The role of International Accounting Standard (IAS) 39 financial instruments : recognition and measurement in the Ireland's banking crisis

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Ryzhenkova, Katerina
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MBA in Finance
Dublin Business School
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This research is focused on the role of the International Accounting Standard (IAS39) ‘Financial Instruments: Recognition and Measurement’ in the Ireland’s recent banking crisis. Specifically it sought to answer the following questions: Whether any limitations exist in the IAS39? What role existing limitations in IAS39 had on the Ireland’s banking crisis? Was IAS39 a contributing factor in the Ireland’s banking crisis? Qualitative research was conducted in order to investigate in depth the specific requirements, models and concepts fundamental to IAS39. Interviews were conducted with five highly qualified accounting professional employed by prominent international accounting firms. In particular this research analysed the fair value measurement requirement imbedded in IAS39 for two out of four categories of the financial instruments; ‘objective evidence’, ‘Incurred loss’ model and financial instruments impairments requirements under IAS39. After the examining IAS39 in great details and analysing opinions of the interviewees this research came to conclusion that IAS39 contained some limitations associated with unclear requirements for the financial instruments impairment and loss provisioning. ‘Incurred loss’ model which is fundamental to the impairment recognition in IAS39 have not allowed institution to recognise more losses earlier. The ‘objective evidence’ requirement in IAS39 is very flexible and allowed institutions to interpret the loss events with different degree of conservatism. This research therefore conclude that IAS39 had contributed to the way banking crisis was reported and stretched recognition of losses over a prolonged period of time, but it was not a root cause of the Ireland’s banking crisis. Due to the sensitivity and debate which is still continuing on this topic and due to the high positions in the prominent international accounting firms and their association with the banking industry all interviewed accountants will remain anonymous and be referred to as Accountant ‘A’, ‘B’, ‘C’, ‘D’ and ‘E’. Their input and assistance with this research in to the role of the IAS is invaluable and research would not be completed without their kind assistance. The identities of the interviewees are known to my Dissertation Supervisor. Author keywords: Ireland’s banking crisis, role of IAS39 in the Ireland’s banking crisis, fair value, 'objective evidence’, loan impairment provisions