Fair value accounting

Well we're into the reporting season. One of the things I have previously suggested we look out for is the impact of "mark-to-market" accounting; especially for businesses that have a relatively large amount of investments in listed assets.

Last night Lateline Business ABC television interviewed the Managing Director of Australian Foundation Investment Company (AFIC), who announced a 75 percent fall in full year profit. The Australian Foundation Investment Company (AFIC) says the slump, to $103 million, reflects a big fall in realised gains and a more than $100 million impairment charge. Transcript and video here.

UPDATE: Not suprisingly, AFIC is calling for an overhaul in the accounting rules for 'impaired' assets. From The Australian:

"The (accounting) standard doesn't make a lot of sense for us," AFIC managing director Ross Barker said. "We have $1 billion in our revaluation reserve, but we can't offset any of that against the assets that we are holding below-cost."

AFIC, he said, was making its views known to international and domestic bodies that review and create accounting standards.

An exposure draft where mark-to-market gains and losses would all be taken through the profit and loss statement, or the balance sheet, would not help, according to the AFIC chief.

The first option would create volatile earnings streams, while the second would mean the dividends that AFIC earns from its investments would also have to be taken through the balance-sheet as an adjustment to reserves.

UPDATE: Here's Argo, another listed investment company, with a similar tale.

Managing director Rob Patterson said the $64.4m loss after tax was not the best measure of the company's performance over the financial year, as it did not reflect the income received from the investment portfolio and was inconsistent with the company's long-term investment philosophy.

A more accurate indicator, he said, was the operating profit of $163.4m, which was down 10.4 per cent from the previous financial year.

The return on the company's investment portfolio over the financial year was a loss of 16.8 per cent, outperforming the benchmark All Ordinaries Index, which declined by 22.1 per cent.