120515 handelshögskolan - why did nordstjernan start the “resistance movement against ifrs”?

Why did Nordstjernan start the

“Resistance Movement against IFRS”?

Tomas Billing

May 15, 2012

Stockholm School of Economics

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PwC’s seminar for listed companies 2010 (I)

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PwC’s seminar for listed companies 2010 (II)

It was not because we oppose

the idea of one standard for Europe

or for the world

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1. an inadequate objective

2. an inadequate basic principle

3. an inadequate organisation

4. many inadequate rules (not all )

It was because IFRS has…

I will come back to these four points

Who is Tomas Billing?

CEO of Nordstjernan (since 1999…)

Chairman of NCC

SSE graduate (class of 1984)

Accounting major!

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What is Nordstjernan?

Family controlled investment holding company

Nordic focus

Both listed holdings (with IFRS) and non-listed

(without IFRS)

Examples of listed holdings: NCC, Ramirent,

Ekornes

Examples of non-listed holdings: Salcomp, Etac,

Rosti

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What are the arguments for IFRS?

A. To have the same accounting rules in Europe

(or in the whole world) is good for the capital

market – reduces cost of capital

B. If not IFRS is implemented we will have

national rules or US GAAP. Both are worse

than IFRS!

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Do we agree?

A. I am OK with this argument as long as the rules

are adequate. To have the same inadequate

rules will not reduce cost of capital

B. To implement something because the

alternatives are worse is not a valid argument.

History has shown this many times

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1. Yesterday you learnt that IASB’s objective

is…

“to develop, in the public interest, a single set of

high quality, understandable, enforceable and

globally accepted financial reporting standard based

on clearly articulated principles…”

This is what we call “snömos” in Swedish

Make the “reverse test”!

1. According to the IFRS’ framework…

“the objective of general purpose financial

statements is to provide financial information about

the reporting entity that is useful to present and

potential equity investors, lenders and other

creditors in making decisions in their capacity as

capital providers. Information that is decision-useful

to capital providers may also be useful to other

users of financial reporting who are not capital

providers”

Objective is to provide information for

investors, not to help managers/boards to

govern companies

1. An inadequate objective

The objective is to provide information for

investors, not to help managers/boards to

govern companies. Additionally, a lot of

“snömos”

2. An inadequate basic principle (I)

Market valuation of balance sheet (fair value) vs

cash flow generation

Example “Polstjernan”

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Land 100 Equity 100

Profit 10

Cash flow 0

Land 110 Equity 110

2. An inadequate basic principle (II)

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Land 100 Equity 100

Profit 10

Cash flow 10

Land 100

Cash 10

Equity 110

2. An inadequate basic principle (III)

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IFRS increases the possibility of

management to “fix” profits

IFRS has nothing to do with cash flow

3. An inadequate organisation

Over 100 full time employees. What drives

them? Who evaluates them?

Who decides what new rules to invent? Demand

driven? No!

Can companies influence IASB? No! (I do not

even get a response…)

Can politicians influence IASB? (e g IAS 39

regarding held-to-maturity investments) Yes!

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4. Many inadequate rules

IAS 39

- Classifications

- Loans at fair value

IFRS 3

- Earn-out

- Partial acquisitions/divestitures

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IAS 39 – Classifications

Normal financial asset

Financial asset that is a held-to-maturity

investment

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Management will influence. Do bonuses

effect behaviors?

“Long term investment is a short term

investment that has gone sour”

IAS 39 – Loans at fair value

Q3-report from UBS (page 1 of 96…):

“Dear shareholders, for the third quarter of 2011

we delivered a net profit attributable to UBS

shareholders of CHF 1,018 million… This was

achieved despite the impact of the unauthorized

trading incident…”

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Positive undertone?! My translation:

“Despite difficult conditions, UBS

managed to generate a profit”

IAS 39 – Loans at fair value

“Dear shareholders, for the third quarter of 2011

UBS made a loss of 800 MCHF. This loss and the

general market turmoil has meant that the owners

of UBS debt is more uncertain about their ability to

repay and, therefore, the market value of UBS’s

debts have decreased. Because of IAS 39, UBS

books this devaluation as profit in the P&L

statement and because the amount is as large as

1.8 billion CHF, UBS reports a total profit. This

profit has nothing to do with the business”

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IAS 39 – Loans at fair value

UBS has done nothing wrong, but is this good

for the shareholders?

Is IFRS’ assumption that managers do not

influence numbers correct?

Solution for Greece? Heureka!

When will we have an accounting standard that

shows the real performance of companies?

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IFRS 3 – Earn-out

This standard is about business combinations,

among other earn-outs and other add-on-

payments in a transaction (“tilläggs-

köpeskillingar”)

Assume NCC purchases a company XYZ for

100 with an extra 30 if profits the next coming

years turn out to be OK

Since NCC believes that probability of this to

happen it assumes that the full amount, 30, is a

debt

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IFRS 3 – Earn-out

The company XYZ does unfortunately not

perform as planned and the 30 in earn-out does

not have to be paid

This means that the 30 in debt has ceased to

exist and NCC makes 30 in extra profit. Heureka

again! Make bad acquisitions and make money

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IFRS 3 – Partial acquisitions/divestitures

If NCC increases a holding from 49.9 % to

50.1 % the full investment should be revalued to

market value

If NCC divests 49.9 % of a formally wholly-

owned subsidiary no result is shown. Full effect

is taken against equity

These two rules have nothing to do with reality.

Additionally, the management can create profits

when they need them…

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1. A new objective focusing on making

companies better

2. A new basic principle with cash flow focus

3. A new organisation

4. Many rules should be changed

IFRS needs…