ADOPT STANDARD, WARTS AND ALL: EXPERTS
by Tom Ravlic
Melbourne Age, 10 September 2001*

Australia must urgently adopt an international accounting standard dealing with derivatives and other financial arrangements despite its flaws, according to experts.

They are urging the Australian Accounting Standards Board to quickly adopt the standard known as IAS 39 to avoid Australian accounting rules being perceived as lax.

The standard, part of those issued by the International Accounting Standards Board, has been criticised for lacking appropriate rules in areas such as debt-equity classifications and securitisation.

But accounting experts say the standard document at least needs market values for derivatives and is better than having a gap.

Wayne Lonergan, a former member of the Australian Accounting Standards Board, said the absence of a standard going beyond mere disclosure of the existence of volatile financial instruments, such as derivatives, meant investors and share analysts were insufficiently informed about the risks corporations faced.

Mr Lonergan, managing director of consulting firm Lonergan Edwards & Associates, said the mining industry had suffered as a result of gaps in present standards.

"The problems of financial instruments have been highlighted in the mining industry where billions of dollars have been lost," he said. "Despite all of the deficiencies in IAS39, it at least makes companies market value their derivatives.

"The absolute minimum stop-gap measure is for the standard setters to urgently implement a standard that forces derivatives to be market valued."

PricewaterhouseCoopers partner Ian Hammond, also a former AASB member, acknowledged IAS39 was flawed. "The international standard has significant problems, including the need for more work on accounting affecting securitisation and debt-equity instruments," he said. But Australia had no alternative but to adopt it with all its flaws because a comprehensive fair-value model was some way off.

David Boymal, national director of accounting and audit at Ernst & Young, said the AASB must take up IAS39 as soon as possible and deal with the problems later by liaising with the international board.

Deloitte Touche Tohmatsu partner John Kidd said the absence of an accounting rule in the area of financial instruments placed Australia behind other advanced capital markets.

"Let's face it, if they do not go with IAS39 at this juncture, we may not have a standard in place for eight years," Mr Kidd said.

"The absence of a standard also means companies that are currently listed or intend raising funds in the United States have a more difficult time complying with US GAAP."

He said market valuing derivatives forced companies to better understand their hedging instruments and how that affected their risk profile.

Follow-Up Story: FAIR-VALUE RULES 'OKAY NOW'
By Tom Ravlic Melbourne Age, 11 September 2001*

Companies could already use 'fair value' rules in overseas accounting standards to value their derivatives and other complex financial arrangements, a top accounting commentator said yesterday.

There were no significant barriers to Australian companies adopting the rules of other countries covering the valuation of financial instruments, Stockford Limited head of accounting policy Colin Parker said yesterday.

Mr Parker said companies could provide better accounting information to the marketplace, creating an opportunity for market differentiation in terms of better-quality reporting to investors and analysts.

He was responding to an article in The Age yesterday reporting a call from PricewaterhouseCoopers and Ernst & Young for the Australian Accounting Standards Board to adopt a flawed international accounting standard known as IAS 39 to cover the absence of a local accounting standard.

Australia has no rules setting down requirements for companies to fair-value derivatives, and there is a lack of guidance relating to how companies should account for securitisations.

The industry experts called for the flawed rules to be implemented promptly to regulate accounting for financial instruments, but Mr Parker believes this is unnecessary.

Mr Parker, a former director of accounting and audit at CPA Australia, said that there was scope for companies to use better methods in overseas pronouncements because the domestic standard on accounting policies sets out a hierarchy of guidance.

The accounting policies standard, known as AASB 1001, requires companies to consider alternatives from overseas bodies if there is no domestic precedent.

Mr Parker noted that the work of an international committee on financial instruments known as the joint working group provided a lead to standard setters and companies on fair-value accounting being the more appropriate way to account for complex financial arrangements such as derivatives.

"It doesn't make a lot of sense to adopt IAS 39, acknowledged by industry experts as a flawed document, when the basic measurement principles are clearly identified in the work of the JWG," Mr Parker said.

"This will in due course become internationally accepted as appropriate accounting practice."

*Copyright 2001 Tom Ravlic. All rights reserved. Reprinted with permission of the copyright holder.