Financial Accounting For Business Combination And Its Role In Global Financial Crisis - An Essay.

Discuss About The Financial Accounting For Business Combination.

Financial Crisis

Financial Accounting which is commonly known as accounting is the basic branch of business dealing with the records, analysis, transactions and all other data of a particular business firm during a particular span of time. Financial accounting is the base of every business and it was practised since olden days, the difference being now is the change of method and types. Financial accounting is basically the day to day record of the flow of economy. Financial accounting is basically carried out by two ways that is Accrual method and Cash method. Fair value accounting is a way of financial accounting where the current market value is used as a basis to determine the liabilities and assets. Fair value is actually an estimated price at which the assets or a particular asset can be sold and the liabilities can be settled in a better way.  

A financial crisis is a sudden crisis where the business cycle becomes weak due to the drop in the price of the assets drops drastically. It is more or less like a business disaster, excess leverage and liquidity mismatching can be the original cause of financial crisis. The world and the growing economy has faced a lot of financial crisis. The most famous one was the Great Depression which happened during 1929. Before understanding a financial crisis especially the one we call a global financial crisis of 2009, a brief outline of the 1929 crisis is required. During the month of September 1929 the buying of shares at the New York stock exchange began to drop and the share prices fell suddenly and thus demands fell and factories were highly effected and unemployment rose (Christensen et al. 2015). Maldistribution of income, speculation and domestic over production were thought to be the major causes behind. Moving towards the Global financial crisis that we shall be dealing in this project, happened during 2008-2009. This financial crisis has drawn the attention towards the fair value accounting of the business (Gordon et al. 2017). During the financial crisis the housing prices fell down by 31.08 %. It actually began with the crisis of subprime mortgage in the United States of America and thus led to an international crisis all over the world. There are various types of financial crisis; sovereign crisis, another common is the balance of payment crisis, housing debt crisis, currency crisis and so on. It is like a disturbance in the market and globally speaking, it becomes a global disturbance and it leads to the increase in the number of insolvency rates which in turn puts the whole economy down (Ball et al. 2015). The modern economic crisis which we say also name as the global economic crisis has been debated globally among economists and many critics are of the opinion that fair value accounting might have led to the crisis (DeFond  et al. 2014). A financial crisis is thus the evil of a business and there is thus an excessive rise of unemployment rate and it comes with several other problems like increase in the crime level. Fair value accounting happens after taking a look after a current market situation. The present financial crisis of 2008 which is commonly called as the global financial crisis is a much debated term and according to experts it is said that the current requirement of the IFRS standards have contributed to the financial crisis (Florou and Kosi, 2015). The International Financial Reporting Standards is a body which sets and lays down rules and basic standards for executing business. In addition, sometimes both are used. In the Accrual method is done when the transactions have taken place and the revenue of a particular firm is recognizable. In Cash method the recording and accounting happens upon the exchange of cash only and after reviewing the payment receipts (Thornton, 2016). This organisation has developed certain norms and rules with the main aim of creating a global background where the framework allows discussions and solutions. In modern day a lot of global companies are with the IFRS and it is necessary to incorporate a common business norms among all the companies (Capkun et al. 2016).

The Current International Financial Reporting Standards and Whether it has Contributed to Financial Crisis

Since 2007 economists started to wander the reason of economic depreciation and enquired the IFRS committee. There was a significant price fall in the earnings and the loses were recognized on the remeasurement of the fair price value. It all started in the USA where the housing loans were improper.In the United States of America the housing loans in the Special purpose vehicles which are nothing but some important part of finance transaction which are known to be bankruptcy remote and these assets are not at risk even when the company becomes insolvent; were started to fall (Amel-Zadeh et al 2017). This resulted in huge loses and during the next year, and it led to limited marketing and the quality was falling incredibly. Soon this mini crisis started to accelerate leading to a world crisis.

 It has been argued that the standards of IFRS has led to the financial crisis and it thus called for an urgent need to rewrite the standards and rules once again. There was a complete revision of the standards and a theoretical and practical investigation of the standards of financial accounting rules.Thus the IFRS standards were altered and necessary changes were adapted for business combination (Magnan  et al. 2015).

