“The European Union (EU) Parliament mandated the adoption of IFRS to improve the integration of capital markets”(Cormier et. al., 2009) in 2005, and this “adoption has made IFRS the most widely accepted financial accounting model in the world” (Paananen et. al, 2009). Therefore, it is no surprise that the two German auto makers, Daimler and BMW that have been selected for this report follow IFRS, and their two latest annual reports date back to 2009 and 2010. Both of those companies are traded on the Frankfurt Stock Exchange and since 2006, they have been using IAS 39 for the recognition and measurement of their financials instruments.
Furthermore, KPMG AG audited BMW’s 2009 financial ...view middle of the document...
However, fair value measurement “remains controversial primarily due to the trade-off between the relevance and the reliability of reported fair values” (Ryan, 2008), and in “the absence of quoted market prices, fair value measurements is based on subjective assumptions and may be subject to manipulation” (Dechow et. Al, 2010).
“The current version of IAS39 classifies financial assets into four categories, of which one (at fair value through profit or loss [FVTPL] contains two subcategories and is by far the most controversial” (The use of fair value in IFRS).
Further “the most controversial amendment concerning IAS 39, happened on October 13, 2008, which enabled “entities to reclassify non-derivative financial assets held-for-trading and financial assets available-for-sale” (Fiechter, 2011) and happened as a response to the 2008 financial crisis.
When the global financial crisis emerged, “critics cited fair value accounting as a principal reason for amplifyinf and extending the credit crunch” (Lowering standards – IASB decision on fair value). Banks and other financial institutions, with significant amounts of financial assets, blamed fair value measurements, when their assets valuation dropped, resulting in losses for those institutions. Those same institutions pressured politicians to take action, as their losses where affecting every country in the European Union, and those politicians pressured the IASB to change IAS 39. “In response to the various requests and in light of the difficult economic climate, the IASB introduced, at extremely short notice and without the regular procedures for consideration, an amendment to IAS 39” permitting “nonderivative financial assets held for trading (HFT) to be reclassified (i) as either available-for-sale (AFS) or held-to-maturity (HTM) in rare circumstances, and (ii) as loans and receivables (LAR) if they would have met the definition of LAR at initial recognition and if the entity has the intention and ability to hold the financial asset for the foreseeable future or until maturity” (Fair value accounting is the wrong scapegoat for this crisis)
Differences between IFRS & US GAAP
IAS 30 defines fair value differently than SFAS 157. Furthermore, fair market valuation is recorded differently under IFRS and under US GAAP. Under IAS 39, fair value is defined as “the amount for which an asset could be exchanged , or a liability settled, between knowledgeable, willing parties in an arm’s length transaction” (paragraph 9)Discusss controversies which have contributed to the establishing of IAS 39
Similarities & differences between and within the two companies’s IAS 39 numbers and disclosures for 2009 and 2010
BMW’s IAS 39 information is reported in the Notes-Accounting Principles & Policies, that “assessments are made regularly as to whether there is any objective...
