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What are the consequences of bankruptcy

what are the consequences of bankruptcy

PwC’s dedicated IFRS blog discusses and debates the hot topics in International Financial Reporting Standards and latest IFRS news.

IASB defines ‘profit or loss’ but what are the consequences for OCI?

02 December 2014

Guest blogger: Richard Davis, follow him on LinkedIn

The blogger’s views are his own; please share your thoughts, comments and reactions. Comments are moderated before being posted.

The IASB has decided to define profit or loss as part of its Conceptual Framework project. Has the IASB finally bowed to stakeholders who have refused to give up ‘earnings’ as a key metric to predict future cash flows? Don’t get your hopes up.

Profit or loss is defined as the “primary source of information about the return an entity has made on its economic resources in a period”. The IASB also proposes to establish a presumption that changes in balance sheet line items are profit or loss. Those items that do fall to be classified in OCI will be recycled to profit or loss. Some day. Eventually.

This leaves us with two questions:  

  • What is left to be recognised in OCI?
  • How/when do amounts initially recognised in OCI impact profit or loss?

Hans Hoogervorst has been talking about the ‘flagship’ use of OCI under existing IFRS - ‘Remeasurements’ of post-employment benefits.  Hans cited such liabilities of the US auto manufacturers and airlines as an example where the recognition in OCI “had dramatic consequences” and “Arguably, these problems would have been confronted much earlier on if they had been presented in profit or loss. The companies in question would have probably been forced to retain more of their earnings at the expense of dividends .”

I think he may be wearing his rose tinted spectacles. One of the Big 3 automakers avoided bankruptcy despite having much the same legacy of union liabilities. And given the scale of the liabilities, there would have had to be colossal amounts of cash or other liquid assets retained to meet them.  Airlines tend to have significant

liabilities off balance sheet (cue David Tweedie’s favourite joke about some day travelling on an airplane on the balance sheet of the airline).  I’m not persuaded that OCI vs profit or loss would have made much of a difference for the automakers or the airlines. 

Whether you agree with Han’s perspective about the dramatic consequences or not, there are extreme views here among conceptual accountants. Some call for anything not ‘realised’ in OCI.  They envisage OCI as a parking lot or holding pen for volatility. Others are at the other end of the spectrum with very little left for OCI; cash flows hedges and currency translation perhaps. Others are focused on remeasurements in OCI (volatility that results from holding assets and not yet settling liabilities). This might be a middle ground but if recognised in OCI then when, if ever, do they appear in profit or loss?

The US GAAP accounting for post-employee benefits continues to bleed remeasurements into the profit or loss. Looking to experience in the US over the last few years we have seen a number of companies voluntarily move to immediate recognition in profit or loss. Why? Anything else is complex, arbitrary and the results are difficult to explain. But waiting until the ‘transaction’ is concluded (like we do with foreign currency translation), doesn’t seem to fit for something that might well be around for as long as (or longer than) the company. So where does that leave us?

Hans did not discuss the possibility of future changes to IAS 19, but reading between the lines might imply that he supports immediate recognition in profit or loss, notwithstanding the long discussions by the Board in developing the 2011 revisions to IAS 19. The two former Board members who voted against the amendment might well feel a little “I told you so” moment. 

I know we have followed the mantra that disclosures cannot compensate for poor accounting for many years but is ‘good’ accounting driven by having to put something into profit or loss because users don’t give enough importance to OCI?

Category: Bank

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