A new financial statement? Or an old one?

David Tweedie has apparently confirmed that the IASB is considering including a 'regulators'' page in financial statements so that people concerned with financial institutions can be given the information they need to ensure market stability. It's quite likely that this will include something that looks very like a historical cost balance sheet, and so, rather being something new, this might signal a return to something old.

This could be a fascinating accounting experiment and would give standard setters an opportunity to find out what information is actually demanded, has impact and has value relevance. I foresee the growth of a minor industry in researching the relative importance of regulatory and 'decision useful' information.

More on Lehman's

Our growth in understanding what went on at Lehman's proceeds apace. Despite the criticism of financial transactions that occurred in London, it seems the accounting that is at issue occurred in the USA. It's said that because the Repo transactions involved exchanging assets worth more than $105 for every $100 of cash received SFAS 140 permitted them to be treated as sales because Lehman's wouldn't have had enough cash to buy them back again.

Layers of the onion

The Lehman collapse has been blamed as the crucial event in the credit crunch but now it is revealed that aggressive accounting had been hiding problems for some time. The device that it is alleged was used to manipulate the financial statements was accounting for repo (repurchase) transactions.

In a repo an asset (a block of loans, say) is exchanged for cash, and the exchange reversed some time later. In substance this is usually a short term loan with the asset being used as collateral.

It's alleged that Lehman's were accounting for these as sales so that the asset disappeared off the balance sheet and the cash was used to reduce net borrowing. The effect is to reduce the bank's reserve ratio to within acceptable limits.

How was Lehman able to count these transactions as sales rather than loans? How was it able to exploit the provisions of the relevant US accounting standard, SFAS 140? It is likely that Lehaman's did so by a piece of cheeky financial engineering whereby the transaction took three stages, with the asset going back and forth to the counter-party three, and ultimately, four times. The title link shows how this is done.

What we don't yet know, is why this had to be done in London, the role of fair value, whether the financial reporting in the UK reflected the same things as the American accounting, and whether the accounting was routed through off-shore vehicles.

This one will run and run.