IAS 28/39: GHL’s dilemma

The application of International Accounting Standards (IAS) 39 — measurement of Financial Instruments and IAS 28 — investments in associates, caused concern for the Guardian Holdings Limited (GHL) shareholder at the last Annual General Meeting (AGM). 

Chairman Nazir Ahamad was forced to explain the application of IAS 28 on Group profits as at June 30 2003.  The standard is relevant to GHL’s 21% holding in RBTT Financial Holdings Limited (RBTTFH). “When group consolidated accounts are prepared, the unrealized investment gain and dividends derived from this strategic investment are replaced by the proportionate share of the RBTTFH’s profits for the period... This consolidation adjustment caused the Group’s profits to be reduced to $120.4 million. Also, the Group’s investment in RBTTFH has a market value of $1.5 billion but it is reflected in the Group’s balance sheet at $806 million in accordance with the requirements of IAS 28. Both standards deal with the measurement and treatment on an ongoing basis (from year end to year end ) of investment assets by a company. Investments (shares in companies, financial instruments) held for other than short term disposal fall under the purview of IAS 39.  All financial assets and liabilities including derivatives are recognised on the balance sheet at the fair value paid or received inclusive of transaction costs — commissions, fees, levies, transfer taxes and duties. Subsequent to acquisition, the items are recognised at fair value as determined by the value they would trade at on the market.  Where a fair value estimate cannot be made the assets are measured at cost. This standard is consistent with the long-term objective of the IASC of full fair value accounting for all financial assets and liabilities.

Investments that represent substantial interests in a company held in an associate company, where the investor has influence must be governed by IAS28.  The standard calls for use of the equity method of accounting. Application of this method translates to investments being initially recorded at cost and subsequently adjusted to reflect the investor’s share of the net profit or loss of the associate (investee). Distributions received from the investee reduce the carrying amount of the investment. Unrealised profits and losses resulting from upstream (associate to investor) and downstream (investor to associate) transactions should be eliminated to the extent of the investor’s interest in the associate. An investor must account for an investment in an associate in its consolidated financial statements by applying the equity method. Both standards aim to control the manner in which companies account for their investments  to ensure that assets are not overvalued and, that the basis for accounting of increases in asset values is  transparent and measurable by any stakeholder.  IAS 28 attempts to remove any gains that may result from trading between the associate and investor i.e. double counting from the published accounts of the investor (company).

These objectives become important when we consider that shareholders and would-be investors are interested in the increased wealth of a company.  The standards curb the enthusiasm of accountants and other financial wizards to make companies more attractive to shareholders /investors. The GHL Chair suggests that the directorship may be able to alleviate the concerns of the shareholders.  With respect to IAS 39, the action plan should involve the development of a national or regional market where assets and liabilities are actively traded.  With its extensive managerial data base and regional links the company is well poised to launch such an objective in conjunction with the region’s Stock Exchange Boards. Until this is done, no open market valuations will exist for assets and increased valuations will not be recognisable for assets. IAS 28 will stop being relevant when GHL ceases to have significant influence in RBTTFH, which is improbable, considering the indelible links between the two entities. As a result, GHL has to continue to apply the standards.  As a result, at the year end and in the years to come, we expect GHL shareholders to whine about the loss in asset value and unrealised gains.  Shareholders have to embrace these standards as part of their reality.  Investments will at times suffer from an increasingly regulatory financial framework, whose long term objective is  protection of shareholders’ interests by ensuring that management has little flexibility within which to manipulate figures.  Shareholders need to expand their annual concerns to include questions of the fiduciary responsibility and the adherence of the company to the regulatory framework.  It is time that they look beyond the dividends receivable on an annual basis.

Maxine Attong is a financial and management consultant.
E-mail :  enhanceink@hotmail.com