Mon, Jun 20, 2011 - Page 11 News List

INTERVIEW: Financial sector impact of IFRS

The government’s decision to phase in International Financial Reporting Standards (IFRS) has worried banks, life insurers and land developers, who believe that the change could weaken asset quality, capital adequacy and share prices. However, the switch to the new accounting rules is intended to make financial disclosure more transparent and accountable and is part of Taiwan’s ongoing effort to link up with the world. Andrew Fuh, head of Ernst & Young Taiwan Global Financial Service, discussed his views on the issue during an interview with ‘Taipei Times’ staff reporter Crystal Hsu on Friday

Andrew Fuh, head of Ernst & Young Taiwan Global Financial Service, talks to the Taipei Times on Friday.

Photo: George Tsorng, Taipei Times

Taipei Times (TT): What are the main differences between the current accounting rules and IFRS to be phased in next year?

Andrew Fuh (傅文芳): The biggest difference lies in the way assets and liabilities are valued. Under current rules, the book value of a house bought 30 years ago remains unchanged despite value changes because the assets are recorded at historical cost. Such accounting practice is simpler, more stable and easier to perform, but does not reflect current fair value at all. It summarizes past transactions instead.

By contrast, IFRS requires companies to value their assets and liabilities based on their fair value or market price. Not only so, companies must also keep updating their values as market conditions change.

Over the years, many investors, shareholders and analysts have complained that the information disclosed in a company’s income statement is outdated, rendering the financial results worthless as references. Mark-to-market accounting allows them to better track the company’s financial performance and net worth. It also requires more disclosure.

TT: Which sectors will be affected most by the adoption of IFRS and how?

Fuh: IFRS will have the biggest impact on the financial institutions because most of their assets are sensitive to mark-to--market valuations. The market price of securities, bonds and other financial assets vary daily and they will have to make adjustments accordingly.

Other service providers and manufacturers will be less affected because the market value of their assets such as equipment is relatively stable. They do not have to disclose value changes so frequently as financial firms under IFRS requirement.

TT: The upcoming IFRS conversion has raised life insurance firms’ hackles as seen by their strong urge to record real estate investments based on market prices. How do you account for that?

Fuh: The life insurance companies have pressed hard for the use of market price to value their holdings in real estate properties in the hope the premium from value gains on real estate investments would more than offset the negative impact caused by IFRS adjustments on their balance sheet.

On Thursday, the Financial Supervisory Commission [FSC] approved the use of market worth in measuring their real estate properties as long as they produce regular rentals. The move, however, will not make the insurers’ income statements look better because the FSC requires them to record the premium as policy reserves to cover negative interest spread accumulated over the years. The premium, if categorized as equity, could have been used to distribute dividends.

That requirement is the equivalent of asking shareholders to put their money in the pockets of -policyholders. The shareholders are surely not going to like that.

TT: The banking sector has voiced grave concerns about falling capital over IFRS. Is the risk real?

Fuh: Pension funds account for a big chunk of employee benefit expenses, especially for banks and life insurance firms since they retain a large staff to deliver services and sell financial products.

Existing accounting rules do not require immediate recognition by banks of expenses in their income statement. Now they only record the expense upon payment.

Upon adopting IFRS, however, they will have to recognize all expenses for retired staffers and employees in force, a change that will significantly weaken their net worth and share prices. Investors could avoid buying their shares, and they may have to inject fresh capital to make up for losses.

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