Financial mismatch calls for creative accounting

... in a top-level broadband deal.

Canberra needs creative accounting: NBN

• Jennifer Hewett, National affairs correspondent 
• From:The Australian 
• March 20, 2010 12:00AM

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A FRUSTRATED Telstra has finally belled the cat on the tortuous negotiations over the national broadband network.

The real significance of the company's statement to the ASX yesterday lies in the implicit warning to government that Canberra needs to urgently come up with some creative accounting to make this deal possible.

Telstra pointed out there was a "significant gap" between what it and NBN Co considered to be an acceptable financial outcome. In very deliberate phrasing, it also noted that these negotiations were currently being conducted on a "business to business" basis.

That is a polite way of saying that NBN Co, which is supposed to run as a commercial operation, can't or won't agree to pay another commercial operation, Telstra, what it thinks its assets are worth.

Related Coverage

• Telstra desperate for NBN deal The Australian, 1 day ago
• Big gap for Telstra Herald Sun, 4 days ago
• Telstra extorting over NBN, lobby says The Australian, 4 days ago
• Telstra warns of NBN 'gap'Herald Sun, 4 days ago
• Telstra safe from poaching by NBN Adelaide Now, 10 Mar 2010

But Telstra noted the company was discussing ways in which this gap could be bridged, "recognising that the government has highlighted the national interest benefits of the NBN and reform of the telecommunications industry".

The invitation could not be plainer. If Canberra views this new broadband network as a national interest issue, it should help out with some form of extra public funding or assistance that will allow the two businesses to reach a commercial compromise. But right now it looks more like a case of lose, lose, lose -- for Telstra, for NBN Co and for the government. So far the government, despite being just as desperate for a deal, has not been willing to provide any such additional financial assistance beyond the $4.7 billion of public money already committed. Even if it had the money, this would be politically devastating.

And it is this huge financial mismatch that is far more crucial than whether or not the government has its NBN legislation stalled in the Senate. In fact, the delay in the bill until after the budget suits the government, as it attempts to see whether or not a deal with Telstra will actually come off.

It's another reason Canberra is sitting on the implementation study that reportedly says a broadband network is viable without Telstra's co-operation -- but will also point out the complications of this and of the whole project.

That leaves a lot of uncertainties and nasties for the government to explain away as the opposition seeks to attack.

But it is also true that time is running out for the government to have a credible account of progress on its big broadband plan before the next election. That's why no one can afford to delay much longer on announcing a deal -- or not.

Communications Minister Stephen Conroy wants Telstra to understand that no matter how painful failure to reach a deal would be for the government, it would be bloodier still for Telstra. Think of it as the nuclear option.

Either Telstra signs up within a few weeks or the government deploys every punishment it can against the company and scrambles around to negotiate a series of deals with Telstra's competitors.

These alternatives would be piecemeal rather than national in scope, slower rather than quicker to set up and the costs potentially even more expensive and unpredictable -- even without the need to compensate Telstra.

It is certainly not Canberra's preferred outcome -- just as it is not Telstra's, which knows it will then face the full wrath of a vengeful government. It's why Telstra was negotiating "constructively" and some modest progress has been made. But the remaining numbers gap of billions of dollars requires a big leap rather than just more incremental steps.

David Thodey doesn't think he can persuade his already irate shareholders that it is a good idea to undervalue (on its figuring at least) Telstra's assets -- access to its ducts and a migration of its traffic -- while effectively writing off its copper network before it has to. NBN Co's Mike Quigley isn't interested in compensating Telstra shareholders for lost value, but simply assessing what makes the best business case for NBN Co as a commercial project and what it might cost him to use alternative suppliers.

And one roadblock preventing the government considering any additional help to get around this is that Labor outsmarted itself with the way it has consistently described NBN Co as a commercial project. If it were to alter that wording to emphasise the investment as a nation-building project, the supposed $43bn cost would have to be added on to the federal budget -- which Canberra is absolutely determined to avoid.

Thodey also knows that the government will be ready to punish Telstra and that it will almost certainly get legislation passed that gives the minister wide discretion, including cutting off access to spectrum, forcing it out of Foxtel and generally trying to ensure it can't compete with the new fibre network.

What a bloody mess.

