IAS 37

Is it a boat? Is it a plane? No, it’s the world’s biggest non-current asset?

Published on: 02 Dec 2009

I just read that Royal Caribbean have recently entered the World’s largest passenger ship – the Oasis of the Seas – into service.  It is enormous, with elevators to carry passengers up and down the 18 passenger decks.  To my old fashioned tastes, it looks rather like a floating housing estate, but I think that’s just age.

Whilst watching an online tour of the ship, I found myself being rather accountant-like about it.  What’s it’s design life and is its useful life going to be shorter?  Do cruise ships go out of fashion before they become too unreliable to sail?  Will it generate more revenues in the early years than the later years?  So should sum of digits/reducing balance depreciation be used instead of straight line?  Of the cost of £800 million to build it, how much is down to the hull of the ship itself and how much to the decoration?  The decoration is no doubt ideal for its target customers just now, but it’s bound to look hopelessly dated in twenty years’ time.  So what’s their policy for “unbundling” the ship into separate components and depreciating each over a different life?

There is much criticism of ship owners sending their decommissioned ships to developing countries to be broken.  As a cruise company, this ship will no doubt not suffer that fate, as to do so would damage the company’s public relations.  So there might be a constructive obligation to decommission the ship in about 30 years’ time at a loss.  Have they recognised that as a liability and discounted to present value?  They should have done, because IAS 37 requires it.

Finally, the interview with the CEO of the company starts by admitting that 2009 has been “horrible” and 2010 doesn’t look much better.  Evidence of impairment right at launch perhaps?  IAS 36 only allows companies to project revenues five years into the future when valuing assets (unless an extension to this period can be justified). Will the global recession be over by then?

So whilst other people see a big ship, I see a floating cocktail of accounting and audit issues.  Is this normal?

Are accountants to blame for the global crisis?

Published on: 14 Oct 2009

A few accounting standards arguably have an unfortunate tendency to exaggerate the economic cycle.  During a time of economic downturn, the chances of a company having impaired assets is increased.  This has the unfortunate effect of taking poor trading results and augmenting them with impairment losses.  In other words, accounting conventions take a bad situation and make it worse.

Or so some people would say.

Some financial instruments are also shown at fair value.  Fair value is primarily decided by reference to market values. During a slump, this also makes reported results worse.

The argument advanced by many is that we ought to amend accounting standards to introduce some sort of dampening effect – requiring companies to impair assets or make provisions during times of boom and release these provisions during a slump.  This, it is argued, is only the equivalent of making hay while the sun shines.

There’s only one problem with this idea of “dynamic provisioning”. Mostly, it flies in the face of the definition of a liability in the Framework. Also, it’s precisely the opposite of what IAS 37 and IFRS 4 (insurance contracts) aimed to do. Fiddling with the accounts to save people from unjustifiable optimism and excessive, groundless pessimism might be politically popular in the current  market turbulence, but arguably it would only reduce the reliability of financial reporting in the long term.  Investors ought to be smart enough to use other information provided to them, such as the statement of cash flows, before reaching judgement on the desirability of a company’s shares.

We hope that the IASB stick to their guns and resist the pressure to codify creative accounting and massaging figures by bogus provisions. We’re confident that they will.

The ExP Group