Explaining your accounts

I have mentioned in class that companies can use voluntary disclosure to explain how the accounting rules impact on their results, and also that we have seen examples of this with the adoption of A-IFRS accounting standards in Australia.

Here's one example - Westpac provided this presentation in April 2007 (note - link to pdf file).

How banks can manage earnings

No surprises, it's the loan-loss reserve. Businessweek with more details.

More bad debts for the banks

Some of the banks are set to report this week, and more doom and gloom is expected, particularly with respect to bad debts. Bad debt provisioning is always one area where managers have some discretion. In the current climate, asset writedowns are also going to be of interest, and have been the focus of discussion of Macquarie's recent results announcement.

Off Balance Sheet Liabilities - the banks

Adele Ferguson in the Oz has a nice back page article on the extent of the off-balance sheet activities(typically exposure to derivatives) of the major banks. It's one of the reasons why the banks are especially hard to value using financial statement data alone.

Accounting for sub-prime losses

The banks (especially in the U.S.) will be preparing their quarterly accounts at the end of September. One of the big issues they will be facing is how to treat their exposure to the sub-prime mortgages. Their assets should be 'marked to market', i.e., banks should determine the 'fair value' of the mortgages (and securitised tranches of mortgages etc). While there are rules as to what to do (i.e. fair value accounting), there is less guidance as to how to do it (i.e. value the mortgages). One of the issues with fair value accounting is the appropriate treatment when there is no active and liquid market (from an Oz article found here:

The banks are also facing losses on their holdings of complex securities where there is often no clear market price because of low trading volumes.

This highlights one of the key issues facing accountants in the future; are they going to take up the role of valuation experts, or will they subcontract out of that role and focus more on the straight 'bookkeeping'. With the move towards fair value accounting standards globally, there will be a dramatic increase in work for valuation experts.

Earnings quality - banks

Where are the banks most likely to have issues with their 'quality of earnings'? Provisioning and doubtful debts, that's where. Here's The Australian's Adele Ferguson explaining things.