Monday, July 27, 2009

How accounting rules can affect business strategy

The change to 'mark to market' accounting for certain asset classes continues to impact on the business environment. Today, Adele Ferguson shows us the impact on some of the Macquarie Group listed vehicles.
The demise of Babcock & Brown, Allco Finance Group and the unravelling of the complex structures behind the Macquarie satellites are a stark reminder that investors have had a gutful of backing a model that was good for the head stock/external manager and bad for investors.
...
A statement from ASIC late last month on "fair values", no doubt speeded up the model's demise. ASIC said "careful consideration should be given to whether assets are traded in active markets. Most ASX-listed securities are actively traded, in which case, quoted prices should be used".

This would have given the Macquarie boys some major heartburn. In its latest results, released in May, profit was down 52 per cent, as chief executive Nicholas Moore made a $2.5 billion writedown on assets such as MIG, MAP, BrisConnections, real estate equity investments, loan impairment provisions and CDO exposures.

Keep an eye out in the upcoming reporting season for the impact of mark-to-market driving write-downs and hits to earnings.

3 comments:

Kevin Lee said...

I read this article from Bloomberg--"Bank Profits From Accounting Rules Masking Looming Loan Losses
"(http://bit.ly/LXzsN). I think it is also related to this topic

Kevin Lee said...

Question: What is the external management model mentioned in this article?

Jeff Coulton said...

"The external manager model for infrastructure is where a sponsoring manager – usually an investment bank – acquires assets and then on-sells them into a separate fund or listed entity but retains the right to manage the assets."
From http://bit.ly/H9QN2 <- Nucleus Global Investors paper by Brian Ingham.