Stringent Accounting Rules may be Making Things Worse During Financial Turmoil

Abstract

Dr. Pongsak Hoontrakul, a senior research fellow at Bangkok's Sasin graduate school, told me the other day that the global financial crisis had serious implications for corporate balance sheets in Thailand and elsewhere. Due to the collapse in the price of key commodities, such as oil and steel as well as financial products such as stocks, the balance sheets of listed and unlisted firms will be destroyed by the current accounting practice, he said. Since the mid-1990's, several countries, including Thailand, have adopted the fair-value accounting (FVA) or mark-to-market (MTM) accounting standard, which are fine in markets that are functioning well. However, Pongsak said, markets have become dysfunctional in the wake of the global financial crisis, as evidenced by the sharp fall in the price of equities - Dow Jones is down by one-third - and crude oil, from the $147perbarrel (Bt5,220) peak in July 2008 to less than $60 now). As a result, most balance sheets will look dismal when they are released early next year, he predicts. Pongsak and other academics suggest that Thailand form a professional study team, consisting of accountants, industrialists, politicians, academics and lawyers, among others, to address the issue. By considering the turmoil in global financial markets and an international movement to revise the rule that requires banks to account for assets in line with market prices, which has led to big changes in mortgage-backed securities, Thailand may need to change its rules on fair-value accounting and proceed with deliberation through communication with constituents on an urgent basis, says a paper coauthored by Taka Fujioka, Seitaro Seko and Pongsak.