Question 3.21
The most appropriate theory to choose from could be, the Public Interest Theory as there is certain distinction being made by people in authority, within the government agencies and that the regulation and the regulatory body intends to benefit and represent the interest of the society. Moreover, President Chirac acted that way saying that the ‘new standards would have harmful consequences on financial stability’, since it does affect companies true financial health in the sense that it will affect profits and sales probably affecting the company’s financial status. Thus, there says that such public theory has emerged in a positive economics, which is good for the involved parties within the business and is also good to the public and its markets as well. Thus, determining what the public interest is advocates the positive theorizing as argued that the public interest approach underestimates the effects of economic and political power influences on regulation. The public interest theory of regulation, regarded as responding to such controlled need as the regulation assume that regulators which include the political actors were also utility exploiters, even though the utility is not specified, it can mean securing and maintaining political power due to public interest ways (1996, 2005: ).
Thus, regulators are being captured by interest groups seeking expropriate income. The positive theory in approach to regulation is consistent also to the public choice theory which stresses the extent to which governmental behavior is understood by envisioning all actors as rational individual maximisers of their own welfare. The analysis is directed to competing preferences of politician actions and decisions that are involved like for instance, how politicians get around regulatory goals in expanding out imperative goals from within. Consequently, the theory then connects such political and economic questions that rely on certain public assumption of rational choice in terms of predicting the behavior of politicians as regulators, just like President Chirac.
Question 3.22
Part A: The nominated theory can involve the regulation of economic theory, as it provides better regulation within the standards to be applied.
Part B and C: Discuss Theories – Alternative Explanations
It can be that, the greatest determining factor in the successful adoption of global standards involve the approach is taken by diverse authorities responsible for financial regulation. The IASB by itself does not have the authority to impose its own standards in giving the standards the necessary regulatory backing. Vested interests will always be ready to resist change such as the controversy in EU regarding accessible accounting standards on financial instruments and that, there is pressure on politicians to grant exemptions from the requirements that have implications within local and systemic stage. Thus, the benefits that global standards would bring could be within national interests. In addition, regardless of the political decision to take control, in a way, the IASB must continue to develop accounting standards that does enhance precision for the users of such financial knowledge. The IASB has to pursue with the projects on its agenda and tackle complicated regulatory and financial issues in achieving better convergence in hope of eliminating certain execution differences respectively. The hedge accounting may be in diverse attitude and to qualify for hedge accounting at all an entity must formally document the hedging relationship. This entails specifically identifying the hedging instrument, the hedged exposure and how the effectiveness of the hedge will be assessed. Then, starting the hedging relationship there must be an expectation that the hedging instrument will be highly effective in offsetting the fair value or cash flows of the hedged item. Throughout the life of the hedge the entity must actually assess the effectiveness of the hedge and must be frequent as annual accounts were published and hedge accounting ceases if effectiveness falls outside accepted percent range.
Particular Hedge Accounting
Hedge accounting itself is likely to look very different under IAS 39 as it operates within the constraints of a general requirement to record all derivatives on the balance sheet at fair value, whether part of a hedging relationship or not. The actual accounting depends on whether the derivative is part of a fair value hedge. In the case of a fair value hedge, gains and losses on the hedging instrument are recognised in the income statement. To preserve the effect of the hedge in the income statement, the hedged asset or liability is also adjusted in respect of the hedged risk and this adjustment is also recognised in income. In this case, the loan would be revalued in respect of changes in interest rates and this adjustment taken to the income statement along with the fair value gain or loss on the swap. The loan option has been originated by the entity and will therefore be recorded at amortised cost; the call option is a derivative and hence will be marked to market through the income statement unless it is an effective hedge.
Part D:
(a) The theory of regulation that seems to explain the actions of Sir Tweedie, possibly inclined to the private interest theory and has involved the hedging process within Australian as well as European business matters.
(b) Then, the theory of regulation in explaining lobbying efforts of the European banks is amicably concerned with the concept of macro-hedging in support to public interest theory as there is notion of continuing to hedge against risks within the portfolio loans and there allows banks to macro-hedge their risks.
(c) The theory to explain of insurance companies, in some ways adheres to the capture theory of regulation wherein there can be control of the regulated interest and the regulated agencies which can involve the insurance firms. Thus, there needs to consider possible hedging procedure as well as the management of its risks involved. For instance, IAS 39 rules on hedging contain some of most radical changes to current practice, not only in terms of the way a hedge is accounted for, but also the way an entity must manage its business in order to achieve special hedge accounting.
(d) Yes, in a way Ruth Picker’s actions appear consistent as he wanted negotiation with IASB for easy transaction on new rules for such generated intangibles although, in the process, issues have dominated the situation and conflicting ideas were evident against Tweedie as the latter had criticized her actions for changing the accounting standards. Thus, in turn Australian companies are supporting the standards due to long-term benefits it can have for the business. As there needs ample requirement that assets and liabilities that are held for trading are marked to market through income statement along with certain EU practices. However, for non-derivative assets to be classified as trading they must be held with views to making part of portfolio for which there is evidence of short taking of profit value as the restrictions can generate problems and differences as to how companies are managed and the way it relates to the investors of business.
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