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Today, there is an interesting article on Fair Value And Biological Assets at nextinsight.net .
The snippet :
The adoption of “fair value accounting” has created an upheaval in financial markets. While the theoretical basis is sound, the rules are written generically and leave a great deal of room for judgment, so they have become open to abuse. There is a saying that “the road to hell is paved with good intentions”.
Fair value accounting has sometimes been justified by pointing to cases where assets bought long ago had appreciated substantially in value, but were still carried on the balance sheet at historical cost. Fair value accounting would make clear the true market value of these assets. Ergo, fair value accounting was justified as a Good Thing™.
In fact, companies have always been free to disclose the fair market value of their assets. For example, Haw Par has a 4% stake in UOB which was previously carried at cost. Prior to adopting fair value accounting, it voluntarily disclosed the fair market value of its investments, which included the stake in UOB. In its 2004 annual report, Haw Par noted that long-term investments carried at $311m were in fact worth $766m at fair market value, and that short-term investments carried at $84m were worth $246m at fair market value.
But there are more insidious aspects of fair value accounting. Among them is the use of fair value accounting for “biological assets” i.e. crops, livestock etc. Fair value accounting allows companies to recognize changes in the “fair value” of their crops and livestock, rather than the actual cash received. This has led to ludicrous financial statements being produced. One particularly egregious example follows.
Oceanus is listed on the Singapore Exchange. It operates abalone farms in China, and at one time claimed to be the largest land-based producer, with over 20,000 tanks housing over 100 million abalones. In 2007 it reported sales of RMB 110m, but net profits of RMB 169m, thanks to RMB 227m of fair value gains. Excluding such fair value gains, Oceanus actually lost RMB 57m. This discrepancy widened each year, and by 2010 it reported RMB 132m in sales but RMB 580m in fair value gains. From 2008 to 2010 the company reported some RMB 2bn in fair value gains, against RMB 1.2bn of actual sales.
For a full article, can be read from here
The snippet :
The adoption of “fair value accounting” has created an upheaval in financial markets. While the theoretical basis is sound, the rules are written generically and leave a great deal of room for judgment, so they have become open to abuse. There is a saying that “the road to hell is paved with good intentions”.
Fair value accounting has sometimes been justified by pointing to cases where assets bought long ago had appreciated substantially in value, but were still carried on the balance sheet at historical cost. Fair value accounting would make clear the true market value of these assets. Ergo, fair value accounting was justified as a Good Thing™.
In fact, companies have always been free to disclose the fair market value of their assets. For example, Haw Par has a 4% stake in UOB which was previously carried at cost. Prior to adopting fair value accounting, it voluntarily disclosed the fair market value of its investments, which included the stake in UOB. In its 2004 annual report, Haw Par noted that long-term investments carried at $311m were in fact worth $766m at fair market value, and that short-term investments carried at $84m were worth $246m at fair market value.
But there are more insidious aspects of fair value accounting. Among them is the use of fair value accounting for “biological assets” i.e. crops, livestock etc. Fair value accounting allows companies to recognize changes in the “fair value” of their crops and livestock, rather than the actual cash received. This has led to ludicrous financial statements being produced. One particularly egregious example follows.
Oceanus is listed on the Singapore Exchange. It operates abalone farms in China, and at one time claimed to be the largest land-based producer, with over 20,000 tanks housing over 100 million abalones. In 2007 it reported sales of RMB 110m, but net profits of RMB 169m, thanks to RMB 227m of fair value gains. Excluding such fair value gains, Oceanus actually lost RMB 57m. This discrepancy widened each year, and by 2010 it reported RMB 132m in sales but RMB 580m in fair value gains. From 2008 to 2010 the company reported some RMB 2bn in fair value gains, against RMB 1.2bn of actual sales.
For a full article, can be read from here
Specuvestor: Asset - Business - Structure.
