Global Financial Crisis (GFC) refers to the financial crisis of 2007-2008 that majorly affected the financial condition of the countries all over the world.
For this reason, most of the economists all over the world consider GFC as the world financial crisis after the great depression of 1930 (Frankel & Saravelos, 2012). The beginning of GFC could be seen from the fall of the United States mortgage market. The GFC contributed to the development of major debates about the use of Fair Value accounting as this accounting process has been held responsible for the root cause of GFC (Chor & Manova, 2012). The aim of this report is to discover the role of accounting in GFC and the actions of various financial authorities towards the solution of GFC.
Part A From the above discussion, it can be seen that fair value accounting process had a major contribution towards the GFC. On an overall basis, it can be seen that the accounting standards had major contributions towards the happening of GFC. At the prior period of Global Financial Crisis, with the help of special purpose, the banks scrutinized their loans and they sold them on the capital market. The banks took this step in order to maximize their profitability. At that time, the process of fair value accounting was developed based on the current accounting practice and requirements.
The year of 2008 was considered as the year of prosperity for the United State market and at that time, wealth was considered as one of the major prosperity (Kothari & Lester, 2012). However, it has been seen that at that time, the companies used to generate wealth with the help of poor lending practice and poor accounting regulatory practices. However, the accounting standards at that time could not enable the financial institutions to record the inflated revenues related to the home loans.
It has been seen that the use of fair value accounting allow the banks to increase their financial leverage at the time of financial boom and later, this reason made the financial statements of those banks more vulnerable. Thus, this whole process contributed to the development of the Global Financial Crisis of 2007-2008. Thus, from the above discussion, it can be seen that the accounting standards and policies played a huge role in the manipulation of financial statements of the banks regarding the home loans. Later in the year, the companies started to blame the accountants of the companies to manipulate the financial statements and it can be considered as the beginning of Global Financial Crisis. As the results, people of America started to consume less, the companies started to lay off the employees that led to major unemployment. From the above analysis, it can be seen that the accounting standards were majorly responsible for Global Financial Crisis.
In response to the Global Financial Crisis, the International Accounting Standard Board has taken some actions to avoid this kind of issue further. They are mentioned below:· IASB has taken initiative for the improvements of off balance sheet items. On a more precise note, IASB has published some specific proposals in order to improve and strengthen the requirements to identify the control entities.· IASB and US Financial Accounting Standard Board have taken joint initiative to include new disclosure requirements regarding impairments in order to come to the common outcomes (Mala & Chand, 2012).· Both IASB and FASB have taken joint initiatives for the addressing of braider accounting issues of impairments on a global basis.
· IASB has also taken step to ensure the fact about treating the credit-linked investments between the principles of IASB and Generally Accepted Accounting Principles (GAAP).· IASB has also ensures that embedded derivatives are assessed for the reclassification of financial assets (Mala & Chand, 2012).From the above-discussion, it can be seen that IASB has taken some of the major steps in response to the Global Economic Crisis.
In this process, IASB has also has also made coordination with US Financial Accounting Standard Board. All these steps have utmost importance in avoiding the further occurrence of Global Economic Crisis. As per the earlier discussions, it can be seen that accounting standards were majorly responsible for the occurrence of Global Financial Crisis. In this situation, it needs to be mentioned that the steps undertaken by IASB will be able to diminish the loopholes in accounting standards.
In addition, there are some of the provisions of IASB that will make sure that this type of financial crisis never happen in the future (Erkens, Hung & Matos, 2012).