Bank accounting and bank value: harmonising (d)effects of a common accounting culture?

Published date20 November 2007
DOIhttps://doi.org/10.1108/13581980710835236
Pages360-380
Date20 November 2007
AuthorIoannis Anagnostopoulos,Roger Buckland
Subject MatterAccounting & finance
Bank accounting and bank value:
harmonising (d)effects
of a common accounting culture?
Ioannis Anagnostopoulos
University of East London, London, UK, and
Roger Buckland
University of Aberdeen, Aberdeen, UK
Abstract
Purpose This paper aims to draw on the potential behavioural implications of the new
(economic) measurement attributes initiated recently by the International Accounting Standard Board
(IASB) in their efforts to reflect more relevant, “true” underlying economic values as opposed to
historical.
Design/methodology/approach Owing to lack of readily observable market prices (market
values) for loans (retail and commercial operations) for statistical testing and initial conservatism on
the part of banks for a survey to be conducted, 15 interviews were employed (from October 2005 to
November 2006) with major bankers (CEOs and CFOs of major banks) and standard setters. The paper
analyses the perceived benefits and costs associated with the application of two diametrically opposite
measurement methodologies for banks. These can also have important implications for the “perceived”
value/measurement profile of a bank – as argued in the concluding section – for bankers and their
regulators, on the one hand, and accounting standard setters and investors, on the other.
Findings – The propositions constitute a significant departure from current accounting practices in
that all financial assets and liabilities should uniformly be recognised and reported under a universally
accepted “economistic” measurement framework.
Originality/value – The paper captures perceptions and attitudes as to the future “behavioural”
direction of banks and provides a balanced argument between the rigours of historical cost accounting
and fair value accounting.
Keywords Accounting, Standards, Financial services
Paper type Research paper
1. Introduction
The rapid growth of the financial sector in the past 20 years owing to the greater
sophistication and an ever increasing degree of interaction among financial markets
has unambiguously led to a heightened degree of interconnectedness among investors,
standard setters, banks and regulatory authorities through tighter information
provision. This is coupled with rapid financial innovation, increasing volatility and
unprecedented cases of accounting fraud, which eventually led to the demise of global
conglomerates. These developments have further uncovered some dysfunctional
aspects of the processing and communication elements of financial reporting necessary
for sound value/risk management, transparency and market discipline.
According to Enron’s Internal Risk Management Manual (2002):
Reported earnings follow the rules and principles of accounting. The results do not always
create measures consistent with underlying economics. However, corporate management’s
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
JFRC
15,4
360
Journal of Financial Regulation and
Compliance
Vol. 15 No. 4, 2007
pp. 360-380
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581980710835236
performance is generally measured by accounting income, not underlying economics. Risk
management strategies ar e therefore directed at acc ounting rather than econom ic
performance.
The above statement – one out of many – in conjunction with the associated
scandal(s) explicitly induces readers to question themselves as to which is the most
reliable basis for measuring company value. Not only does it question the merits of
traditional HC accounting, but it also makes explicitly obvious why International
Accounting Standard setters have moved towards adopting fair value accounting
(and ideally full fair value accounting, hereafter FFVA[1]) as the single, universally
accepted basis of asset measurement and financial reporting. This reflects an effort to
minimise the manipulation of accounts, increase transparency and comparability and,
to some extent, restore the damaged reputation, integrity and trust of the wider
investing community in accounting standards.
Specifically, in the case of banks, the current mixed accounting model followed
(whole book approach[2]) (Jackson and Lodge, 2000) inevitably creates distortions of
value:
.partly due to the nature of the assets/liabilities employed by companies (i.e. the
increasing degree of complexity of financial instruments);
.partly due to the nature of their operations;
.partly due to the different prioritisation of the characteristics attached to
financial information by accounting standard setters and stock exchange
commissions on the one hand and bankers and their regulators on the other; and
.partly due to the system characteristics in which companies operate.
Hence, the combined efforts of International Accounting Standard Board (IASB) and
FASB to also provide for convergence between US and European standards (i.e. a
universally accepted accounting framework). For example, the specific operational
characteristics of the system under which banks function (i.e. credit-based vs
market-based systems) make it even more difficult for a uniform agreement to be
reached among the related parties and gives rise to our interest in the reaction between
operators in a market-driven system (UK) and their counterparts in a credit-driven
system (Greece). Our motivation, therefore, is enhanced to endeavour to examine the
views of professionals belonging in two “contrasting systems”.
All internationally active, listed companies have had to prepare and report their
results under International Financial Reporting Standards (hereafter IFRS) since
January 2005. The latest proposed amendment came from the Financial Accounting
Standard Board’s Exposure Draft deliberations (The Fair Value Option), which came to
co-advocate IASB’s Standard 39-Fair Value Option (IASB 39, 2004). In the latter,
companies can opt for FFVA for all financial instruments and liabilities. Specifically,
the proposed standard states:
This proposed statement would create a fair value option under which an entity may
irrevocably elect fair value as the initial and subsequent measurement attribute for any
financial asset or liability on a contract-by-contract basis, with changes in fair value
recognised in earnings as those changes occur (Para. 2, FASB, ED, Jan. 2006).
Bank accounting
and bank value
361

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