Sunday, January 17, 2010

Buy, Sell, Hold ? IAS 37

"It has been my experience that competency in mathematics, both in numerical manipulations and in understanding its conceptual foundations, enhances a person's ability to handle the more ambiguous and qualitative relationships that dominate our day-to-day financial decision-making." ~ Alan Greenspan
IAS 37 is the international accounting standard that deals with contingent assets and liabilities.  The vague language in IAS 37 leads to inconsistencies in the evaluation by investors in the review and analysis of financial statements. 

  • Contingent liability by using a "best estimate" of the outlay used to settle the obligation can have several interpretations and outcomes. 
  • Doesn't specify costs to include in the measurement of a liability and may include:
    • Include only direct costs
    • May factor in incremental costs
    • Others may add indirect costs and overhead fees
    • Market pricing of current work
A draft by the IASB attempts to remove the vague wording and has the following components:
  • Replace "best estimate" of a liability with the amount you would rationally pay at the reporting period to relieve the obligation.
  • Obligation to settle a legal dispute, the expected cash payments plus associated costs such as legal fees.
  • Shutting down a factory utilize service provider's estimate to retain objectivity.
Publicly held U.S. companies may be filing IFRS opposed to US GAAP and need to stay current on IASB rule making process.  Standardization of accounting standards will lead to greater global efficiency.

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