World class accountancy

From guess who?

But profit is not waht itn used to be. Under IFRS profit is the change in the net worth of your balance sheet on a mark to market basis: it is not the result of your trading in the quarter.

So if you made incredibly harsh provisions (and most banks did) and then some of the provided for assets perform again you make a profit as a correction to the previous provision.

Under historic cost you wouldn’t.

But when most people don’t appreciate that this looks like a real profit.

This is true of course. But the flip side of this statement is that using historic cost accounting they didn\’t make a loss either in the earlier quarters.

6 comments on “World class accountancy

  1. Wholly untrue Tim

    You clearly don’t understand that the historic cost convention requires valuation at the lower of cost and net realisable value

    So unrealised losses are recognised and gains are not

    How about a world c lass apology? 🙂

    Richard

    Tim adds: If that is indeed the case then the system is even more insane than I had thought. How can anything be valued if you only acknowledge losses and not profits?

    But you are correct, the system is indeed that insane (having looked it up) so apologies.

  2. So the notion that accountancy is all about adding up refers only to numbers adding up, not to logic adding up? Blimey.

  3. In any case, the change in your balance sheet is recognised on the SORIE, of which profit on your income statement is just one component (precisely because balance sheets can change for bizarre and surreal reasons).

  4. It’s often thought that accountancy is a dry and formulaic occupation, whereas in reality it’s a highly creative art… Some of the greatest works of fiction that I’ve ever read have been company Balance Sheets. 🙂

  5. but given that historical cost accounting would require you to make a provision against impaired assets (as Mr Murphy says), then the example he cites is a false one. Under both types of accounting, you could revise the provision and book an unrealised profit – just that HCA would not permit you to show a valuation greater than historical cost.

  6. Actually, Our Dickie managed to fuck the story up without having to fuck up the accounting (although, as diogenes1960 points out, he did).

    According to the Financial Time article he links to, Credit Suisse turned a net profit of SFr2bn for the first quarter. Credit Suisse marked up SFr413m in its residential mortgage-backed securities portfolio, but also marked down SFr1.4b in its commercial mortgage-backed securities. So, the net effect? A write-down of SFr1bn!

    The first thing you have to remember about Our Dickie is that FACTS DON’T MATTER.

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