According to the article, to strength the investor's confidence, improving transparency and accuracy of financial information is essential. Mainly the problem is that the credit crisis of the global financial system which has broadens from toxic mortgage-backed assets. The credit crisis is increasing from risky investments that have contaminated the balance sheets of banks and other financial institutions. For the incomplete and inaccurate information of financial standing which is directly reflected in deficient disclosures of asset values, liabilities on corporate balance sheets. In that case, financial analysts and regulators are requested to the banks to use fair-value accounting for impaired assets which will be improved financial transparency.
Some people, including William Isaac, a former chairman of the Federal Deposit Insurance Corp. [FDIC] have even blamed the credit crisis on the Financial Accounting Standards Board's 15-year-old rule which assets can be valued with current market value. In that case, the U.S. Securities & Exchange Commission and the Financial Accounting Standards Board issued a ruling that can be emphasized to value assets using their own financial models which have amended on Sept 30 by the U.S. Securities & Exchange Commission and the Financial Accounting Standards Board. Paul Miller, an accounting professor at the University of Colorado identifies that how the companies think about capital market. Miller said that companies can build their loyalty and increase their market share by more attentive to their customers, better care of employees' needs and just-in-time supply chain management which can boost profitability on the focused of over the past 30 years where companies have depended on their success with three of four elements which are their customers, their employees and their supply chains. Miller focused that capital market is not working properly with these three elements due to the lack of manager's responsibility to keep well-informed information about firms' cash flows and use of any capital for their shareholders. If they do not do so, the corporation and their shareholders fail to understand the capital market information and it will make more difficult to find the investment decision and also difficult to build trust that will lead to management's reputation and leads the assets and stock prices at fire sale prices which means the prices are being discounted.
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With the view point of Miller, to develop the trust in the market for investors, it is needed two key financial reporting practices to be reformed. One is the off-balance-sheet financing under the U.S. Generally Accepted Accounting Principles [GAAP] and another one is pension-fund accounting. For operating leases, the two projects have been working. One project is joint project that the FASB and the International Accounting Standards Board in London that would have need of all leases are capitalized on companies' balance sheets. Another joint project between FASB and the International Accounting Standards Board which is called FAS 158 where pension-fund assets and liabilities are keeping out of footnotes and these pension-fund assets and liabilities are put on the balance sheet as a net amount. Phase two of the pension accounting project is still under the dealing out and focused the impact on the earnings of offering pensions. Some market strategies are persuaded banks that have to go back to your old ways to plain-vanilla investment such as payroll, inventories etc. until investors recover their sophisticated investments. Kenneth Scott, senior research fellow at the Hoover Institution and a professor at Stanford University's law school thought that to improve the transparency, it is needed to ruin the mistrust for securitized assets like collateralized mortgage obligations [CMOs]. So at that time, Scott suggested that CMOs problems can be eliminated by even-further-removed instrument which is called CDO squared. The structure of securitized assets can be clearer when there was a data bank is available which combined the information of all asset pools. But at that time, Scott argues that this type of data base would be very difficult to recover the credit market freeze-up situation. Scott provides an alternative solution based in theory which could start to create a database with all of the pool reports of triple-A securities and put this data base in to some computer model that will help to reduce uncertainty. Walter Pagano said that if the companies will be stricter about their capital requirements and their assets is being liquid than in the past, it will help to boost the investor confidence. Pagano adding that The Treasury Dept. already adds up all of the liquidity companies within their current debt-to-capital ratios. Pagano predicted that current debt-to-capital ratios are enhanced corporate governance of assorted issues of their companies' balance sheet. Philip Moyer, chief executive of EDGAR Online said that financial reporting can be moved from paper based document to electronic database formats that will help to reenter all the numbers in the analyst's spreadsheet which will help to get confidence about their analysis and analyzing all the data sources which will help to get idea about the impact of an investor's portfolio. EDGAR online has implemented an interactive data protocol which is called XBRL in U.S. which is also now popular in China, Japan, and Korea that allows analysts to easily compare items between companies. But Mayor says that in the recent time, companies are getting permitted to label items whatever they want. Cindy Fornelli, executive director of CAQ said that whatever technology can be used to investors, the investors need to assess the financial statements of the companies with detailed level of information. The CAQ recently completed an 18-month public dialogue tour with investors, high-level company officials, a state Attorney General, and a former chairman of the SEC to modernize the financial reporting. Christine DeFabio said that we can't fix this crisis not only looking for accounting and reporting but also looking the business environment in broader way by getting cash and access to capital. DeFabio did not support the Bogoslaw, D financial reporting argument.
