Financial Reforms, Obama style.

This is the thirty ninth in a series of articles on the financial reforms sought to be initiated by the Obama Administration in U.S.A.

Improving Accounting Standards: It is a fact that some of the most complicated instruments in the financial world like the derivatives, etc, were one of the major causes of the market failure. Being complicated in nature, they also required complicated accounting procedures to be complied with. And this complexity in accounting procedures helped the firms escape proper scrutiny and accountability.
The financial crisis eventually mad the authorities sit up and take note of the kind of instruments circulating in the market, and the way they were accounted for.
Arising from this realization, the following recommendations have been made to improve accounting standards.
1) Accounting standards setters have been asked to define what is fair value accounting. To lay down the ground rules and norms relaing to this sujbect, and to come up with standards that are consistent with their definition. One of the key requirements in this regard, is to establish a new financial measurement standard that would replace the existing model and to reduce the complexity of accounting standards. Another major objective is to set new accounting standards to promote global consistency in impairment approaches.
2) Loan loss provisioning and related issues is another task set for the standard setters to look into, and come out with a new and improved version to take care of the issues thrown up by the economic crisis. Standard setters have been asked to examine various approaches, apart from the existing ones, such as a fair value model, expected loss model, and dynamic provisioning.
3) Development of a single set of high quality global accounting standards is a cherished goal in the new global financial accounting regime. Where accounting treatment is similar for similar instruments throughout the world, supervision and regulation becomes easy, and also helps eliminate scope for misuse of the system.
To be concluded.