“We are in the middle of the worst financial crisis in recent memory.” wrote Stephen Schwarzmann (2008). Since the middle of 2007 the media’s dominating topic has been the global financial crisis, whose roots lay in the U.S. capital market – in fact one of the best-regulated financial markets in the world. In times when capital knows no borders and all the single foreign capital markets are interconnected, it took less time until the impact of the American ‘credit crunch’ reached the rest of the world and unbalanced even the most powerful banks. In spite of market’s cross-border linkage a huge variety of different (or even contrary) accounting standards exists. Against this background the Internationals Accounting Standards Board (IASB) in cooperation with its U.S. counterpart the Financial Accounting Standards Board (FASB) tries to cope with this crisis by amending existing and setting new standards. That should guarantee showing the true economies of entities for their report’s users.
This paper will reflect the current developments of the European standard setters regarding ‘IAS 17 – Leases’. First of all the problem areas of the old standard will be shown, then the amendments will be highlighted. The focus lays on the amendments in lessee accounting and they will be evaluated by means of expert opinions whether these actions are effective and decision-useful to the public.
Table of Contents
1. Introduction
2. Problem definition and current standard status
3. The IASB/FASB joint lease project and objective
4. Evaluation of the decision-usefulness of the amendments
5. Conclusion and outlook
Objectives and Topics
This paper examines the decision-usefulness of IASB standard-setting activities during the financial crisis, specifically focusing on the proposed amendments to IAS 17 regarding lease accounting.
- The impact of the financial crisis on international accounting standards.
- The convergence of international standards between the IASB and FASB.
- Distinction between financial and operating leases and associated accounting problems.
- The economic rationale for bringing operating leases onto the balance sheet.
- Evaluation of transparency improvements for investors and financial statement users.
Excerpt from the Book
The decision-usefulness of the IASB’s standard setting during the financial crisis using the example of IAS 17 – Lease
“We are in the middle of the worst financial crisis in recent memory.” wrote Stephen Schwarzmann (2008). Since the middle of 2007 the media’s dominating topic has been the global financial crisis, whose roots lay in the U.S. capital market – in fact one of the best-regulated financial markets in the world. In times when capital knows no borders and all the single foreign capital markets are interconnected, it took less time until the impact of the American ‘credit crunch’ reached the rest of the world and unbalanced even the most powerful banks. In spite of market’s cross-border linkage a huge variety of different (or even contrary) accounting standards exists. Against this background the Internationals Accounting Standards Board (IASB) in cooperation with its U.S. counterpart the Financial Accounting Standards Board (FASB) tries to cope with this crisis by amending existing and setting new standards. That should guarantee showing the true economies of entities for their report’s users.
This paper will reflect the current developments of the European standard setters regarding ‘IAS 17 – Leases’. First of all the problem areas of the old standard will be shown, then the amendments will be highlighted. The focus lays on the amendments in lessee accounting and they will be evaluated by means of expert opinions whether these actions are effective and decision-useful to the public.
Summary of Chapters
1. Introduction: Introduces the global financial crisis context and the role of accounting standard setters in ensuring transparency.
2. Problem definition and current standard status: Discusses the inherent flaws in the distinction between financial and operating leases under IAS 17 and the resulting off-balance sheet risks.
3. The IASB/FASB joint lease project and objective: Outlines the collaborative efforts to move toward a single model for lease accounting to improve comparability.
4. Evaluation of the decision-usefulness of the amendments: Assesses the impact of capitalization on financial ratios and the potential for improved investment decision-making.
5. Conclusion and outlook: Reflects on the limitations of standard setting during a crisis and the long-term necessity of transparent accounting.
Keywords
IASB, FASB, IAS 17, Lease Accounting, Financial Crisis, Transparency, Off-balance Sheet Finance, Decision-usefulness, Convergence, Lessee Accounting, Financial Statements, Capitalization, Risk and Reward, Accountability, Economic Truth
Frequently Asked Questions
What is the primary focus of this assignment?
The assignment explores whether the standard-setting efforts by the IASB, specifically regarding the revision of IAS 17, contribute to more decision-useful financial information for users during a global financial crisis.
What are the core themes discussed in the paper?
The paper covers the convergence of accounting standards, the limitations of the current lease classification, the impact of off-balance sheet liabilities, and the resulting transparency for stakeholders.
What is the main objective of the research?
The primary objective is to evaluate if proposed amendments in lease accounting provide better insights into an entity's financial health by ensuring all lease-related obligations are recognized on the balance sheet.
Which methodology is employed in this study?
The study utilizes a qualitative assessment of current developments, industry expert opinions, and empirical research findings regarding lease capitalization impacts.
What is covered in the main body of the paper?
The main body examines the definitions of financial versus operating leases, the "substantially all risks and rewards" criteria, the joint project with the FASB, and the subsequent effects on financial performance ratios.
Which keywords characterize this research?
Key terms include IASB, Lease Accounting, Financial Crisis, Transparency, Off-balance sheet finance, and Decision-usefulness.
Why does the author cite the ENRON scandal in the context of lease accounting?
The ENRON scandal is referenced to highlight how off-balance sheet financing can lead to a lack of transparency and create systemic risks that mislead investors and stakeholders.
What argument does Sir David Tweedie make regarding lease accounting?
He highlights the necessity of bringing aircraft and other leased assets onto the balance sheet to reflect the true economic commitments and liabilities of airlines and other companies.
How do the amendments affect financial ratios like ROA or the leverage ratio?
The amendments generally increase the amount of recognized assets and liabilities, which slightly decreases the return on assets (ROA) but increases the leverage or gearing ratios, providing a more accurate assessment of financial risk.
Is the IASB's reaction to the financial crisis considered perfect?
No, the author concludes that standard setters face limitations in predicting crises and that accounting standards cannot be "perfect" due to the subject's complexity and the influence of inventive accounting practices.
- Quote paper
- Thorsten Wenke (Author), 2008, The decision-usefulness of the IASB’s standard setting during the financial crisis using the example of IAS 17 – Lease, Munich, GRIN Verlag, https://www.grin.com/document/137222
