When doing the exam in Schwester book, they write down liability at market. Is this allowed in IFRS? If it’s asset I agree, but for liability, I’m not sure… This is not a conservative approach at all. Anyone here got the answer? THanks.
I seem to remember Citigroup being able to book a profit last quarter by writing down their own debt. Seemed ridiculous at the time and still does. Don’t know what the circumstances were though. I’m probably not much help sorry.
isn’t this an analyst adjustment? This is to ensure that if you are using financial statements to do comparisons across companies - you are judging the two companies alike. E.g if a company had taken its LTD a long time ago, while another company in the same industry - has taken on debt only recently when the interest rates were much higher - (or if the companies were in different countries) - you would not be able to do a like-to-like comparison. Making the debt identical (by making the market value of Debt on the balance sheet) while adjusting the equity accordingly (L Up + E Down, or L Down + E Up) allows for the comparison. Since this is an analyst only adjustment for comparison, I do not believe IFRS vs. US GAAP rears its head here.
This is from the WSJ. See the last paragraph Citigroup Inc. said it earned a quarterly profit for the first time in 18 months, logging a $1.6 billion gain between January and March. But many of the banking company’s businesses continued to deteriorate. The earnings may give some breathing room to Chief Executive Vikram Pandit, who told deputies earlier this year that a first-quarter profit was essential. Citigroup did notch some notable trading gains in its capital-markets business. The fixed-income business received a boost from strong trading in interest rates and commodities. Still, Citi’s bread-and-butter businesses, such as global retail banking and credit cards, suffered from swelling loan defaults. Citigroup’s shares on Friday fell 36 cents or nearly 9% to $3.65. Citi absorbed $7.3 billion in loan defaults during the quarter and set aside $2.7 billion to cover anticipated future losses. Earnings were hit by the repricing of a January preferred-share offering, which will leave the government owning up to 36% of the bank and causing an overall loss of 18 cents a share. The latest quarter included $3.5 billion of write-downs and $968 million in gains, including $704 million from the sale of its stake in credit-card services provider Redecard SA. The figures also include a $2.4 billion boost from a little-followed accounting adjustment under Financial Accounting Standards Board’s rule 159, which governs how banks value their debt. Under this standard, when debt declines in value, the banks must account for it as though they had bought it back at market rates, and retiring it at par. This can have the strange effect of enhancing earnings at banks whose debt is declining in value.
Thanks folks. Well there’s such FAS rule 159 in US :). Nice!
Similarly, Morgan Stanley had to book a loss earlier this year from writing UP its debt to mkt value =P
Be careful. This FASB went into effect for companies reporting in 2008. I think they went into effect after the printing of the CFAI curriculum for 2009. US GAAP rules are changing very quickly. I think the CFA exam will be more focused on IFRS standards because they seem to be much more stable and convergence seems to be going towards IFRS.