Source: The Australian, 20 March 2010

Incurred vs. Expected accounting losses

This seemingly endless mark-to-market issue turns out to be so and even more convoluted with the recent GFC.  (Emil Jayaputra)

 

Beware the ripple effect of expected accounting losses

By Jane Fuller

FT, August 27 2009 03:00 | Last updated: August 27 2009

As preparers and users of accounts brace themselves for another regulatory onslaught this autumn, one thing they should not count on is an end to so-called "pro-cyclical" accounting.

Some believe the International Accounting Standards Board's proposed switch from an "incurred" loss model to an "expected" loss model will help smooth out peaks and troughs in bank profits over the economic cycle. But in responding to the IASB's "request for information" (deadline September 1) they should be careful what they wish for.

While factoring in expected losses from the start of a loan may top-slice profits in a boom, it will also condense the reporting of losses during the bust. That will intensify pressure on balance sheets.

It is worth remembering that, for all the fuss about "fair value" accounting, narrowly interpreted as "mark-to-market", it typically applies to less than half of bank assets. The incurred loss model for loans is a historic system that reports losses well after the cycle turns and we all start to "expect" that losses will mount.

This lag has been captured in exercises conducted by the International Monetary Fund and central banks estimating bank losses over the next couple of years. The question is not whether there is much more to come, but how many hundreds of billions of dollars. Witness, at last, the mounting loan loss provisions at German banks. The expected loss model would not wait until a loan has been stabbed, poisoned and shot, Rasputin-style, before a cut in value was recognised. But while some losses would have been anticipated, expectations are affected by the cycle. Changing sentiment at the onset of recession would cause them to be revised downwards and, hence, provisions to mount.

Resulting impairment charges would come hot on the heels of mark-to-market losses, which are leading indicators. This means that banks would have less time between waves of losses to recover and raise new capital from the private or public sector.

To cope with that, banks will have to carry higher capital buffers, as every regulator and commentator has suggested. Bank managements have bad form on this. In the EU, for instance, when IFRS was adopted in 2005, it was clear that balance sheets would get bigger and that results would be more volatile - with the inevitable multiplying effect on that bigger asset base. The obvious response should have been to build up a bigger equity cushion to absorb potential losses. On the contrary, profits were splashed out on pay, dividends and share buy-backs.

This is why prudential regulators are set to order additional capital buffers to cope with unexpected losses. US bank regulators have already done this under the Supervisory Capital Assessment Program. In the accounts, such buffers could be called "economic cycle reserves", an appropriation from after-tax profits that cannot be distributed to staff or shareholders.

But there is another way in which the expected loss model will continue the march against historical accounting. First, the trigger for loan impairments will be much more sensitive to current market sentiment. And second, the debate is being fuelled about what interest rate to use.

If the valuation employs the initial rate set, either fixed or variable according to a contractual formula, that is the one applied in the calculation of present value. But a fair value calculation would use the current market rate for that type of instrument. Such up-to-date valuations are shown in the notes under IFRS. The US standard-setter is inclined to put gains and losses in the "other comprehensive income" bucket, still excluded from earnings per share.

Controversial accounting changes have a habit of moving from the notes to OCI to the income statement. Those looking for accounts to be smoothed through the cycle (not this author) will find little comfort in the current proposals.

Jane Fuller is co-director of the CSFI and chairs the Accounting Advocacy Committee of CFA UK

www.ft.com/accountancy

Show Desktop Alert for filtered messages

OUTLOOK TIPS:  Desktop Alert won't show Filtered emails?

 

Firstly you have all emails coming from all parties containing various types of messages: from your immediate manager, branches/offices nationwide or global, intercompany issues, Income tax, FBT, GST/BAS, IT stuff, Statutory reports, personal related, and so on. So you definitely want all those emails filtered to specific folders by using Outlook's Email Rules.

When you have set all your messages filtered properly, another problem crops up. They get directed covertly straight to the selected folders without showing the snazzy Desktop Alert that you'd usually see when a new mail arrives (because the Desktop Alert by default only works for the Inbox folder!).

So how to get around this? Simple, but I wouldn't say so have I not known the solution. Just create a new rule and choose 'Start from a blank rule' instead of creating from template. Click on the first selection 'Check messages when they arrive',and go Next. Press Next again and Yes when asked if this rule will apply to all messages. Finally, tick 'display a Desktop Alert'. And hit 'Finish' button. Remember to keep this new rule at the top of all other filters you have so that it is run first by Outlook before executing other rules. Spick and span. (EJ)

 

Version used: Outlook 2003

Source: Various sources on the Internet

(emiljayaputra.blogspot.com)