Valuation within illiquid markets - Is ‘Fair Value’ measurement still an appropriate approach?

Inhaltsverzeichnis (Table of Contents)

• Introduction
• Overview: 'Financial Crisis'
• 'Special purpose entities' and 'mortgage-backed securities'
• Reasons for setting up SPEs and issuing MBSs
• Developing of the sub-prime crisis
• Accounting for ‘Financial Instruments' within the financial crisis
• Recent accounting for financial instruments – IAS 39
• Categorisation of financial instruments
• Fair value and measurement under different market conditions
• Overview 'mark-to-model' techniques in illiquid markets
• Problems with IAS 39
• General problems related to IAS 39
• Criticism related to IAS 39 especially during the financial crisis
• IASB's response to the problems of IAS 39
• IASB addressing complexity of IAS 39
• Amendment of IAS 39
• IASB's reasons for amending IAS 39
• Criticism regarding the amendments of IAS 39
• Conclusion

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This paper examines the impact of the financial crisis on accounting standards for financial instruments, particularly focusing on the IASB's 'fair value' approach. The paper aims to determine whether better accounting standards could have prevented the downturn in the global economy by analyzing the origin of the financial crisis, its development, the central IFRS standard IAS 39, and the IASB's attempts to address the problems arising from the credit crisis.

• The origin and development of the sub-prime crisis
• The role of 'special purpose entities' (SPEs) and 'mortgage-backed securities' (MBSs)
• The application and limitations of IAS 39, particularly the 'fair value' approach, in illiquid markets
• The criticisms and problems associated with IAS 39, specifically during the financial crisis
• The IASB's response and attempts to amend IAS 39 in light of the crisis

Zusammenfassung der Kapitel (Chapter Summaries)

Introduction

This chapter introduces the paper's objective to analyze the impact of the financial crisis on accounting standards for financial instruments, specifically focusing on the 'fair value' approach. It emphasizes the significance of banks in the global economy and the role of accounting standards in the crisis.

Overview: 'Financial Crisis'

This section delves into the origins of the sub-prime crisis, focusing on 'special purpose entities' (SPEs) and 'mortgage-backed securities' (MBSs). It explains the concept of 'sub-prime' mortgages, how they were packaged and sold into the market, and the role of securitization in transferring credit risk.

Accounting for ‘Financial Instruments' within the financial crisis

This chapter examines the accounting standard IAS 39 for financial instruments and its application in the context of the financial crisis. It explores the categorization of financial instruments, the concept of 'fair value,' and the challenges of 'mark-to-model' techniques in illiquid markets. Additionally, it highlights the criticisms and problems associated with IAS 39, particularly during the crisis.

IASB's response to the problems of IAS 39

This section outlines the IASB's responses and attempts to address the complexities and problems associated with IAS 39 in light of the financial crisis. It includes discussions on the IASB's attempts to amend the standard, the reasons for these amendments, and the criticisms received regarding these changes.

Conclusion

This chapter is not included in the preview to avoid spoilers.

Schlüsselwörter (Keywords)

This paper focuses on key concepts related to the global financial crisis, including 'sub-prime mortgages,' 'special purpose entities' (SPEs), 'mortgage-backed securities' (MBSs), 'fair value' accounting, and the International Accounting Standards Board (IASB). It explores the limitations of accounting standards in illiquid markets and the criticisms surrounding the application of 'fair value' in times of financial turmoil.