ASB derivatives paper suffers renewed attack

The Accounting Standards Board’s discussion paper, Derivatives and other financial instruments, will confuse users, many of whom are not yet aware of the ‘far reaching consequences’ of the proposals, according to the English ICA’s financial reporting committee.

This criticism comes a week after the Scots ICA branded the ASB proposals ‘too much, too quickly’.

The English ICA’s formal response says the case ‘has still to be made’ in favour of the ASB’s suggestion that all derivatives and financial instruments be measured at current values. The only apparent reason for revaluing long-term debt, it says, is to avoid discrepancies that would arise from the valuation of related derivatives.

Hedge accounting would be more appropriate where financial instruments are used to protect against adverse market movements. While the ASB intends that some gains be taken through the profit and loss account and others through the statement of recognised gains and losses (STRGL), the institute says ‘there appears to be little justification’ for this, adding that the role of the STRGL needs to be clarified.

Tony Wedgwood, accounting technical partner at KPMG and chairman of the institute’s working party, said: ‘The ASB’s definition of financial instruments is extremely wide. Basically, it means everything in the balance sheet except things you can kick.’

Japanese Prime Minister Ryutaro Hashimoto has proposed a ‘Big Bang’ financial services reform package which will include a review of legal and accounting systems ‘to cope with the expansion of financial derivatives trading’.

ACCA CONDEMNS GOODWILL DRAFT

The Accounting Standards Board’s exposure draft FRED 12, Goodwill and Intangible Assets, has come under fire from ACCA which has called for negative goodwill to be written back through the profit and loss account.

The ASB wants negative goodwill to be put through the statement of total recognised gains and losses. ACCA argues that the more appropriate treatment would be to match it against reorganisation costs.

Richard Martin, ACCA senior technical officer, said: ‘Under acquisition accounting rules, costs relating to the reorganisation of companies are charged to the profit and loss.’

He added that the treatment of negative goodwill should mirror positive goodwill which is also amortised though the profit and loss account.

Ron Paterson, technical partner at Ernst & Young, said: ‘The statement of gains and losses seems to be being used by the ASB for things that it is not quite sure what to do with.’

But Ken Wild, technical partner at Deloitte & Touche, said negative goodwill can arise in different ways. This can lead to different conclusions as to how to deal with it. He added that this would also give rise to problems of when to recognise negative goodwill, according to the rules of SSAP2 and the Companies Act.