Apr 17, 2009

Apples and bananas

For real estate listed companies like for other industries, March was the month of FY08 earning season and we did publish our numbers on the 31st of March (a replay of the webcast of alstria result presentation can be found here).

It is also time for comparison between the results of the different real estate companies in the press. This was the case this year more than ever, as some have shown big numbers in the red and other are still comfortably in the green. Reading those articles provides a good illustration of where retail shareholders can be awfully confused by the complexity of the IFRS accounting rules. Most of the article I read in that respect would usually compare a company using IFRS 40 cost accounting and other (like alstria) who use fair value accounting for there investment property. Both accounting practices are authorized under IFRS, and my purpose here is not to write anything for or against Fair Value accounting.

It usually becomes messy as soon as one tries to do what IFRS is (arguably) all about: Comparing financial information for companies in the same sector. When a reader takes two annual reports of two German listed companies and undertake to compare them, he could (and usually do if he is not a professional accountant or investor) miss the fact that one company is using cost accounting and the other Fair Value accounting. This year this mere accounting practice difference would translate into one company showing net income while the other showing a net loss. This in turn could lead, when this reader is a journalist to some misplaced comments or misleading interpretations by their readers.

To some extend I should not really care and that there are more important thinks happening out there. The fact is however than when as management you read such an article, your first reaction is usually not friendly to the journalist (to stay politically correct), and I had last week a hard time resisting picking up the phone. I however take the time to calm down, and rethink about the whole story, and realize that:

1- It is acceptable that companies use different accounting methodologies under current IFRS standard and therefore nothing to complain about here
2- It is understandable that a journalist (or any other interested party in that respect) is looking to compare the P&L and balance sheet of two listed companies based on there respective IFRS reports. After all this is the whole purpose of IFRS.

Not a big deal, but I just wanted to highlight the fact that unless you are a professional investor or a chartered accountant IFRS can lead you to compare apples and bananas in complete good faith. Can I suggest picking up one single accounting rule?

And by the way if you think that accounting is complicated as its stand, you should take a look at the planned Lease Accounting review that is underway (if you really have nothing else to do, or if you think that accounting is the best hobby ever, you can take a deeper look at the request for comment from IASB which is available for download here)

No comments:

Post a Comment