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IAS 39 Financial Instruments: Recognition & Measurement And Challenges of Fair Value Accounting

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Introduction

´╗┐IAS 39 Financial Instruments: Recognition & Measurement And Challenges of Fair Value Accounting 2,042 Words CONTENTS ________________ 1 INTRODUCTION??????????????????????????..?..??.....2 2 KEY FEATURES OF IAS 39..........................................................................???????....2 2.1 Key Features of IAS 39?.........................................................................................................3 2.1.1 Definitions????????????????????????????.........3 2.1.2 Recognition??????????????????????????...?..?...3 2.1.3 Measurement????????????????????????????.?4 2.2 Practical Example of IAS 39 Implementation???????????????.....?...?4 3 UNDERLYING RATIONALE OF IAS 39???????????.........................................6 3.1 Rationale of the Standard..........................................................................................................6 3.2 Historical Development of the Standard...................................................................................7 4 CRITICISMS OF IAS 39??????????????????????????..........7 5 CONCLUSION????????????????????????????.................9 6 References?...???????????????????????????..?.....?.....11 7 Appendix A: LVMH Group Consolidated SOFP as at 31/12/2010................................................14 8 Appendix B: LVMH Group Consolidated I/S & Consolidated SOCI for the y/e 31/12/2010..........................................................................................................................................16 ________________ INTRODUCTION The general purpose of IFRS is to provide a single set of high quality, global accounting standards that require transparent and comparable information in general purpose financial statements (Deloitte, 2012). This particular paper is based upon the analysis of IAS 39 Financial Instruments: Measurement and Recognition and the effect of its implementation on the preparation of financial statements. Key features of IAS 39 will be discussed in the following part of the document along with applicable example of an implementation of this standard in published financial statements. The third part of the paper is dedicated to the assessment of underlying rationale of IAS 39 and the background to its development. ...read more.

Middle

In addition, it is stated that fair value is based upon commonly used valuation models and on available market data, however it is also mentioned that it may be confirmed in the case of complex instruments by reference to values quoted by independent financial institutions. The most notable effect of IAS 39 on the preparation of financial statements is that the changes in fair values associated with subsequent measurement are recognised in the net financial income or expense as it can be seen in the Appendix B, which appears to be the most significant ground for the criticisms imposed on the standard. This will be discussed later on in the document. UNDERLYING RATIONALE OF IAS 39 3.1 Rationale of the Standard In order to assess the rationale of IAS 39 Financial Instruments: Recognition and Measurement the idea behind the fair value accounting has to be understood. When historical cost accounting (HCA) is implemented financial instruments are recognised at their historic value, which even though is measured reliably (transaction cost etc) it is still based upon past events and therefore falls to reflect current economic reality and prevailing market conditions. Fair value accounting is primarily aimed at assigning current values to both assets and liabilities. ...read more.

Conclusion

CONCLUSION To conclude it should be stated that several aspects of fair value accounting covered in IAS 39 have been discussed in this document. First of all, key features have been identified and it was outlined that IAS 39 appears to be the most complex standard ever published by IASB, nonetheless addressing the issues associated with historical cost accounting. Secondly, the underlying rationale of the standard has been covered highlighting the need and therefore the background to its development. It was specifically outlined that due to its complex nature IAS 39 underwent several significant revisions and had faced political lobbying at the highest levels due to its controversial effect on the preparation and presentation of financial statements. This lobbying resulted in two versions of the standard and undermined the adoption of global financial reporting standards in Europe. Finally, it was explained why the IAS 39 had been heavily criticised and even being referred to as ?deficient?. Upon the primary reasons the standard complexity and the high degree of subjectivity have been identified. However, to sum up it should also be mentioned that it may be argued that increased volatility in accounting magnitudes is not necessarily a problem if investors correctly interpret the information disclosed (ECB, 2004). ...read more.

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