Earnings season? Beware of the glitch!

All obvious events are treacherous animals: take for instance the understandable fact that publicly traded companies do their best for each earnings season to appear and sound as joyous as investors would have dreamt. The new accounting system of 2007, primarily based on international standards issued by the International Accounting Standards Board (IASB), raises target information to the category of the golden calf of the accounting rules. Among these parameters, professors Leandro Cañibano and Felipe Herranz from the University of Madrid say listed firms can find very good help to get the golden tan on their bodies. Too good, actually.

Although the traditional aims of accounting exercises (registration, legal, tax, etc..) have not been abandoned aside,

“providing financial statements populated by reliable information has become the foundation of the accounting rules,” Cañibano and Herranz comment.

But. In the new model, the fair value (based on the market) is partly incorporated in the accounts, in some cases replacing the previously existing purchase price, generally. The fresh number brings on, therefore, revenues and expenses that come strictly from those different valuations –that could be considered as ‘not completed’ because the company still hasn’t taken these items to the markets.

Furthermore, these expenses and revenue may in some cases end up in the profit and loss accounts or charged directly into the company’s net equity. If the latter happens, the numbers are generally transferred to the profit and loss accounts of subsequent years as set for each case, a mechanism called recycling.

“No wonder that this new approach leads to yet another twilight zone: the new accounting results do not match taxable income, and may also be different from those that could have been obtained following the asset protection criteria of the old 1990 accounting general plan.”

That is, the consolidated accounting profit may not match the distributable profit. Thanks, professors.

About the Author

Victor Jimenez
London contributor at thecorner.eu, reporting about the City and the Eurozone economies. He regularly writes for Spanish newspaper group Prensa Ibérica--some of his features include shared work with journalists of The Daily Telegraph and the BBC.

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