• Register
Return to: Home > News > US business leaders worry about risks of complex financial instruments

US business leaders worry about risks of complex financial instruments

Financial instruments are a growing presence on company balance sheets, and business executives say more market awareness is needed to prevent another financial crisis, according to a survey by the American Institute of CPAs (AICPA).

When asked about their company financial statements, 59% of the CPAs surveyed reported having complex financial instruments such as mortgage-backed securities, interest rate swaps or other derivatives on their company balance sheets.  Of those respondents with complex financial instruments on their books:

  • 69% expect financial instruments to become more complex (57% slightly more complex, 12% substantially more complex) over the next one to three years, compared with 1% who expect them to decrease in complexity.
  • 53% believe there is not enough market awareness of complex financial instruments to prevent a financial crisis, compared with only 22% who believe there is adequate awareness.
  • 55% said they are concerned about the valuation of derivatives with 6% reporting significant concern and 49% reporting slight or moderate concern.
  • 56% said it would be easier to determine the value of complex financial instruments if they were measured and reported on a consistent and transparent basis.

Complex financial instruments historically have been difficult to value. That difficulty is seen as a major cause of the financial crisis that lead to the recession of 2008. The derivatives market exceeded $594 trillion in 2018. More than a quarter (28%) of respondents said they expect financial instruments to take a larger percentage of their balance sheets over the next one to three years, while only 15% see that decreasing.

“With financial instruments growing in complexity and taking up an increasing share of balance sheets, it is imperative that executives and finance teams understand these potentially risky investments,” said Ash Noah, CPA, CGMA, managing director of CGMA learning, education and development for the Association of International Certified Professional Accountants.

AICPA created a Financial Instruments Performance Framework to improve the consistency and transparency of fair value measurements for these complex instruments. It establishes documentation requirements and provides guidance on the scope of work supporting an auditable fair value estimate for financial instruments. The framework, along with the Certified in the Valuation of Financial Instruments credential (CVFI), will assure financial statements and disclosures are consistent and clearly supported.

Top Content

    HONG KONG NATIONALS: UNDERSTANDING VISA AND TAX WHEN MOVING TO THE UK

    Over 2 million Hong Kongers learned recently that they may soon be offered a route to UK citizenship following China’s introduction at the end of June of its controversial Security Law in the territory.

    read more

    SASB IMPLEMENTATION SERIES: COMMUNICATING ESG TO MAINSTREAM INVESTORS

    As part of a series of webinars, the Sustainability Accounting Standards Board (SASB) took a closer look at how to communicate ESG initiatives and progress to mainstream investors

    read more

    REPORTING AND COMPLIANCE: WHY WE NEED A DATA REVOLUTION

    Commerce no longer adheres to national boundaries: the largest international organisations to the smallest businesses operate in a global market. However, rules for corporate reporting and compliance do adhere to borders, write IMA’s Jeff Thomson and Liv A Watson

    read more

    CORONAVIRUS TIMELINE: REACTIONS FROM THE ACCOUNTANCY PROFESSION

    As the Coronavirus (COVID-19) continues to spread across the world, the International Accounting Bulletin and The Accountant will be collating all the latest news and updates from the profession on the pandemic’s impact.

    read more
Privacy Policy

We have updated our privacy policy. In the latest update it explains what cookies are and how we use them on our site. To learn more about cookies and their benefits, please view our privacy policy. Please be aware that parts of this site will not function correctly if you disable cookies. By continuing to use this site, you consent to our use of cookies in accordance with our privacy policy unless you have disabled them.