The Role of Financial Accounting in the Current Financial Crisis

Some commentators claim that the current financial crisis has its roots in housing bubbles and excessive leverage in the US, the UK and some other western countries. Others, while agreeing that house prices and excessive debt have played a role, point to errors by regulators and bad financial reporting as key causes of the current difficulties. This presentation will describe some features of US GAAP and International Financial Reporting Standards (IFRS) that some, including certain bank regulators and legislators, claim have exacerbated the current crisis. The presentation will also focus on accounting standards that have drawn relatively less criticism (at least, so far) but which arguably led to a lack of transparency about arrangements involving off-balance sheet structures and the asset-backed securities that have played a role in some banks' financial difficulties. The presentation will describe accounting treatments of financial asset transfers, in particular, accounting for arrangements that create asset-backed securities, on measurement rules and accounting alternatives for financial assets, in particular, the accounting distinctions between loans and securities, and on impairment rules. The presentation will also consider recent and proposed changes in the accounting for, and disclosures about, credit derivatives, off-balance sheet structures and loan loss provisions and how these relate to the current financial crisis.