[Re: Accounting rules place box ticking above prudence, Wednesday]
Unfortuantely, Syed Kamall has made fundamental errors in his article. The accounting rules proposed by International Financial Reporting Standards (IFRS) don’t allow balance sheet inflation. They are also not yet finalised and the IFRS rules relevant to banks weren’t in operation during the financial crisis. The box ticking that Kamall writes about is a feature of US accounting rules, as is asset inflation. Balance sheet inflation during the financial crisis was due to very odd accounting practices adopted to deal with securitisation that had not been qualified by UK and EU auditors. These practices were never sanctioned by International Accounting Standards (IAC), the precursor to IFRS, or UK generally accepted accounting principles (GAAP). IFRS regulations continue previous IAS and GAAP philosophy and advocate prudence and good policy. This includes the fair value concept, which means that if no one wants to buy your product it does not have value. The IFRS board’s discussion with US accounting regulators, which is causing delay and contention, is about valuing structured items that no one wants to buy at the time of reporting. The US argument is that someone may want to buy it in future and they can model the price. This has proven to be inaccurate. Examples include the sort of toxic assets held by the bad bank section of Northern Rock.