Revised proposals on accounting for leases and insurance contracts
Read our July 2013 financial reporting brief for commentary on accounting and regulatory developments during the second quarter of 2013
Credit risk in fair value measurement
Understanding the credit risk associated with financial instruments
The ongoing credit crisis has emphasised the necessity to better understand the credit risk associated with financial instruments. John McCarroll and Goind Ram Khatri outline some key considerations.
First published in Accountancy Ireland.
Since the start of the global financial crisis in 2008 the credibility of counter parties to the investment transactions has become increasingly important. This has resulted in investors demanding higher premiums
(higher spread) for an average risk investment. And, because of the presumption of higher inherent credit risk, even the bonds issued by some governments, which were once considered as risk-free investments, are
now trading well below their par. Over-the counter transactions, on the other hand, are also significantly affected by the current economic climate because of their dependency on counterparty credit risk.
Although credit risk was always considered key in fair value measurement, the financial crisis has highlighted its importance.