ACT Comments on JWG Proposals for Accounting for Financial Instruments - Full Text
The Technical Director
Accounting Standards Board
28 June 2001
Dear Sir,
RE: JWG PROPOSALS FOR ACCOUNTING FOR FINANCIAL INSTRUMENTS
Thank you for giving us the opportunity to comment on your consultation paper. We have canvassed opinion amongst our members who have expressed a number of concerns on the effectiveness and usefulness of fair value accounting, particularly in its application to a class as wide-ranging as financial instruments. Our comments relate to the application of fair value accounting to corporates, not financial services organisations.
Our main points can be summarised as follows:
The volatility in the figures reported on the face of the profit and loss account as a result of using fair values will, we believe, encourage companies to take avoiding action by changing their risk management policies.
The essential requirement of accounting for financial instruments is to allow readers of accounts to distinguish between instruments that reduce risk and those that increase it i.e. what is hedging and what is speculation. The proposals as currently structured do not achieve this and in some cases are positively misleading in this respect.
Fair value accounting will not achieve clarity for the readers of accounts and will lead to the misinterpretation of risks and risk management activity which is invariably focused on managing cashflows not fair value. We support the JWG’s intention that companies should disclose their risk management objectives and policies, their financial risk positions and their financial performance. However we do not think it useful for the exposition of the effectiveness of the company’s policies to be based (as would be necessary) on information that is fundamentally different from what appears on the face of the accounts.
We believe that the way forward is for some fair value information to be disclosed by larger companies in notes to the accounts, for the benefit of sophisticated users. However, to require corporates to provide extensive fair value information on the face of their accounts is an inappropriate response. We believe that the issue of the cost relative to the benefit is crucial to assessing the merits of any move towards fair value accounting.
It is essential that there should be a cost benefit exercise similar to that conducted by the FSA before there is any firm commitment to a fair value based approach.
We have organised our comments by reference to the major uses of accounting information for our members: corporate governance, explaining company performance, the measurement of shareholder value and the impact on financial covenants in loan and bond documentation. We also make more detailed comments on the cost benefit trade-off of providing fair value information.
