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Coping with the World Financial Cri

Coping with the World Financial Crisis: New Accounting Standards are Out but Little Understood
Since the onset of the world financial crisis, accounting standards were quickly identified not only as one source of the problem, but also as a potential tool to help ease the hard landing and allow companies to improve their standing. The result of this world debate was the amendment in October of this year of international accounting standards with respect to the treatment of securities owned by companies. In line with the world trend, and to keep Egyptian accounting standards in tune with the international ones, the Minister of Investment issued Decree Number 234 of 2008 – published on November 11th, 2008 – Amending Egyptian Accounting Standards Number 25 and 26. The thrust of the change is to allow companies which own securities to reclassify them from being held for trading or short term – thus out of the profit and loss statement m to being held for a long term or maturity, thus impacting the shareholders ownership rights. This is now possible even in cases where the acquisition of the securities was originally intended to be for a short term or for trading. The result of application of the new standards – for those who select to do so – is to reduce the impact of short term big decline in the value of securities on the annual profit and loss statement and transfer this effect to the shareholder value of the company. Undoubtedly some of the Egyptian companies will be happy to apply the new standards in light of heavy losses in their portfolios as a result of the more than 60% decline in the Egyptian Stock Exchange indices since May 2008.
Some key aspects of the new rules are worth pointing out to:
  • The new accounting standards may be applicable as of July 1st, 2008, thus allowing their impact to be felt on this year’s company financial results.
  • The new standards do not apply to derivatives.
  • The reclassification of assets according to the new rules is applicable on the basis of the assets’ fair value on the date of reclassification.
  • Accordingly, there is no retro activity of the rules, in the sense that losses already re organized in the profit and loss account can not be reversed.
  • A large emphasis is placed in the new Accounting Standards on the importance of disclosure of the reclassification and its impact on the company’s balance sheet.
Conclusion
The issuance of the new Accounting Standards is a welcome development as it allows companies to reduce and smooth out the impact of violent losses incurred in their securities portfolios. However, although well understood and circulated among the accounting profession, this is a set of rules which needs to be better explained to the wider audience, especially among investors and shareholders. It is imperative that some appreciation of the impact of the new rules spreads among investors prior to the release of end of the year financial statements, and the accounting and legal professions should play a role in this respect.
Since the onset of the world financial crisis, accounting standards were quickly identified not only as one source of the problem, but also as a potential tool to help ease the hard landing and allow companies to improve their standing. The result of this world debate was the amendment in October of this year of international accounting standards with respect to the treatment of securities owned by companies. In line with the world trend, and to keep Egyptian accounting standards in tune with the international ones, the Minister of Investment issued Decree Number 234 of 2008 – published on November 11th, 2008 – Amending Egyptian Accounting Standards Number 25 and 26. The thrust of the change is to allow companies which own securities to reclassify them from being held for trading or short term – thus out of the profit and loss statement m to being held for a long term or maturity, thus impacting the shareholders ownership rights. This is now possible even in cases where the acquisition of the securities was originally intended to be for a short term or for trading. The result of application of the new standards – for those who select to do so – is to reduce the impact of short term big decline in the value of securities on the annual profit and loss statement and transfer this effect to the shareholder value of the company. Undoubtedly some of the Egyptian companies will be happy to apply the new standards in light of heavy losses in their portfolios as a result of the more than 60% decline in the Egyptian Stock Exchange indices since May 2008.
Some key aspects of the new rules are worth pointing out to:
  • The new accounting standards may be applicable as of July 1st, 2008, thus allowing their impact to be felt on this year’s company financial results.
  • The new standards do not apply to derivatives.
  • The reclassification of assets according to the new rules is applicable on the basis of the assets’ fair value on the date of reclassification.
  • Accordingly, there is no retro activity of the rules, in the sense that losses already re organized in the profit and loss account can not be reversed.
  • A large emphasis is placed in the new Accounting Standards on the importance of disclosure of the reclassification and its impact on the company’s balance sheet.
Conclusion
The issuance of the new Accounting Standards is a welcome development as it allows companies to reduce and smooth out the impact of violent losses incurred in their securities portfolios. However, although well understood and circulated among the accounting profession, this is a set of rules which needs to be better explained to the wider audience, especially among investors and shareholders. It is imperative that some appreciation of the impact of the new rules spreads among investors prior to the release of end of the year financial statements, and the accounting and legal professions should play a role in this respect.