Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search

 


Accounting standards chair Hoogervorst dark on Ebitda

Accounting standards chair Hoogervorst dark on Ebitda, prefers ‘rough’ measure of net profit

By Jonathan Underhill

April 15 (BusinessDesk) – The head of the global body responsible for setting accounting standards says he scratches his head over companies using an Ebitda measure of earnings but he understands why some prefer not to focus on net profit as a performance measure.

Hans Hoogervorst, chairman of the International Accounting Standards Board, is visiting New Zealand seven years after companies here were required to adopt the New Zealand equivalent to international reporting standards, known as NZ IFRS. The rule change filled gaps in the nation’s existing standards including recognition of financial instruments, share-based payments to executives and directors, and the treatment of mezzanine financing.

Forcing companies to recognise changes in the value of financial instruments in their profit and loss statement brought transparency to the use of products such as derivatives, which Warren Buffet once called ‘financial weapons of mass destruction’, and which triggered the 1994 bankruptcy of California’s Orange County.

But pushing more items into the P&L has also encouraged companies to present extra, non-standard measures of profit, including ‘underlying earnings’ and earnings before interest, tax, depreciation and amortisation.

“Ebitda I don’t understand at all,” Hoogervorst told BusinessDesk. “Why don’t you want to know about depreciation and interest, which tells you a lot about the leverage of a company.”

“If I was an analyst and I saw underlying earnings, I would always want to know what is on top,” he said. “What are underlying earnings? They usually look better than total earnings. So those are reasons for scepticism.”

The Financial Markets Authority set out its expectations on the use of alternative earnings measures under 10 principles that became effective on Jan. 1, 2013. They include a requirement to show how the measure is calculated and to provide reconciliation to GAAP profit. They also require companies to use such measures consistently from period to period, consider their prominence and avoid bias.

Hoogervorst, a former Dutch finance minister and financial markets authority chief, says he understands that annual statements have become “very long and tough to read” but to some extent that was inevitable as companies become more complex, including the use of derivatives, complicated pension arrangements and merger and acquisition activity.

But he also said there is “too much of a tick the box mentality by both companies and their auditors and regulators”, leaving the investors “swamped by disclosures.”

A Deloitte survey of 100 New Zealand companies released last year on the use of underlying profit in 2012 found that 90 of them had provided a total of 253 alternative profit measures. That was the year before the new FMA guidelines kicked in. Of the 253, 81 percent were reconciled with GAAP profit and 63 percent provided a clear explanation of how the measure had been calculated.

“I think that the logic of the markets is that one number is always dominant and it should be the P&L,” Hoogervorst said. “In the long run that number gives the least surprises because it includes everything.
I recognise that P&L is a rough number.”

The IASB recently completed a new revenue recognition standard that will take effect in the next couple of years, installing a standard top-line definition around the globe. More than 100 countries now use IFRS. The body is now working on a standard for the insurance industry, which “has a huge lobby” and as major buyers of government bonds is a voice governments tend to listen to, Hoogervorst said.

In a speech in Sydney this month, Hoogervorst said he is “still shocked as we continue to stagger from scandal to scandal in the financial markets.”

He said at the root of these problems was “the enormous extent of moral hazard in the financial markets”, including agent-principal conflicts and “the asymmetry of information.”

The IASB’s role was to “keep capitalism honest,” he said, quoting his predecessor David Tweedie. The body had battled vested interests in its efforts to combat moral hazard. Successes included having stock options treated as an expense and bringing pension liabilities on balance sheet. It is currently battling to get lease contracts included.

(BusinessDesk)


© Scoop Media

 
 
 
 
 
Business Headlines | Sci-Tech Headlines

 

Science: Hookworm Discovery At Malaghan Institute

Professor Graham Le Gros has led a team which has stimulated both innate and memory responses to the parasite, discovering along the way the unexpected behaviour of one particular immune cell, in Hookworm, one of the world’s most devastating tropical ... More>>

Business: Provinces Urged To Make Full Use Of New Air Services

Provincial New Zealand has been urged to use new air services to Auckland or risk losing them either partially or completely. The stark warning was issued today by Far North mayor John Carter at a ceremony at Kaitaia airport to mark the final Air ... More>>

Mobile: 2degrees To Credit All Calls And SMS To Nepal

In the wake of the devastating earthquake in Nepal in the weekend, 2degrees will be crediting all calls and SMS messages made to mobiles and landlines in Nepal from Friday 24th April until midnight Wednesday 29th April. More>>

Scoop Business: Alex Swney Pleads Guilty To $2.5M Fraud Charge

Alex Swney, former chief executive of the Auckland city centre business association Heart of the City, has pleaded guilty to dishonestly using documents to obtain $2.5 million. More>>

ALSO:

Petrol Burns Prices: Second Consecutive Quarterly Fall For CPI

The consumers price index (CPI) fell 0.3 percent in the March 2015 quarter, following a 0.2 percent fall in the December 2014 quarter, Statistics New Zealand said today. The last time the CPI showed two consecutive quarterly falls was in the December 1998 and March 1999 quarters. More>>

ALSO:

Scoop Business: NZ Broadcasters Launch Battle Against Global Mode ISPs

New Zealand broadcasters have confirmed they’ve launched legal proceedings against internet service providers who give customers’ access to “global mode”, which allows customers access to offshore online content, claiming it breaches the local content providers’ copyright. More>>

ALSO:

Sanford: Closure Of Christchurch Mussel Processing Plant Confirmed

The decision comes after a period of consultation with the 232 staff employed at the Riccarton site, who were told on 9 April that Sanford was considering the future of mussel processing in Christchurch. Recent weather patterns had impacted on natural spat (offspring) supply... More>>

ALSO:

Price Of Cheese: Dairy Product Prices Fall To The Lowest This Year

Dairy product prices fell in the latest GlobalDairyTrade auction, hitting the lowest level in the 2015 auctions so far, as prices for milk powder and butter slid amid concern about the outlook for commodities. More>>

ALSO:

Houston, We Have An Air Route: Air New Zealand To Fly Direct To The Heart Of Texas

Air New Zealand will fly its completely refitted Boeing 777-200 aircraft between Auckland and Houston up to five times a week opening up the state of Texas as well as popular nearby tourist states such as Louisiana and Florida. More>>

ALSO:

Get More From Scoop

 
 
 
 
 
 
 
 
 
Business
Search Scoop  
 
 
Powered by Vodafone
NZ independent news