Monday, July 26, 2010

Re-jigging the mark-to-market rule

I don't really want to say, "I told you so" on the mark-to-market rule being impracticable and unhelpful, but....

As may would be aware, on 1st January 2010, Malaysia, in line with the entire world, adopted the mark-to-market rule, also known as FRS139.

Just to recap on FRS139 as extracted from this article:

Derivatives (e.g. foreign exchange contracts, options) and many financial assets such as investments in shares and debt securities are now required to be stated at fair value. The standard also introduces complex hedge accounting and impairment rules.

But, what's happening now?

The IASB is, however, currently undertaking a comprehensive review of financial instruments accounting and aims to replace IAS39 with a new financial instruments standard referred to as IFRS9 Financial Instruments.

The IFRS9 project is partly driven by requests for reform from the Group of 20 and other constituents. The IFRS9 project is divided into three main phases: classification and measurement, impairment, and hedge accounting.

The IASB aims to complete all phases by the second quarter of 2011. To date, the classification and measurement phase has been completed and draft proposals arising from the impairment phase have been issued.

Under the classification and measurement phase, the four categories for financial assets under IAS39 (namely held to maturity, loans and receivables, fair value through profit or loss, and available for sale) are replaced by just two categories i.e. amortised cost and fair value.

An entity’s “business model” condition is introduced to determine the appropriate classification for financial assets. If an entity’s business model’s objective is to hold assets to collect the contractual cashflows, then the financial assets are measured at amortised cost.

This change is intended to make it easier for entities to measure their financial assets (particularly quoted debt securities) at amortised cost rather than fair value. Hence, unlike previously, an entity does not have to hold all debt securities to maturity to qualify for amortised cost measurement.

Other key changes

There are also key changes in the accounting for investments in equity investments (shares).

Equity investments are generally measured at fair value and gains/losses on fair value changes are recognised in profit or loss. However, an entity may elect to present the fair value changes to other comprehensive income (OCI) instead. The election is irrevocable and can be made on an individual share-by-share basis.

Well, it's just an agonizing waste of time and resources.

This is the downside to having capital markets that keep inventing ways to create false wealth that has nothing to do with the brick-and-mortar real world of the real economy where people generate actual goods and services and receive a fair wage and return.

They call the invented wealth "derivatives", i.e. imaginary financial products that are derived from actual equity and financial instruments. That, if you trouble yourself to take a reality check, is all about creating illusions.

And, the greatest economic minds in the Western world are still puzzling over how to pick up the pieces when these illusory products are proven to be just that ... illusions that go "PUFF!!!" into thin air at the first sign of trouble.

How do you measure the value of that?

2 comments:

Anonymous said...

i thought accounting standards was suppose to eliminate latitude of judgment, bring about consistency and enable comparison

now the standards are driven by the "needs" of the financial wizads who bring us speculation, major bank collapses, sub prime crises, multi-million pay packages etc

how much do they contribute in terms of brick and mortar? I am not sure. Cost of living has gone up much faster in the past 10 years than any other time in human history...

accounting standards have grown into even some accountants struggle to make heads and tails out of it.

compliance cost and work stress will go up, laymen readers will struggle to comprehend and all that...

however, an irreversible trend is already entrenched. Wonder how much change can Obama bring ont these financial wizardry

hxl said...

Monday, July 26, 2010
Re-jigging the mark-to-market rule
I don't really want to say, "I told you so" on the mark-to-market rule being impracticable and unhelpful, but....

As may would be aware, on 1st January 2010, Malaysia, in line with the entire world, adopted the mark-to-market rule, also known as FRS139.

Just to recap on FRS139 as extracted from this article:

Derivatives (e.g. foreign exchange contracts, options) and many financial assets such as investments in shares and debt securities are now required to be stated at fair value. The standard also introduces complex hedge accounting and impairment rules.

But, what's happening now?

The IASB is, however, currently undertaking a comprehensive review of financial instruments accounting and aims to replace IAS39 with a new financial instruments standard referred to as IFRS9 Financial Instruments.

The IFRS9 project is partly driven by requests for reform from the Group of 20 and other constituents. The IFRS9 project is divided into three main phases: classification and measurement, impairment, and hedge accounting.

The IASB aims to complete all phases by the second quarter of 2011. To date, the classification and measurement phase has been completed and draft proposals arising from the impairment phase have been issued.

Under the classification and measurement phase, the four categories for financial assets under IAS39 (namely held to maturity, loans and receivables, fair value through profit or loss, and available for sale) are replaced by just two categories i.e. amortised cost and fair value.

An entity’s “business model” condition is introduced to determine the appropriate classification for financial assets. If an entity’s business model’s objective is to hold assets to collect the contractual cashflows, then the financial assets are measured at amortised cost.

This change is intended to make it easier for entities to measure their financial assets (particularly quoted debt securities) at amortised cost rather than fair value. Hence, unlike previously, an entity does not have to hold all debt securities to maturity to qualify for amortised cost measurement.

Other key changes

There are also key changes in the accounting for investments in equity investments (shares).

Equity investments are generally measured at fair value and gains/losses on fair value changes are recognised in profit or loss. However, an entity may elect to present the fair value changes to other comprehensive income (OCI) instead. The election is irrevocable and can be made on an individual share-by-share basis.
Well, it's just an agonizing waste of time and resources.

This is the downside to having capital markets that keep inventing ways to create false wealth that has nothing to do with the brick-and-mortar real world of the real economy where people generate actual goods and services and receive a fair wage and return.

They call the invented wealth "derivatives", i.e. imaginary financial products that are derived from actual equity and financial instruments. That, if you trouble yourself to take a reality check, is all about creating illusions.

And, the greatest economic minds in the Western world are still puzzling over how to pick up the pieces when these illusory products are proven to be just that ... illusions that go "PUFF!!!" into thin air at the first sign of trouble.

How do you measure the value of that?