Having completed the discussion below on the implications for
banks, perhaps a quick discussion on the implications for the
non-financial services companies is in order. In Australia, as with the
rest of the (IAS 39 – FAS 133 is quite similar) world, the main
impacts for the resources and industrial companies were quite different
for those of the banks, largely due to the differing structures of the
businesses and what had gone before.
The important thing to note is that, unlike the banks, each and every company here was different, so the below are fairly gross generalisations which may be true overall, but are unlikely to be correct in any specific instance.
This was a bit trickier for the non-banks than for the banks, but,
with one exception, mostly well handled. Where it was easiest was where
there were equity or bond holdings in another, listed, firm. The fair
value of these was easy to determine and could be put through the
accounts quite cleanly if they had not been so under the old rules.
The only area that caused major problems was trying to fair value the shares, or debt, of unlisted entities. If there is no market price, trying to work out the value of a subsidiary or associated company is simply difficult to impossible. This is probably where the most difficulty came in. It was also, in most part, the most pointless as the values of these were largely eliminated on consolidation where the company was a subsidiary, as most were. This issue was therefore, widely fudged.
This is where the real work was – and the most trip-ups. Many
companies simply did not put their documentation into place before the
appropriate date – which, for most of them, was 1 July 2005. This meant
an accounting nightmare as previously valid hedges became invalid on
transition, together with all the implications of that. Where it was in
place, frequently the effectiveness testing was simply not done, or it
was done in a different way to the way the documentation stated it would
be. Because firms did not actively engage with their auditors early
enough in the process the headaches just got bigger.
A friendly piece of advice to those going over to IAS after this: do not hedge account under IAS 39. Don’t. Not worth it. Just explain to your shareholders what the impacts of leaving them at fair value are and deal with the ups and downs that will result. There are other accounting implications but they are a price worth paying.
Held to Maturity / Loans and Receivables
Unlike at the banks, this one was not a major issue – again with one major problem.
With a few exceptions, determining the costs and revenues directly attributable to taking out a loan was simple – and, even easier, not material. Most firms, sensibly, avoided using the HTM category and just had all their investments of that type done as AFS.
The problem arose from all of the loans that typically flow between entities in a consolidated group. Under the old standards these could be held at face value and were effectively ignored as long as there were no real signs that there were major problems at the sub that the parent could not handle.
The way the new standard works requires that the loan be fair valued – i.e. if the loan could not be repaid now, or at least soon, and it carried no interest it had to be written down and the difference between the face value and the written down value taken as an equity injection, with the difference unwinding as “interest” through the P&L. This had several ugly effects that I will not go into here. Suffice to say that, on a standalone basis, you do not want any of these lying around.
This was a real sleeper that came back to bite several companies.
Smaller firms generally did not need to worry about it, as the sorts of
contracts that normally contain these are the ones you get the lawyers
in to draft. Lawyers, however, did not know to look for these so by the
time the accountants got around to it they needed some real time to
Several of these needed a considerable amount of work – so, when negotiating contracts from now on, try to avoid negotiating unusual price escalation clauses. They are a pain. If you need to have them in, get your accountants in early and get them to talk to the lawyers.
Impairment considerations (at least in respect of financial instruments) were also not a major concern. As these firms mostly borrow from, rather than lend into, the market impairment on instruments was not a major concern. Specific provisioning generally did not need much work, except to allow for the fair valuing of any long dated receivables. Collective impairment normally just meant writing back the entire general provision as losses were normally low enough that it would have been difficult to prove that there were any outstanding losses.