications nonetheless indicate that the measure of fair value and the choice of accounting treatments made by the IASB are highly debatable, but do not necessarily mean that fair value accounting itself must be rejected.

Edhec argues a return to accounting at historical cost would be mistaken – it would only prolong the crisis, much as it prolonged the Japanese banking and financial crisis – and 28.1 per cent of respondents agree that the amendments could worsen the crisis by making financial information less trustworthy.

To download the Edhec report, please click here
To download the reactions to the Edhec study, please
click here

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