Thursday, March 20, 2008

SocGen's Accounting: Innovative or Inventive?

Everybody has read, discussed and digested the multi billion euro trading loss that Societe Generale suffered a few months back. What has escaped public attention to a large extent is the subsequent accounting treatment of this loss.
The bank follows the IFRS (International Financial Reporting Standards) for the preparation of their financial statements and these have been audited by the company’s auditors (Messrs Ernst & Young and Deloitte).Investors and observers would have expected the huge trading loss that Societe suffered in January ’08 to be reflected in the first quarter financial results of this year.
According to Societe Generale’s special board committee that led its investigation into the trading incident, the trader had closed out most of his positions by the end of 2007. On that basis, such a trading loss should have been accounted for in the year that it occurred i.e. 2008. However, according to the bank’s Annual Report, it has been accounted for in the financial year 2007. This has been done by creating a provision equal to the amount of the trading loss in the consolidated 2007 income . Accounting for a loss that has not occurred in that relevant financial period is a very unconventional accounting treatment appearing to defy common accounting principles.

The Annual Report states,
“….. the Group considered that the application of IAS 10 “Events After the Balance Sheet Date” and IAS 39 “Financial Instruments: Recognition and Measurement” for the accounting of transactions relating to the unauthorized activities and their unwinding was inconsistent with the objective of the financial statements described in the F ramework of IFRS standards. For the purpose of a fair presentation of its financial situation , it was more appropriate to record all the financial consequences of the unwinding of these unauthorized activities under a separate caption in consolidated income for the 2007 financial year. To this end and in accordance with the provisions of paragraphs 17 and 18 of IAS 1 “Presentation of Financial Statements” the Group decided to depart from the provisions of IAS10 “Events After the Balance Sheet Date” and IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”, by booking in the consolidated income for the 2007 financial year a provision for the total cost of the unauthorized activities.”

The International Accounting Standards include a rarely used provision related to ‘true & fair’ financial statements. This provision provides that “in the extremely rare circumstances in which management concludes that compliance” with the rules “would be so misleading that it would conflict with the objective of financial statements,” a company can depart from the rules. This is the loophole under which Societe Generale has decided to depart from the provisions of IAS 10 “Events occurring after Balance Sheet Date” and IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”.

This departure in conventional accounting has been submitted to to the banking supervisorybody (Secrétariat général de la Commission bancaire) and to the market authority (Autorité des Marchés Financiers) to confirm its acceptability regarding the regulatory framework.

Keep checking The CG Factor for updates on this issue.

No comments:

Post a Comment