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Based on the article, I identified the four substantial issues which is raised to the current debates in reporting and regulations. These are given below:
Suspended fair value accounting for impaired assets
Off balance sheet Financing
Pension fund accounting
1. Suspended fair value accounting for impaired assets:
To suspend fair value accounting for impaired assets, the main problem for the financial crisis was that companies are failure due to lack of incomplete and inaccurate interpretation of financial standing, which reflected in lacking disclosure of asset values, liabilities and overall risk on corporate balance sheet. Whereas, financial analysts and regulators said that it need to more transparent about financial reporting. At that time, banks are requested to suspend fair-value accounting for impaired assets which is automatically credit market is strengthened not loosen up. (Bogoslaw, D., (2008). ''How to Fix Financial Reporting'', Business Week Online)
During 1980's, William Isaac was blamed the credit crisis on the Financial Accounting Standards Board's 15-year-old rule required that where assets can be valued by fair valued basis whether no market exists. Based on the old rule, companies are writing down assets value, destroy equity and block the bank landing ability by fair value accounting. The new rule which was issued in Sep 30th indicated that executive have to revaluation the assets of their own financial model. Paul Miller stated that when companies can think about capital market then a paradigm shift is very much needed. To success and boost up the profitability, companies' are operating their operation with three entities like their customers, employees, and supply chains. Management has responsibility to give accurate information to shareholders about the capital market. With these information's, investors can easily asses about the companies' balance sheet including prospective cash flow and can use of raised capital. Inaccurate and not detailed information can be affected the overall management reputation. Due to lack of information's, stock prices were leading as discounted rate.
So, therefore, the 15 years old rule which was made in mid 1980 stated that fair value equals to current market value where market did not exist. According to Sep 30th, U.S SEC and the financial accounting board indicate that executives can value their assets their own financial model. According to IAS 36 and IFR9 standards, instruments such as impaired assets can be determined by an impairment model where cash flows perspective is still working rather than fair value based which can easily get the investors' confidence at capital market which is related to Paul Miller's comment about capital market for financial reporting.
However, ACCA agreed that the problem of reliability of fair value in liquid market which is not appropriate for financial reporting.*
2. Off balance sheet Financing:
In the view point of Miller, to raise the investors trust, there are two key financial practices need to transformation in financial reporting. One of them is under the U.S. GAAP of off balance sheet financing and second one is pension-fund accounting. Under the current rules, companies have to disclose only net liabilities and assets for operating leases. FASB and IASB together set up a project in London where stated that all leases have to be capitalized in the company's balance sheet.
In IAS 17 standards focused that finance is secured based on this securities term & rate where $1 trillion or more worth of securitized assets are put in more urgent basis on the balance sheet. If companies to do so such thing then it will be very costly at first but through it can bear a good sign for such companies and strong their the balance sheet and also secured the $1 trillion or more worth asset.
3. Pension fund accounting:
Based on the second joint project between FASB and the international accounting Standards Boards FAS 158 are already taking the reporting of pension-fund assets and liabilities out of the footnotes and put them on the balance sheet as a net amount which was focused on the impact on earnings of offering pensions.
Some markets strategists are enforcing banks go back to your old ways to plain-vanilla investment where products are mandatory which has satisfied investors in future. Wherever, Kenneth Scott preferred "CDO squared" for improving transparency which was arised from CMOs and CDOs.
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Under IAS 19 employee benefit, the pension-fund assets and liabilities was excluded in balance sheet because there is no consistent way to work under the U.S. GAAP. But after that, it was revised in 1998 as an IAS 19(revised) employee benefit where the pension-fund assets and liabilities were included in the balance sheet. So now under the current IAS 19 standard, for the valuation and reporting of pension fund assets and liabilities in the accounts of the sponsoring employers are based on two major requirements.
All assets must be marked to market value on the balance sheet according to the date.
Net present value of all future liabilities actual and contingent must be discounted at a single rate determined by the yield at the sheet date. So based on the FAS 158 joint project suggestion will be appropriate that put the pension fund assets or liabilities in the balance sheet without footnote.
(it is taken from http://www.iasb.org/Search.htm?q=pension%20fund&adv=0)
4. XBRL issue:
Philip Moyer, chief executive of EDGAR stated that financial reporting is moving away from paper based document to electronic database form. Through electronic database form, financial reporters can easily reenter all the numbers in their own spreadsheets which can easily help to analysts and regulators to analyze the data. Electronic database form also can help to know the impact of investor's portfolio by asset-backed securities in marketplace. EDGAR Online implemented a data protocol called XBRL in U.S. which allows comparing items between companies.