The fair value measurement was altered and a full revision was done taking into account the causes and aftermaths of the crisis. Then the company dealt with the enhancement of the fair value measurement. It was made clear to the business schools, taught and revised to the various companies. Then there took place a more enhanced classification and disclosure of the financial tools, agendas and the various instruments which helped in the proper running of a business (Xie, 2016). The “Off Balance sheet” structures were included and dealt with. The liabilities and assets were once again dealt with. Hedge accounting was incorporated.A Financial Crisis advisory group was set to settle the crisis. If we look at the case from different angles we will get different results and it is really controversial to blame the IFRS for the financial crisis, It is rather difficult to conclude on one point and blame the IFRS (Lilien et al. 2018). However, the IFRS do needs to change few strategies which it has successfully changed and recovered. Judging from one angle it would be alright to say that IFRS had few strategies which lead to the crisis and it was a bit different from the rules set by other organisations. After all there were many other reasons for this crisis. There are solution for any economic crisis and it always comes up with remedies. Business Combination is what we require in the present globally spread and globally accessed markets. Business combination is a situation when a particular buyer takes control of another business venture with transaction. A compound or a combination is a better solution to most of the problem. A business combination ensures unity among company and the need of growing together faster (Bewley et al. 2018). A proper business combination and accounting can help to solve the excessive competitiveness problem which leads to fall of market. In this way the company can become cost efficient and thus maximising profit.

Business Combination and its Advantages

Conclusion

After the long and critical discussion over the financial crisis, reasons for it and the role of IFRS and a doubt whether it was solely responsible for the crisis makes us clear with one point, that a particular cause  should not be blamed for the whole matter. We can easily conclude that business combination has many advantages. It can strengthen the current business and the company can spread over a large geographical area. Another advantage of combining business can be to improve the managerial areas and thus the employees will have a better time management and thus it will lead to a better oriented work. Thus the IFRS has recognized business combination as the merging of companies or rather where an acquirer obtains control over multiple business agendas which will lead to common goals for future prospects.

References

Amel-Zadeh, A., Barth, M.E. and Landsman, W.R., 2017. Erratum to: The contribution of bank regulation and fair value accounting to procyclical leverage. Review of Accounting Studies, 22(3), pp.1455-1457.

Ball, R., Li, X. and Shivakumar, L., 2015. Contractibility and transparency of financial statement information prepared under IFRS: Evidence from debt contracts around IFRS adoption. Journal of Accounting Research, 53(5), pp.915-963.

Bewley, K., Graham, C. and Peng, S., 2018. The winding road to fair value accounting in China: a social movement analysis. Accounting, Auditing & Accountability Journal, 31(4), pp.1257-1285.

Capkun, V., Collins, D. and Jeanjean, T., 2016. The effect of IAS/IFRS adoption on earnings management (smoothing): A closer look at competing explanations. Journal of Accounting and Public Policy, 35(4), pp.352-394.

Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review, 24(1), pp.31-61.

DeFond, M.L., Hung, M., Li, S. and Li, Y., 2014. Does mandatory IFRS adoption affect crash risk?. The Accounting Review, 90(1), pp.265-299.

Florou, A. and Kosi, U., 2015. Does mandatory IFRS adoption facilitate debt financing?. Review of Accounting Studies, 20(4), pp.1407-1456.

Gordon, E.A., Henry, E., Jorgensen, B.N. and Linthicum, C.L., 2017. Flexibility in cash-flow classification under IFRS: determinants and consequences. Review of Accounting Studies, 22(2), pp.839-872.

Lilien, S.B., Sarath, B. and Yan, Y., 2018. Fair Value Accounting, Earnings Management, and the Case of Bargain Purchase Gain.

Magnan, M., Menini, A. and Parbonetti, A., 2015. Fair value accounting: information or confusion for financial markets?. Review of Accounting Studies, 20(1), pp.559-591.

Thornton, G., 2016. Applying IFRS 9 with IFRS 4 (amendments to IFRS 4): accounting technical. Professional Accountant, 2016(29), pp.16-17.

Xie, B., 2016. Does fair value accounting exacerbate the procyclicality of bank lending?. Journal of Accounting Research, 54(1), pp.235-274.