Changes in rules could lead to volatile corporate earnings

Changes in rules could lead to volatile corporate earnings
Bangkok Post (19 October 2007)

New accounting standards to take effect in the near future will allow balance sheets to better reflect cash flows, but they could increase costs and cause earnings to fluctuate, according to PricewaterhouseCoopers. Nangnoi Charoentaveesub, a PWC partner, said the Federation of Accounting Professions, the supervisory body for accounting in Thailand, was now holding public hearings on the new accounting standards. The new standards include guidelines regarding how to treat deferred income tax, employee benefits, government grants and intangible assets. The deferred income tax rules stipulated guidelines on how companies book provisions as expenditures. The standard on employee benefits would call for companies to book retirement compensation as expenditures in the balance sheet, as opposed to the existing practice of booking them when companies actually pay the sum. Local firms must also calculate goodwill, licence and R&D expenditures in their accounts. Items would reflect a firm's future cash flow in a discount for calculations of present value. ''These new accounting standards will increase the use of fair value as a base of calculations and improve disclosure. In addition, they call for more disclosure. But company balance sheets will be much more complex,'' Ms Nangnoi said. The association had yet to set a timeframe for the implementation of the standards, she added. Ms Nangnoi said local firms should prepare to adopt newly introduced standards that focus on the fair value of investment in property, agriculture, share-based payment for personnel, insurance contracts and the exploration and evaluation of mineral resources. ''For agricultural businesses, for instance, firms need to book cash flow from their crops or livestock even if they have not been sold. It is difficult yet to calculate a fair value for their assets,'' she said. New standards on share-based value call for firms to book employee stock options on their annual balance sheets instead of on exercise dates. The standard on insurance contracts would help insurers' balance sheets reflect future liabilities and cashflow, she added. Unakorn Phruithithada, another PWC partner, said the balance sheets of local businesses could be volatile in light of new accounting standard IAS 39, which calls for firms to calculate all financial items from cashflow based on fair value. In addition, it calls for firms to book derivative contracts based on mark-to-market prices.