Who are the intended beneficiaries of financial statements?

As yesterday’s Financial Times reported http://www.ft.com/cms/s/0/ddc1a5a6-fea3-11de-91d7-00144feab49a.html the Basel Committee have made it clear that the needs of regulators and central banks are different from those of investors when it comes to how, and more particularly when, banks should make provisions for bad debts.

This should not  be a surprise as it has been clear for some time that regulators would like to see some form of ‘dynamic provisioning’ which spreads the cost of bad debts over the economic cycle – rather than recognising the bad debts when the losses are foreseeable.  There are many arguments for both approaches, some of which I have commented on previously, but the two approaches are different – and they meet different needs.  What is disappointing is the implication that one set of accounts should be able to meet both sets of needs or, more particularly, that they must meet the needs of regulators in priority to those of investors.

It is possible to prepare financial statements that the disclose figures on more than one basis, and a reconciliation between them.  This would have the advantage of total transparency with clear disclosure of the quantum of any ‘dynamic provisions’ and could be a solution to this apparent conundrum.  The other possible solution is for financial statements to continue to be prepared for investors with separate information provided to regulators to meet their needs.  Indeed, regulated companies already provide additional information to their regulators so one might wonder why this isn’t the most obvious solution.

It can not be right for financial statements to be prepared solely on a basis that meets the needs of regulators with investors having no right or ability to get the information that they need. Further, it can not be right that the financial statements for regulated companies should be prepared for a different audience, and thus on a potentially different basis, to the financial statements for non-regulated companies.  Regulators have the power to get the information they need; they should not do so to the detriment of investors.

 Standards & Regulators  0 Comments January 13th, 2010