International Accounting Standards Board (IASB) which is in London based where they are providing core taxonomy of XBRL for financial Statements with the members of XBRL.org for approving the companies' information. The IASB core taxonomy is an XML-based measurement for the `Commercial and Industrial' sector which can be authorized to investors and companies to exchange financial information from financial statements like balance sheet, income statement across all of the software and technologies, as well as the Internet.
The last development of XLBR Companies based on reporting in IFRS that is issued by the International Accounting Standards Board which is estimated to provide their interactive data reports which will be started with financial year ending on or after 15 June 2011. For that reason, Companies can capable to take on interactive data as earlier when their requirement of their started date. By adopting this interactive data, all of the U.S. public companies will file with greater financial information in this interactive data by December 2011 for becoming the use by investors. According to the fundamental of IASB, the latest development of accompanying software's which is to be used to transformation of their EDGAR information system but US GAAP taxonomy is not evidently stated.
Criticisms of the article
The rule that is issued on Sept. 30 is an updated version of FASB 15-year-old rule which is allowed to executives for valuing their assets using their own financial models and findings when market is not existed and when assets are being sold at discounted prices which will be contradicted with the previous one which is theoretically removed fair value accounting because fair value accounting does not clearly defined and it is difficult to treat as liabilities. But at the same time, ACCA stated some advantages of fair value accounting which are being more transparent, additional information etc. so based on ACCA's fair-value accounting advantages and disadvantages, they called that fair-value accounting is not the only cause of financial crisis. So fair value accounting was not suspended to allow the investors' confidence and disclosure of all assets and liabilities. So it is criticized by the article and also Bogoslaw, D., suggestions about the center of the bank. For Example; In 1990s, Japanese banks are being cited as an example because of fair values was not used and the problems were over-inflated property and share stakes were disguised by the accounting.
The view points of Paul Miller, a paradigm shift is essential for the time of thinking about capital markets and how the companies can be taught about capital market. So, at that time, Miller was argued the Sept 30th updated rules and also he is trying to prove that this updated rules are provided as an improper solution for fixing financial reporting.
Under the U.S GAAP, all pools of assets and related liabilities should be included with balance sheet but the view point of off- balance sheet financing; companies are required to disclose only net liabilities and assets which disagree with with IAS 17. Moreover, In the GAAP rule indicated that in IASB off balance applied only for operating lease but they didn't say about financial lease which made the article conflicted.
In the revised rule of IAS 19 of pension-fund accounting is called employee benefit, two major requirements are clearly stated where all assets must be marked to market value which is not included in the article. But another one requirement is net present value of all future liabilities actual and contingent must be discounted at a single rate determined by the yield at the sheet date. So based on the FAS 158 joint project suggested that it will be appropriate that put the pension fund assets or liabilities in the balance sheet without footnote. But according to Scott, if a data bank that will be made with the combination of all pools of assets and liabilities which can be easily make the assets will be securitized and reduce the uncertainty. Even though, Scott argued that creating such database would be very difficult to achieve the financial reporting transparency. So, at this point Scott suggested that this data bank helped to securitized assets but at the same time he made a conflict view about this data bank.
With the XBRL issue, there is a conflict between XBRL and IAS (U.S GAAP Taxonomy) was that at first XBRL was commonly popular in the U.S and also China, Japan and Korea which can be very effective for analysts and also regulators for analyzing the data and all the label items between the companies. But in the U.S GAAP taxonomies which is released in 2009 with complete set of document and company information, commercial and industrial information, banks and institutions information, brokerage and +dealer's information which will be help for analysts and regulators to assess the companies available information with XBRL- XBRL international, Inc stated. So, without the U.S Taxonomy, XBRL did not mentioned clearly all of the information about companies that's why the XBRL issues are much criticized by the XBRL international, Inc.
Throughout the overall criticism, we identified that many re-known authors like Bogoslaw, D., Paul Miller, William Isaac, Kenneth Scott, Philip Moyer etc. are identified their different perspective with many issues about how to fix the financial reporting. In the time of fixing financial reporting, many different projects was setting up like FASB and International financing accounting standards FAS 158 in U.S. and in London projects where indicated that all leases are shown in capitalized and pension-fund assets and liabilities are shown as net amount in the balance sheet. Cindy Fornelli indicates that modernize financial reporting which have been made through 18-month dialogue tour with some specialists. But the article main criticism raised by the Christine DeFabio was that she totally disagreed about all of the authors which is mentioned within the article about financial accounting and reporting. She stated within the article that if the time of fixing the financial crisis, not only follow up the accounting and reporting based but also follow up the business environment which can be able to get cash and capital in broader way.