Wednesday, January 9

Companies could be forced to reveal off-balance sheet vehicles

This is such a d'oh statement that I cannot believe it, even after so many years in the financial markets. The concept of off-balance sheet is so ludicrous that there are frankly no logical or economic justifications for it. But we still have gigantic financial institutions with billions of dollars of exposure sitting in these off balance sheet vehicles which actually do impact the stock price and the assets/liabilities of the company. So what was exactly the point of having it on off balance sheet? So this attempt is a very good attempt. I quote:

Companies could be forced to develop a "parallel" balance sheet to better explain their off-balance sheet vehicles if preliminary ideas being discussed by international accounting standard setters are developed further.
The International Accounting Standards Board is discussing the issue and is due to publish a consultation paper - the first public step in its standard-setting process - later this year.
Off-balance sheet accounting practices have been criticised for their role in the credit crunch, where they are blamed for potentially obscuring the true risks banks face.
A number of leading banks, including Citigroup and HSBC, have announced they will be bringing structured investment vehicles back on to their books as a result of the market turmoil, sparking questions as to whether they should have been allowed to use the special accounting treatment in the first place.
The IASB project was launched before the credit crunch began and the IASB's technical staff are discussing the issue internally.
Some have suggested a form of parallel balance sheet on which entities such as SIVs could be explained in greater detail and the numbers would reconcile directly with those on the main balance sheet. This would mainly affect financial institutions.
Some details of off-balance sheet holdings are disclosed in footnotes to the accounts, but these are scattered throughout long reports and in many cases do not clearly match the actual balance sheet numbers, according to experts. The issue is due to be discussed by the board in the coming months and the full proposals have not yet been drafted. The parallel balance sheet is one possible option.
"At this stage, we're not trying to zero down to an answer. We'll be discussing this with a large number of interested parties," said Sir David Tweedie, head of the IASB. "What we're trying to do is simplify the accounting so banks can say, 'if it all blows up, this is what we face, but here are the reasons it won't'. That way, people have the information."
Auditors are conducting year-end audits of many of the biggest banks and have warned they will be paying particular attention to off-balance sheet activity and fair-value accounting - the practice by which banks mark their assets to current market prices.
Agreeing fair values has been made tougher this year by the complexity of the instruments and the drying-up of markets.

All this to be taken with a grain of piquant salt!!!

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