Commentary: Appearances in the balance

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The Independent Online
UK plc may owe more than policy makers have supposed, a factor that could slow down a rise in business investment as the economy recovers. The Accounting Standards Board's latest proposals, if adopted, would show that the balance sheets of a large chunk of British industry could suddenly look a lot less healthy.

Reckitt & Colman's debt, according to its latest balance sheet, is pounds 424m, a conservative 58 per cent of shareholders' funds of pounds 720m. But, according to the ASB, it owes pounds 625m, or 1.2 times shareholders' funds of pounds 519m. There is no dispute over a pounds 201m debt. Rather, the ASB is insisting that companies classify covertible capital bonds as debt, not equity.

Convertible capital bonds and other esoteric instruments were all the rage in the late-1980s. More than pounds 5.6bn was raised in the four years to 1991 compared with less than pounds 3bn in the previous 10. The attractions were two-fold. First, they were cheaper than equity finance, which had become expensive in the wake of the 1987 crash. Second, although accounting rules allowed them to be treated as equity - so balance sheets looked better - the cost of servicing them was tax-deductible.

The absurdity of the accounting treatment became apparent when companies like Next, whose share price stayed stubbornly below the conversion price, had to launch rights issues to repay the bonds.

The apparent rise in many companies' gearing should not surprise sensible City analysts, who already treat such instruments as debt. But it does underline the damage UK plc inflicted on itself during the Eighties boom. Homeowners were not the only ones with a taste for cheap debt.