Fair Value and Accounting Politics

The title link is to an article in the FT about the European reaction to the IASB's proposals on fair value accounting. The IASB proposes to reform the unsatisfactory IAS39, which classifies financial instruments into somewhat arbitrary categories. There will be the option to value items with predictable cash flows on an amortised cost basis (like a tangible fixed asset) rather than marking to market (fair value). However the EU is worried this will disadvantage European banks in comparison with US ones that account under different rules.

The moral of this situation: financial reporting is strongly influenced by politics and competition whatever the theoretical arguments may be.

Monitoring Board

In January 2009, the IASB formed a 'monitoring board' composed of representatives of international regulators. Said board has been fairly quiet but has just said that standards should be 'reliable, relevant, understandable and comparable'. This is an interesting straw in the wind because it reflects the old wording of the IASB conceptual framework, not the proposed new wording, which replaced 'reliable' with 'faithful representation'. Words matter and this was not just a cosmetic change. 'Faithful representation' was seen by some commentators as part of an ongoing trend to move towards fair values.

Another term, another financial crisis

The world seems to be a more stable place than it was a few months ago. The stock market has had a record run in the last quarter, house prices are stabilising, even the pound has stopped falling against the Euro.

Does this mean the financial crisis is over? I doubt it. The public finances are a mess and we can't see any fundamental change to them until after the election. What then? My guess is that whoever wins is going to squeeze public expenditure hard. Universities, inter alia, will be in for a thin time of it. However the size of the cuts needed to reduce borrowing to manageable levels is enormous. The alternative course of action - a rousing bout of inflation - is going to look awfully tempting to whoever wins the election. Index-linked bonds anyone?

The trouble with markets

Roger Martin argues (see title link) that linking managers rewards to share prices (eg with options) gives them an incentive to manage the 'expectations' market rather than the real market for production of goods and services. He fingers efficient markets theory, shareholder value and agency theory as the intellectual culprits and advocates reward based on 'real' performance.

He has a convincing case and a corollary of his argument would be a return to historical cost accounting rather than the use of fair values, which are based on the expectations market.

The unacceptable face of capitalism reborn?

The title link is to a report that hedge funds are buying poor quality corporate debt in order to take over ("loan to own") or liquidate ("loan to bust") the issuing companies. Edward Heath dubbed some of the activites of Tiny Rowland's Lonrho as "the unacceptable face of capitalism". We seem to be seeing that face in a new guise.

Accountants plead for protection

In possibly the least unexpected news item of the year, Accountancy Age reports that the Big 4 are seeking immunity from law suits arising from the credit crunch. Perhaps they should have thought a bit more about the risks their financial clients were running.

Financial Oligarchs

Writing in the FT, Martin Woolf asks whether 'America is the new Russia'. The power of the financial sector to influence government and attract subsidies from the public purse is corrosive. Graphs of relative wages and financial sector profits show how much hold the financial sector had generated over the economy as regulation was reduced.

Will increased regulation, which everyone now expects, reverse this? The volume of noise generated by interested parties seeking to reduce the impact of regulation makes one wonder whether new regulation will be toothless.