The Lebanese Association Of Certified

Public Accountants
the 17th International Congress 22 and 23 April 2009
2008 : Turbulent Year, Repercussions On 2009

Global Financial Crisis and Accounting Profession

Naim Saba Khoury

CHAIRMAN JACPA

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 Global Financial Crisis
- Mortgage loans in U.S.A.
- Securitization
S iti ti andd cycling
li off suchh mortgage
t loans.
l
- Inadequate regulatory supervision of banks and financial institutions:
• Asset qquality.
y
• Liquidity.
• Capital adequacy.
• Accounting profession
profession.
• Corporate governance.
• Risk management .
• Derivatives .
• Corruption.
• Ineffective due diligence .
• Non prudent expectations.
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- Lack of regular supervisions of rating agencies .
- Global capitalist system .
• Acted in contradiction of corporate social
responsibilities.
• Market forces.
forces
• Lack of trust .
• Uncertainty in market .

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Gl b l Fi
Global Financial
i l Crisis
C i i And
A d Accounting
A i
Standards
The factors that led to the gglobal financial crisis were
attributed to economic causes and not to accounting
standards i.e. Fair value accounting

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 Questions Raised As A Result Of
Global Financial Crisis
- Can we blame the accounting setting standards
f adoption
for d ti off fair
f i value
l accountingti for
f
financial instruments?
- Has accounting contributed to spreading and
deepening the crisis in the global arena?
- Does the return to the use of historical cost
method instead of fair value method provide
more benefits for financial reporting purposes?
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 Answers In Response To Questions
Raised
- Arguments on fair value estimate and measurement
have taken place before the crisis and are still
ongoing however the debate did not at all address
ongoing,
rejection or suspension of fair value accounting.
- Fair value accounting responses to economic value
which provide more meaningful and beneficial
information for the users of the financial statements.

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- Historical cost method shall not reflect fair value and
thus the financial statement shall fail to reflect full
transparency. In addition, management can manage the
profit according to its intention, Also financial
statements shall not disclose all risks involved in the
financial instruments.
instruments
- Fair value accounting is reflecting what is occurring in
g
the market and therefore recognizes and reports
p losses
incurred.
- Without using fair value accounting, losses can not be
revealed
l d andd reported,
d which
hi h means that
h fair
f i value
l
accounting leads to a fair and true view of the financial
statements

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 IFAC Efforts
- Promote educational programs and awareness among
auditors for accountingg and auditing g statements related to
financial instruments.
- Strengthen global convergence for financial reporting and
establish joint committee with U.S.A for the crisis.
- Develop debates on best practice to the audit of financial
institutions.
- I
Increase ttransparency in
i financial
fi i l reporting
ti
- Audit of estimates and valuations in the case of market
uncertainty.y
- Audit Alerts.
- Accounting and auditing amendments.
- R
Recommendations
d i to Group
G off T
Twenty - G20
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 The Crisis And IFRS
- Accountingg standards amendments due to the crisis
• IAS No. 39
- Reclassification of financial assets out of trading category
in particular circumstances.
- Transfer from available for sale category
g y to the loan and
receivable category financial asset that met the definition of
loans and receivable, if the entity has the intention and
ability to hold for foreseeable future.
• IFRS ((7 7)
in response to amendment of IAS 39
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 IFRS Amendments
1. Amendments of May 2008 resulting from the improvement
project, effective date January 1 2009.
2009.

IFRS ((55) Non. Current asset hold for sale and discontinued
operation.
IAS ((11) Presentation Of Financial Statements.
IAS ((16
16)) Property, Plant And Equipment.
IAS ((19
19)) Employee Benefits.
IAS ((20
20)) Governments Grants.
IAS (25
(25)) B
Borrowing
i Costs.
C t
IAS ((27
27)) Consolidation and separate financial
statements.

