Emirates Business 24/7 has turned out a gem. It's all about mark-to-market accounting.
Mark-to-market accounting (aka fair-value accounting) has been a standard of modern accounting since the early 1990s. It says that you have to put down the current value of your assets on your balance sheet, even if you haven't yet realized the loss (or gain) on those assets. So, for example, if I bought Dh1m in stocks five years ago and they're now worth Dh500,000, I (as a company) have to record them as a Dh500,000 loss, even though I haven't yet actually sold the shares and locked in the loss. Two years from now, they could be worth Dh1m again, and I may plan to hold them for more than 10 years. Yet I still must record fluctuations in the price of that asset on the company's balance sheet.
What are the benefits of mark-to-market? Mainly, it gives analysts and investors an accurate snapshot of a company's current financial position. To return to the example above, it'd be hard to argue that I was giving you a true picture of my financial condition if I booked my Dh1m investment as still worth Dh1m. It may have the potential to rise to its former heights, but that's just not where it is now. In a similar vein, if property and financial companies in the GCC, which have taken big fair-value losses, were to book the value of their land and investments assuming their values were the same as at the time of purchase, it wouldn't quite reflect the reality: they couldn't get that price on the market now. Raj Madha, an EFG-Hermes analyst, argues persuasively for mark-to-market in the Emirates Business article.
The naysayers, meanwhile, have been putting huge pressure on international accounting regulatory bodies to change the rules. They say mark-to-market is flawed principally because of its bias towards short-term earnings and the disincentives it places on long-term investments. Paul Koster, the CEO of the Dubai Financial Services Authority, a regulatory body similar to the FSA in the UK, is against it. So are lots of powerful people across the globe. And they do have a point. If companies' earnings are going to be affected by the current market value of assets they don't plan on selling anytime soon, they'll be loath to invest for the long term. If I put my money in a Dh1m investment that I know will be volatile in the short term but that I expect to make huge gains in, say, 10 years, I could be punished severely on the balance sheet in the interim - when it declines to Dh500,000 in year two, for example. Worse yet, the market for the asset could completely disappear, or it could be an investment that inherently lacks a ready market. And yet mark-to-market forces you to book a value for it.
The arguments both for and against fair-value accounting are powerful. On the one hand, it's a good idea for companies to be forced to disclose their current financial positions as accurately as possible. On the other, it'd be foolish to steer companies away from sensible long-term investments for fear of how fair-value accounting will affect their bottom lines.
Any way you slice it, it's certainly an interesting debate. And kudos to Emirates Business for delving into it.