View from City Road: Review panel out of step

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The Independent Online
A BODY that was set up to make sure that companies stick to the letter of accounting law was always going to run into controversy, but it is perhaps unfortunate that the Financial Reporting Review Panel should find itself in the limelight twice in one week.

First there was the investigation into Trafalgar House's reclassification of development properties as investments, where a pronouncement is unlikely until after the partial offer from Hongkong Land closes. Its timing shows that the panel needs to come to terms with its role as a regulator.

Trafalgar says that any restatement of its accounts required by the panel would not affect the aggregate of shareholders' funds. It would, however, mean that pounds 102.7m previously written off the revaluation reserve would have to be charged against distributable profits. There is also a risk that the two sides will decide to fight it out in court. Shareholders should have the facts before they decide on the bid.

Yesterday, the panel raised it eyebrows again when it criticised GPG, the investment company, for complying with an exposure draft before the draft became an accounting standard. But the panel decided not to take further action because the standard is about to be issued.

GPG's desire to be in the vanguard of accounting practice may have been strengthened by the fact that its treatment meant that an extraordinary profit became exceptional, thus boosting pre-tax profits from pounds 5m to pounds 10.8m. But many other companies assume that exposure drafts represent best practice. The fact that more have not been caught owes more to the ruling by the urgent issues task force, whose pronouncements on grey areas must be obeyed, that virtually all reorganisation and restructuring costs should be treated as exceptional.

The view of the standard setters is that exposure drafts are not yet rigid rules, so companies risk having to alter their practice again if the draft is amended. But it would be better to recommend that companies follow them if they believe it would give (in the jargon) a more true and fair view. The willingness with which companies comply would highlight drafts that need amending.

The panel has a valuable role in cleaning up company accounting. But it should remember the responsibilities of that role.

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