What a language to do business in
Andrew Kinast is the managing partner of Grant Thornton Poland.
The country, being in the vanguard of technical change in accounting (sorry, I am back in the land of sarcasm), introduced new rules at the beginning of 2002 that require financial instruments to be valued and properly disclosed in financial statements.
Financial instruments are principally contracts that allow the purchaser to buy or sell foreign currency or to swap interest rates at a future moment in time. Historically, this was a way of limiting downside exposure arising from market movements in interest and exchange rates. As time went by, banks and other institutions started devising ever more complex transactions as add-on services (and a way of generating fees).
As Allied Irish Banks will testify following its little escapade in the United States, it is possible to lose control very quickly over what is being contracted. Relatively complex rules of disclosure have already been devised, including an International Accounting Standard (number 32 for those experiencing difficulties with falling asleep).
The basic premise is that the results of a given year should reflect the relative movements during the year of whatever the financial instrument concerns. Among others, the standard reflects the matching concept (charge to current profit and loss account the effects of what happened in the year) and the prudence concept such that shareholders and others are aware that an entity has ongoing obligations that could generate significant losses in the future. This is, of course, particularly important where entities treat financial instruments as a form of gambling on the future rather than as a means of protecting themselves against downside risk. What is a common feature is that financial instruments define a future financial price for an existing asset or liability.
The intention is quite clear, but as usual the practice is a bit of a problem. Basically, (and if I understand it correctly), a financial instrument is a type of gamble. Its proponents will argue that it minimizes risk, but this probably only applies to banks and others selling the instruments. In reality, although it can reduce risk by placing a stop loss or floor to the cost of a particular transaction to be realized, in the future it conversely stops the realization of profits if the markets move the other way.
This is where domestic practice runs away from itself mainly due to the eradication of a coherent accounting aims and policies clause (what it is the law is trying to achieve) from the accountancy law.
I have spent a lot of time this year trying to persuade clients that there is a point of view (propounded by the finance ministry) which requires all future contracts denominated in a foreign currency to be treated as financial instruments and valued in the financial statements. I am not saying that I agree with this view. Clearly, a contract to purchase zł. 10 billion on May 1, 2004 is a financial instrument, and the disclosure rules apply. Similarly a contract to purchase 500 cruise missiles in August of this year, for which I have no potential customers and no use within my own business, is a quasi-instrument. However, a contract to rent office space denominated in U.S. dollars or a contract with my sales director who is paid in euro is NOT a financial instrument as it is only a way of establishing a price for things that I will need for my own business purposes and the expense of which only concerns the period in which I will benefit from the service or goods concerned.
The fact that the U.S. dollar stood at a particular exchange rate at year-end does not mean that I have to value the contract at year-end rates. Not in the least because a double-sided entry requires a compensating entry to be made, the question being where. I cannot see how you would be able to use the standard "mark to market" valuation, as there is no balance sheet asset. This is possible in the case of speculative contracts or contracts securing existing receivables or liabilities, but not in the case of contracts for the procurement in the future of goods and services for own purposes. The benefit will be charged to the profit and loss account in the future, and the financial obligation will also arise in the future.
Quite clearly, it is right that an entity should disclose material contracts for the purchase of goods and services in the future. But this is normally done in notes to the accounts and not on the face of the balance sheet. Our accounting regulations do not require this to be done at all, so there is no way that a reader of the accounts can know that a hypermarket chain has, for instance, signed long-term non-cancelable rental contracts for premises or that an airline has contracted to lease a significant number of aircraft. But neither would be disclosed in the balance sheet. So why, suddenly, if the contract is denominated in foreign currency, should it become a financial instrument?
So I turn to the Polish language version of the International Accounting Standard, and everything becomes clear. The English language is very good at having precise economic and accounting terminology, and therefore the standards only define words which are specific to a particular instance. A glossary of common terminology in Polish is required on top of the translation of the standards. It would then be clear what the standard is trying to achieve.
Otherwise, as Alice said, "I choose my words to mean what I want them to mean." Wars have been started on this basis, never mind making life difficult for innocent clients. Still, it does mean extra fees for accounting firms and auditors. Just don't start me on the issue of the tax consequences.
