JARAF Editorial, Volume 2 (1) July 2007.

Journal of Applied Research in Accounting and Finance (JARAF), Vol. 2, No. 1, 2007

4 Pages Posted: 10 Jan 2008 Last revised: 18 Aug 2014

See all articles by Tyrone M. Carlin

Tyrone M. Carlin

Southern Cross University; The University of Sydney Business School

Nigel Finch

Saki Partners


The time for publication of this edition of JARAF coincides with a period of potential danger in global capital markets. In the United States, tens of thousands of mortgages originated over the past several years with apparently scant regard to the credit characteristics of the end borrowers have commenced turning sour. Delinquency rates have jumped markedly. Traditionally, the fact that a home mortgage taken out by a borrower in Tipton Iowa or Tupelo Mississippi had fallen into default would be of little consequence to an investor in Australia.

Yet a combination of substantial increases in sub prime loan origination, demand for securitised debt instruments under- pinned by residential mortgages and the explosive growth of the credit derivatives market has meant that risk which commenced its life in a small town in America’s mid west or deep south can be rapidly transmitted to any part of the globe. Investors in at least two Australian hedge funds have already discovered this phenomenon, no doubt to their considerable chagrin. If these episodic manifestations of risk lead to widened credit spreads the effects could cascade far more broadly, including to equity valuations.

Financial regulators have expressed concern at these events, as well they might. The explosion of the credit default swap market from a phenomenon with an aggregate outstanding face value of virtually zero at the commencement of this decade to a US $25 trillion monster has thinkers worried. The balance sheet no longer reveals that which it might hitherto have indicated about credit risk, its location and its concentration.

Just as financial regulators have concerns about the capacity of their traditional prudential supervisory methodologies to protect against financial contagion, so too the accounting fraternity should have concern. Writing in this edition of the journal, Sir David Tweedie raises specific concerns about ac- counting and reporting procedures for financial instruments. He depicts the accounting rules for these as an unruly jungle of breathtaking complexity yet without an appropriate foundation in principle. The clear lesson is that as capital markets innovate and grow, the accounting profession simply has not kept up. Nor can this criticism be levelled merely at what might ac- cording to a generous interpretation be labelled novel phenomena. Sir David reports that while ardent supporters of the global harmonisation project will be delighted that this has essentially been achieved in relation to leasing, the result, to use his turn of phrase, is useless.

By adding pension accounting to his “black spot” list, he offers a compelling argument for the critical need to move quickly to an approach to standard setting more obviously aligned with a foundation of principle, in which the exercise of professional judgement by practitioners is encouraged rather than stymied.

In a detailed and important piece written from the perspective of a senior practitioner, Wayne Lonergan expresses similar concerns. His chief focus lies on the rules embedded in Australia’s new AIFRS standards pertaining to intangibles, in particular goodwill and its impairment. While arguing that the new standards covering these areas contain some improvements over past practice, Lonergan is scathing of certain of the technical elements of the new standards which he convincingly argues are financially illogical and could lead to material errors in financial statements. The final article in this edition echoes those concerns by providing evidence of the treatment of some of the more complex elements of the good- will impairment accounting rules by large audit firms – with surprising results.

Ultimately, as Sir David Tweedie observes, we get the accounting standards we deserve. It is to be hoped that the type of discourse embedded in this edition of JARAF contributes to the pursuit of improvements in these most important though clearly imperfect institutions.

Keywords: financial reporting

JEL Classification: M40, M41

Suggested Citation

Carlin, Tyrone M. and Finch, Nigel, JARAF Editorial, Volume 2 (1) July 2007.. Journal of Applied Research in Accounting and Finance (JARAF), Vol. 2, No. 1, 2007. Available at SSRN: https://ssrn.com/abstract=1081490

Tyrone M. Carlin

Southern Cross University ( email )

Lismore, New South Wales 2480

The University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
+ 61 2 9036 7230 (Phone)
+61 2 9351 7471 (Fax)

HOME PAGE: http://sydney.edu.au/business/staff/tyronec

Nigel Finch (Contact Author)

Saki Partners ( email )


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