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Companies given latitude on mark-to-market valuations as securities prices turned unrealistic in March

2 June 2020 11:10 am - 0     - {{hitsCtrl.values.hits}}

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The companies reporting their financial performance for the March quarter have been allowed to fair value their financial assets as the prices prevailed on March 31, 2020 were unrealistic and much of them were tainted by the gyrations, since the investors turned risk-off and responded to the economic shock caused by the pandemic by selling their securities, pulling down the stock prices and indices as a whole.  


Banks and other companies, which hold financial instruments such as government and equity securities as of March 31, 2020, chose the prices prevailed prior to March to book the mark-to-market gains and losses in their accounts, so that the impact on their profits from the fair value changes was kept to a minimum. 


To this end, the Instituted of Chartered Accountants of Sri Lanka (CA Sri Lanka) gave the reporting entities the leeway via a guidance note on how to deal with fair value measurement when the securities prices had taken a heavy beating due to the pandemic-induced 
economic disruptions.


While the guidelines were applicable on all reporting entities as of March 31, 2020, they were more pronounced in case of banks and other entities in the financial services industry, as they hold large swaths of government securities and equities.The investors of government securities and equities around the world responded to the lockdowns necessitated to stem the pandemic, as the measures were taking a heavier toll on the businesses, jobs and the wider economy. 


The bearish investors sold their securities pulling the indices down around the world, including that of the Colombo Stock Exchange, which had to bring in index-based circuit breakers on March 20, to stem further fall.  


During March alone, the All Share Price Index fell by 18.26 percent and S&P SL 20 Index fell by a much steeper 26.01 percent. Had the holders of these equity securities re-measured the values of their securities at the prices prevailed at the end of March, they would have had to book substantial mark-to-market losses, which could weigh on their earnings, depending on how they categorise these securities.


As a broader leeway has been given to the reporting entities, some of the entities have taken the securities values as far back as December 31, 2019, to assume the value as of March 31, 2020, through which they book the gain or loss from the mark-to-market exercise, the interim 
results showed. 

CA Sri Lanka under its guidelines has also allowed the reporting entities to choose where they book such fair value losses between the earnings and comprehensive income. 
It allowed companies to prevent any fair value loss on their earnings by transferring it to the bottom section of the income statement to be part of the comprehensive income, when such losses are substantial enough to cloud the performance of the business. 

 

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