IFRS, Fair Value and Corporate Governance: The Impact on Budgets, Balance Sheets and Management Accounts

497 Pages·2006·3.258 MB·English

by  Dimitris N. Chorafas

IFRS, Fair Value and
Corporate Governance
The Impact on Budgets, Balance
Sheets and Management Accounts
Dimitris N. Chorafas
AMSTERDAM ● BOSTON ● HEIDELBERG ● LONDON ● NEW YORK ● OXFORD
PARIS ● SAN DIEGO ● SAN FRANCISCO ● SINGAPORE ● SYDNEY ● TOKYO
CIMA Publishing is an imprint of Elsevier
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CIMA Publishing is an imprint of Elsevier
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First edition 2006
Copyright 2006, Dimitris N. Chorafas. Published by Elsevier Ltd. All rights reserved
The right of Dimitris N. Chorafas to be identified as the author of this work has been asserted in
accordance with the Copyright, Designs and Patents Act 1988
The right of Dimitris N. Chorafas to be identified as the author of this work has been asserted in
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ISBN–13: 978-0-7506-6895-8
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To accounting standards setters and regulators who
are tasked with keeping the financial ship afloat
For is and is not come together;
Hard and easy are complementary;
Long and short are relative;
High and low comparative;
Pitch and sound make harmony;
Before and after are a sequence.
Laotse (600 BC)
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Contents
Preface xi
Selected Abbreviations xv
Part 1: Business Competition, Standards Boards and
Corporate Accounting 1
1 New Rules of Competition and Accounting Standards 3
1. Introduction 5
2. The financial industry’s raw materials 7
3. The crucial issue of global accounting standards 10
4. The prudential principle of financial statements and
marking to market 14
5. Managing the differences in accounting standards: a case study 18
6. Taking liberties with accounting standards and business rules 22
2 The International Accounting Standards Board and
Corporate Governance 27
1. Introduction 29
2. Service to industry by the International Accounting Standards
Board 31
3. The seminal work of Luca Paciolo: a flashback 34
4. Journal, general ledger, and contractual rights 36
5. Higher level of reliability in financial reporting 40
6. Obsolete standards become counterproductive 44
7. Core variables in corporate governance 48
8. Accounting standards and corporate governance: a case
study in insurance 51
3 Dynamics of International Financial Reporting Standards 57
1. Introduction 59
2. Positive and negative opinions on IFRS 61
3. Disclosure about capital and fair value 64
4. IFRS requirements for maximum and minimum risk disclosure 68
5. The greater transparency provided by IFRS 72
6. Regulators, more stringent accounting standards, and
early aftermath of IFRS 75
4 The Controversy over IAS 39 81
1. Introduction 83
2. Financial instruments defined according to IAS 39 and IAS 32 86
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Contents
3. Recognition and derecognition of assets and liabilities 89
4. Assets available for sale under IAS 39: results of a simulation 92
5. The challenge of fair value and the IAS 39 controversy 95
6. The March and July 2005 Draft of IAS 39 100
5 IAS 39 and the Recognition of Derivatives Risk 105
1. Introduction 107
2. AIS 39’s approach to hedges made through derivatives 109
3. The art of hedge accounting 113
4. Being prudent with embedded derivatives 116
5. IAS 39 as an agent of risk management 118
6. IAS 39 and alternative investments: a case study 123
7. Closing the loophole of hedge funds 129
Part 2: Implementing IFRS 135
6 Project Management for Implementation of IFRS 137
1. Introduction 139
2. Prerequisites for a successful IFRS project 140
3. The role of project management 144
4. Milestone planning for IFRS 147
5. Design reviews for better project management 152
6. Paying attention to cost control 156
7 An IFRS Task Force Case Study. Top Management
Responsibility 161
1. Introduction 163
2. The Task Force’s chairperson, membership, and
work schedule 165
3. The impact of communication and of case studies 169
4. Assuring compliance to IFRS standards 172
5. Learning to live in a world populated with models 175
6. Using the new accounting system to improve personal
productivity 179
Part 3: Management Accounting and the Budget 185
8 Management Accounting and Corporate Governance 187
1. Introduction 189
