`Big bath' time is running out
An abuse by which companies blur the distinction between good times and bad is finally to be ended.
Wednesday 18 June 1997
On the face of it, that looks like prudent housekeeping of the kind that should appeal to us all. However, as with all such policies, it is open to abuse.
And Sir David Tweedie and his colleagues at the Accounting Standards Board are convinced that that is exactly what has been happening for a good while. "All too often the provision is wildly excessive and conveniently finds its way back to the profit and loss account in a later period," Sir David, the ASB chairman, said last week.
As a result, the canny company is able to make a big provision when times are good and profits are running at an acceptable level and then claw some of the money back when things get a little tighter.
Having already moved to limit the discretion available to boards when providing for acquisitions, the board is proposing to end the abuse entirely by moving against provisions for a "big bath", where many different possibilities are thrown in together.
The plans were first published in 1995, to the somewhat predictable howls of protest from the corporate sector. Among directors' complaints was that the information that they would have to produce to justify provisions might be commercially sensitive. But although the board is apparently prepared to allow exceptions when disclosure of the justification of provisions in the run-up to a legal action might affect the company, it seems determined to press ahead with its reforms.
Under the rules which could be in place next year, provisions would be allowed only if the board is obliged to go ahead with expenditure on such matters as redundancies. It is a deliberate attempt to stop companies just saying that they intend to embark on a reorganisation and hence set aside an amount equivalent to the estimated cost of such an action.
"An entity is demonstrably committed when it has a detailed plan for, and cannot realistically withdraw from a reorganisation," the ASB says. It calls for provisions to be "realistic and prudent" and for each type of provision to be disclosed and measured, rather than just lumped together in the approach that led to the big baths that have so upset Sir David.
Under the proposals, provisions would not normally be allowed to cover future operating losses. However, those for enviromental liabilities should be shown in the balance sheet when the company is obliged - "legally or constructively" - to put right damage or restore the environment.
Gerry Acher, head of audit and accounting at KPMG, welcomed the extension of the original proposals, to include contingencies, on the grounds that "the two clearly overlap to a large extent".
He could also see the point of the board's simultaneous publication of proposals aimed at ensuring that companies show fixed assets in their balance sheets at no more than their "recoverable" value. The introduction of an impairment test in this area - under which, in Sir David's words, "assets that are genuinely impaired are written down" - fits in with the board's plans for the treatment of goodwill. This often tricky concoction is designed to account for the difference between the value of a company's assets and the price paid for the organisation in a takeover. It will soon be subject to its own impairment test with the aim of ensuring that businesses seek to measure the value of intangible assets, such as brands and other intellectual property.
"Provisions and impairments are interlinked anyway," Acher says. "For example, a reorganisation may entail both asset write-downs and other costs to be incurred. So it is absolutely right for the ASB to table both Freds (Financial Reporting Exposure Drafts) together."
But he adds that he and his counterparts in other firms would have to scrutinise them carefully to ensure that "they are workable and to the point".
Moreover, the International Accounting Standards Committee, headed by Sir Bryan Carsberg, is also working on those issues, so there is an opportunity for Britain to lead the way towards worldwide harmonisation in what has frequently been a highly contentious field
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 2 Rihanna 'nude pictures' claims emerge on 4Chan as hacking scandal continues
- 3 Kim Kardashian 'nude photos' leaked on 4chan weeks after Jennifer Lawrence scandal
- 4 'F*ck it, I quit': KTVA reporter Charlo Greene quits live on air in spectacular fashion
- 5 Hitler’s former food taster reveals the horrors of the Wolf’s Lair
Scotland could still declare independence – even without referendum, says Alex Salmond
Scottish referendum results: Cross-party consensus collapses amid Tory-Labour spat on the 'English question'
Hilary Mantel 'should be investigated by police' over Margaret Thatcher assassination story, says Lord Bell
Scottish independence: David Cameron is becoming the 'George Bush of Britain'
Plebgate MP Andrew Mitchell called officer a 'little s**t', claim court documents 'exposing ex-Chief Whip's 'record of abusing police'
Archbishop of Canterbury admits doubts about existence of God
iJobs Money & Business
£65000 Per Annum Benefits + bonus: Clearwater People Solutions Ltd: If you are...
£20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...
£20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...
£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...
Day In a Page
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green