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IAS ((28
28)) Investment In Associates.
IAS ((29
29)) Financial Reporting In HYP
Economies.
Economies
IAS ((31
31)) Interest In Joint Venture.
IAS ((32
32)) Financial Instruments – Presentation
IAS ((36
36)) Impairment Of Assets.
IAS ((38
38)) Intangible Assets.
IAS ((39
39)) Financial Instruments, Recognition
Measurement.
IAS (40
(40)) Investment Property.
Property
IAS ((41
41)) Agriculture

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2. Other Amendments
IFRS 1 First – Time Adoption of IFRS.
IFRS 2 Share Based Payment.
IFRS 3 B i
Business Combinations.
C bi ti
IFRS 7 Financial Instruments-
Instruments- Disclosures
IAS 1 Presentation Of Financial Statements.
Statements
IAS 27 Consolidated And Separate F/S.
IAS 28 Investments In Associates.
IAS 31 Interest In J.V.
IAS 32 Financial Instruments, Presentation.
IAS 39 Fi
Financial
i l Instruments,
I Recognition
R ii
Measurement.

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 Global Financial Crisis And Auditing

- IFAC issues two alerts as follows:

• Challenges in auditing fair value accounting estimates.
• Audit consideration in respect
p of going
g g concern.
- The crisis key audit and accounting discussions are
focused on various topics including: Valuation,
impairment, liquidity, market confidence, risk
management, transparent disclosure.
- Madoff Case
- IFAC indicates opposition to a more radical change of
the use of fair value accounting without due process.
process
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K A
Key Auditing
diti IIssues C
Consequentt T
To
The Crisis

- Intangible assets,
assets goodwill.
goodwill
- Going concern.
- Impairment of assets.

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 Intangible Assets,
Assets Goodwill
- Goodwill accumulated in the boom as a result of
merger and acquisition transactions.
- As the economyy deteriorated ggoodwill values declined,,
and impairment losses were incurred.
- Goodwill book values in ((s & p 500500)) are valued at 2.6
trillion or 10%
10% of their total assets i.e. shall absorb
equity value (Gold Man Sacks).
- Goodwill at AOL Time Warner is $$100 100 billion, in
Royal Bank of Scotland amounted to $$6 6 billion.

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 Going Concern
- Going concern assumption is a fundamental principle in
the preparation of financial statements.
- Assessment of the validity of such assumption is the
responsibility of management (BOD).
- Appropriateness
i off the
h use off going
i concern assumption i
should be considered by the auditor.
- The financial crisis led to lack of funds to entities, which
may affect the entity ability to continue as a going
concern.
- Disclosures
Disclos res req
required
ired in the financial statements are
driven by management.
- A need to include an emphasis
p of matter in the auditors
report should be considered.
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 Impairment Of Financial Assets
- Prolonged decline or other than temporary decline.
- Specific factors.
factors
- Other factors:
- Intent and ability to hold investments for a sufficient
period to recover or to decline.
p y
- Financial condition of the company.
- Matters that affect operations of the company.
- Length of the time the carrying amount was less than cost.
- Materiality of the decline.
- Evidence to reach conclusion.

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 IFAC Recommendations To
Group Of Twenty (G.20
(G.20))
Accountancy profession plays an essential role in resolving
the financial crisis and in building a reformed international
financial system:
IFAC, in helping to strengthen this role, provided the
following recommendations to the Group Of Twenty (G. (G.20
20):
):
- To adopt ISAs where they have not already been followed,
in order to strengthen transparency and accountability, in
audit of F/S and to helpp national and jurisdictional
j regulatory
g y
system.
- To adopt OECD principles of corporate governance.

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- To develop implementation guidance for all global standards
such as IASs, IFRS, OECD’S principles and FSF.
- Establish international, principles-
principles-based threshold
competencies for senior financial officers in public interest
companies i.e.
i e training in corporate ethics,
ethics knowledge and
applications of financial reporting standards, CPE, rules and
regulations.
- Reform of enterprise risk management systems and senior
remunerations.
- To adopt IPSAS

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- To acknowledge the importance of SMEs.
- To
T support world ld bank
b k andd other
h international
i i l
institutions to assist countries to strengthen the
fi
financial
i l implementation
i l i off high
hi h quality
li models
d l
of reporting infrastructure. To establish and
strengthen
h national
i l professional
f i l bodies
b di .
- To support (ROSC) – Report on observance of
standards and codes.

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