reporting of derivatives

[morganist]

derivatives that are owned by companies did not have to be disclosed on annual statements in the uk until 1998 frs 13. this only stated disclosure not treatment and as a result there was no set regulation on how companies should treat derivatives on their financial reporting.

it was only in december 2004 that frs 25 and frs 26 stated the treatment of derivatives and the requirement to comply was not fully enforced until late 2006.

no wonder the derivatives were so easily hidden and overvalued when companies did not have to comply to any stringent regulation until late 2006. i remember accountants asking why it was so soft four years before that.

what do you think.

 

[morganist]

http://www.frc.org.uk/asb/technical/standards/pub0654.html

link for you to look it up.

 

[Martinghoul]

Frankly, I don't care about derivatives on companies' financial statements. Whatever exposure is being concealed this way (if any) is dwarfed by the under-reporting of various risks embedded in their pension obligations (longevity, duration, etc).

 

[morganist]

Quote from Martinghoul:

Frankly, I don't care about derivatives on companies' financial statements. Whatever exposure is being concealed this way (if any) is dwarfed by the under-reporting of various risks embedded in their pension obligations (longevity, duration, etc).

first of all it means that it is not just the BoE the Treasury and FSA that are not on the ball. it is other institutions. secondly any toxic debt on companies books from investments that are based on futures would have been more transparent and may have been picked up on the company end prior to the default's that occurred if the regulation took place earlier. it wasn't just fund managers that purchased derivatives the treasury departments of companies also invested in derivatives which lost money, if treatment of that investment was tight earlier on the depth of the toxic debt may have been revealed earlier due to having to explain the risk of these instruments to share holders and having to justify them too.

 

[Martinghoul]

I am not disagreeing with you. I just think you're barking up the wrong tree, so to speak...

If a company speculated in the world of complex financial derivatives and got burned (recent example in the UK being Mitchells & Butlers), so what? This has happened before and will happen again. Idiots get hired, do stupid things, lose money and get fired, when the pain that they caused shareholders finally gets revealed. Even if you design more stringent regulation, people will still find ways around it. It's not a problem, as long as the system as a whole remains stable and there's no recourse to public funds.

IMHO, the really big issues are ones where, in one way or another, it's the public money that's being put at risk. Either this is explicit speculation with public funds (Orange County, London Borough of Hammersmith & Fulham, Jefferson County) or an implicit expectation of bailout (current banking crisis, UK pension deficit).

 

[ByLoSellHi]

I think your intuition is well-placed, morganist.

 

[morganist]

Quote from ByLoSellHi:

I think your intuition is well-placed, morganist.

its like a sixth sense.

anyway i think i right on this one. although i do agree with argument about regulation being swayed to a degree i think a lot of this would have been prevented though if the frs 25 and frs 26 were introduced a decade earlier.