Monday, January 3, 2005

 

Mexican companies face new ways to count their blessings

 

By Kenneth Emmond

 

One of the tentacles of globalization reached Mexico just last Saturday.

 

Effective January 1, 2005, all companies listed on stock exchanges in Europe must comply with new accounting principles. Those listed in the U.S.A and major players on the Mexican exchange are encouraged to comply, and will likely have to do so soon.

 

Firms from 90 nations, including about 200 companies with stocks or commercial paper listed on the Mexican Stock Exchange (BMV), are required or encouraged to comply.

 

On the surface it’s as prosaic an incursion as anyone could imagine - the adoption of international financial reporting standards (IFRS). Nonetheless, it will bring about a sea change in the way investors, regulators and even tax authorities receive financial information.

 

For instance, one favorite strategy is to ignore the cost of share options provided as performance bonuses. The new system requires these to be counted as an expense, as they should be.

 

The custom of depreciating goodwill - the value of a business over and above its physical assets following a merger - is no longer permitted. Other intangible assets, such as trademarks and franchises, must be included in the balance sheet.

 

The IFRS goals are twofold - to move toward standardized accounting practices, and to improve accounting transparency to investors and regulators.

 

This is part of a larger movement, which aims to create a single worldwide accounting standard so that investors can make apples-to-apples comparisons of firms no matter what their country of origin.

 

Officials from the London-based International Accounting Standards Board (IASB), the body that oversees the IFRS, and their generally accepted accounting principles (GAAP) counterparts, have agreed on many standards but the systems are still far from being completely harmonized.

 

IASB President Sir David Tweedie puts it this way: “We are trying to harmonize the two standards … but differences will continue for many years…. The goal is to make the differences between the U.S. GAAP and the IFRS disappear.”

 

Mexico’s accounting profession has supported the process since it began inching forward back in 1973.

 

Its rule-making body, the Mexican Board for the Research and Development of Standards of Financial Information (CINIF), is working toward harmonizing national rules with international standards.

 

This work is endorsed by the National Banking and Securities Commission (CNBV), which regulates the BMV.

 

In Mexico the IFRS adjustment is just one of several sets of accounting reforms coming into effect for large companies.

 

Many internationally listed companies, in Mexico and elsewhere, are already adjusting their accounting to comply with the Sarbanes-Oxley Act, a requirement for all companies listed in the U.S. Its main purpose is to show investors and legislators that companies are involved only in business activities they say they are involved in.

 

The Sarbanes-Oxley law was passed to avoid a repetition of the accounting antics of firms like Enron that, it was discovered, dabbled in fraudulent off-balance-sheet activities that no one but management was aware of, and that ultimately caused its demise.

 

All Mexican companies, large or small, must make adjustments each year to comply with the coming year’s tax legislation, but this year it’s more demanding than usual.

 

Apart from the usual strictures, which generally involve minor changes from the previous year, there’s the watered-down but still complex fiscal reforms passed by Congress last November.

 

Among the issues it deals with are inventory valuations, accounts receivable, costing, and calculation of profits.

 

Blending these changes with the IFRS requirements and the Sarbanes-Oxley rules are a financial manager’s nightmare - and an accountant’s dream come true.

 

Companies that are uncomfortable with the new regulations may not agree, but in the long run it’s all in the best interests of everyone, including themselves.

 

Obfuscating benefits to top executives and burying profits where the tax officials won’t see them may serve the executive suite, but few others. In many large companies, the interests of executives have been moving away from those of ordinary shareholders, and it’s healthy to move them closer together again.

 

Analysts will find it easier to make international comparisons of same-sector companies without having to estimate differences due to disparate accounting systems.

 

Regulators will not be faced with multinational companies that hide behind rules that apply at their head office.

 

All of this will result in a quantum leap in investor confidence that corporate financial reporting is done on a what-you-get-is-what-you-see basis.

 

Even anti-globalists are likely to agree that universal accounting standards will be an unmitigated benefit of the globalization process.

 

——————————

Kenneth Emmond is a freelance journalist, economist, and market consultant who has lived in Mexico since 1995.  He is a graduate of Carleton University School of Journalism in Ottawa, Canada, and has a Master's degree in economics from the University of Manitoba.  He has worked with The Canadian Press and United Press and in a professional capacity with Canadian Pacific Railway and The Winnipeg Commodity Exchange.  His e-mail address is kemmond00@yahoo.com.