View from City Road: ASB brings back balance

ALMOST a decade after the virtual collapse of Burnett & Hallamshire revealed the disastrous consequences of allowing companies to shift large amounts of debt off their balance sheets, the Accounting Standards Board has issued a draft standard that will bring everything back into the accounts.

The length of the debate means that most investors are well aware of the problem, and many of the offenders have cleaned up their act. The complex arrangements of Burton Group, for example - which not only did a sale and leaseback to an unconsolidated subsidiary, but also took a profit on the deal - have already been reversed.

Companies have also become more willing to volunteer off-balance sheet information. In future, they will have to. The thrust of the ASB's proposals is that the accounts should show the substance of the transaction, rather than simply its legal form. So sale-and-leaseback deals - of shops or whisky stocks, for example - where the asset will be taken back by the company, and quasi-subsidiaries set up simply to raise loans, should be shown on the face of the balance sheet.

The main area of controversy is likely to be with securitisation of mortgages and other debts. While the banks have won one part of the battle with the ASB, so that most securitised mortgage schemes will remain off-balance sheet, they are concerned that the peculiarities of credit-card securitisation mean it will be caught. So far, that has been a purely American phenomenon, although Barclays has looked seriously at the issue. The ASB's rules could nip the market in the bud, although this may be a small price to pay for greater transparency of accounts.