Free Accounting Dissertations - Companies Have Used Securitisation To Cash In Assets Like Trade Receivables
Companies have used securitisation to cash in assets like trade receivables sitting on their balance sheets. Securitisation helps companies to slim down their balance sheets and hence allows companies to show higher return on assets at same earnings. And it was one of the reasons why companies went for securitisation. But stringent criteria for moving assets and liabilities off balance sheet will threaten securitisation. Sue Harding, chief accountant at Standard & Poor’s in Europe said that new international accounting standards were sweeping a lot of securitised assets back on to balance sheets (Jopson, Feb 2005).
This will help investors compare like to like and avoid companies that have used securitisation only to make-up their balance sheets. There is no harm in using securitisation if used in a proper way and not to deceive stakeholders. But we have seen how corporations like Enron had used securitisation to disguise their true financial position.
Annual impairment review. Annual impairment review will benefit investors because the companies then won’t like to take big goodwill cuts in one year and not do anything for years. Annual reviews would help investors judging whether the amount paid by companies in acquiring other company was justified or not.
Access to cheaper capital. Increase in investor profile diversification would most probably lower the cost of capital for most of the companies. This is especially true for smaller companies which don’t have financial muscles and resources to tap international investors.
Expensing research costs gives better information to investors and other stakeholders because at research stage the chances of success are quite uncertain. Investors can only be sure of development costs bringing in some returns in future. Also by segregating research and development costs, external stakeholders will now have a better chance to differentiate the suitability of costs incurred in developing new products.
Multiple listings. Many companies now have multiple listings across different countries. Companies need to prepare financial statements as per each local accounting standard to meet listing requirements. With one accounting standard only it will save a lot of botheration for companies with multiple listings.
Dividends. Under IFRS dividends are not provided for until the dividend recommended by the Board is approved by shareholders. This move will bring more convergence between accounting profits and cash flows.
Disadvantages of IFRS
Fair value. While fair value in a way conveys more up to date value of a company as compared to historic costs, it also puts a question mark on the methods used and the reliability of fair value. Derivative instruments which are commonly traded on various stock exchanges can be easily assigned value.
