View from City Road: Users back in the driving seat
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Your support makes all the difference.DAVID TWEEDIE, chairman of the Accounting Standards Board, may be a bit optimistic in hoping that the latest accounting standard will change the behaviour of analysts and investors. But it does put the onus on them to think about the components of companies' profits - and on companies to give them the information they need to make their judgements.
In effect, the current system is turned on its head. Previously, all non-recurring items were lumped as below-the-line extraordinaries, where they had no impact on earnings per share. Now, everything will have to be taken above the line, leaving users to exclude those items that they believe are not part of a company's on-going performance. That task will be facilitated by the requirement to separate profits on disposals of businesses or fixed assets from trading profits - which must also be split into profits arising from acquisitions, discontinued businesses and on-going operations.
The standard will also stop some of the more blatant distortions of accounting rules. No longer will companies be able to hide losses of subsidiaries that they would rather sell by setting up provisions - see Alfred McAlpine and many others - or treating them as extraordinary - see Isosceles' treatment of Herman's. Discontinued means there is a binding sale agreement or 'detailed formal plan for termination'. It also means withdrawing from a particular market, or materially shrinking in size. The costs of closing factories, including provisions for future charges, to boost productivity must be taken against on-going operations.
A more concerted crackdown on the use of provisions, one of the most fertile areas for creative accounting, will not be made until a draft standard is issued, probably next spring. But the ASB clearly intends to discourage companies from setting up large provisions to flatter future results, and is likely to require full discloure of amounts used - a fact that may give pause to acquisitive companies like Hanson and BTR.
A new statement of recognised gains and losses, which will be given equal prominence to the profits-and-loss account, will reduce the attractions of channelling costs against reserves. That could have made shareholders in Polly Peck, where exchange losses were hidden in note 25, rather more cautious.
The standard has certainly made analysis harder, but at least it has put users back in the driving seat.
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