Saturday, 24 May 2008

Educated readers

Of financial statements that is. The IIF has recently pleaded for more laxity in applying fair value accounting in disrupted markets. Specifically they want banks to be permitted to use book value where it suits them, but not to be locked into hold to maturity if they do that. As Lex says:
However diplomatically couched, the proposals are unedifying. After precipitating a crisis and then borrowing large amounts of public money, it takes an audacious industry to cast accounting as a villain...The IIF wants “stable valuations” that “increase market confidence”. This is not the purpose of accounting standards. Even if market prices have overshot ... relying on banks’ interpretations is worse.
Exactly right. Nothing forces users of financial statements to act based on the earnings disclosed. But now that, for the first time, these readers are seeing the real volatility of earnings, rather than the smoothed version produced by accural, they are bidding down financial shares. They are better educated and hence able to make more informed decisions. The IFF wants to take that information away - somehow I don't think the readers will stand for it.

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