2. Management accounting defined 191
3. Management organization and sought-out results 195
4. What should and should not be expected from an expert
accountant? 198
5. Why financial reporting and management accounting
correlate 201
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Contents
6. Impact of subjective judgment on accounting figures 205
7. Effective use of management accounting: a case study on
cost-finding 208
9 Budgeting: A Case Study on Financial Planning 213
1. Introduction 215
2. The budget as financial information system 217
3. Analysis of financial information 220
4. Elaboration and upkeep of a budget 224
5. Practical experience in setting a budget 228
6. A case study with the budgetary bandwidth method 231
7. Qualitative factors, quantitative parameters and break-even 235
8. Insight provided by budget analysis 237
10 Valuing Assets: The Challenge of Being ‘Right’ 241
1. Introduction 243
2. Tracing fair value accounting to its origins 245
3. New rules are the aftermath of financial markets
developments 248
4. LOCOM and Replacement Value 252
5. Taking advantage of vision provided by fair value ‘plus’ 254
6. A case study on differences between IFRS and US GAAP 257
7. Contrary opinions on IFRS and cherry-picking 261
8. What the critics forget: top management’s accountability 266
11 Business Ethics Add Value to Financial Disclosures 269
1. Introduction 271
2. Stamping out the practice of creative accounting 272
3. The application of the Sarbanes–Oxley Act in the
United States 276
4. Transparency is the best disinfectant: a case study with
WorldCom 278
5. Off-balance sheet and proforma are creative accounting
practices 282
6. Expensing stock options is good business ethics 285
7. Companies respecting themselves account for all
their expenses 288
12 Forward-Looking Statements, Models, Earnings, and
Goodwill 293
1. Introduction 295
2. Forecasters and Forecasts 296
3. Forward-looking statements require lots of experimentation 300
4. Measuring earnings: uncertainty and bias of current metrics 304
5. The Regulation of Goodwill and Goodwill Impairment 308
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Contents
6. Assessing real estate prices in the housing market: a case study 311
7. Models for fair value estimates of real estate 316
Part 4: Corporate Governance and the Balance Sheet 323
13 Balance Sheets and Income Statements as
Management Tools 325
1. Introduction 327
2. Assets defined 329
3. Liabilities defined 333
4. Modelling the balance sheet 336
5. The profit and loss statement 340
6. B/S and P&L complement one another 343
7. Financial planning, cash flow, and book value 346
8. Accuracy, transparency, and the market’s perspective 352
14 Economic Capital Is on Both Sides of the
Balance Sheet 357
1. Introduction 359
2. Paciolo’s Balance Sheet Needs Thorough Revisiting 361
3. Regulatory and Economic Capital Are Made Up of Both
Assets and Liabilities 364
4. Contradictions in market discipline: a case study with
loans provisions 367
5. Facing the challenge of procyclicality through
economic capital 371
6. The capital buffer solution 373
7. Corporate-wide risk management 375
15 The Real-Time Management Report 381
1. Introduction 383
2. ‘What-if’ experimentation with balance sheets 384
3. Analytics is a polyvalent methodology 388
4. Virtual balance sheet and budget vs actual 391
5. The pervasive nature of financial information 394
6. Watching over position risk 397
7. Real-time access to satisfy new Basel directives: SFTs,
CCRs and more 401
8. The new rules of governance require a paradigm shift 404
16 Internal Control, Stress Testing, and Effective
Risk Management 407
1. Introduction 409
2. Enterprise risk and style of management 411
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3. Stress testing cost and risk and return 413
4. Stress testing and standards fatigue 417
5. Stress testing is a holistic methodology 420
6. Relative risk and relative capital 423
7. Synergy between fair value accounting and risk management 426
8. Learning a lesson from the bankruptcy of the Rolls-Royce of
hedge funds 430
17 The Role of the Audit Committee 435
1. Introduction 437
2. An Audit Committee’s charter 439
3. Auditing and the auditor connection 443
4. The auditing of internal control 448
5. Auditing and risk management correlate 453
6. The major responsibility of Audit Committee
members is a steady watch 457
Index 461
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