November Update: Essential News

The ‘R’ word
The pound suffered its worst decline in 16 years the day after Bank of England Governor Mervyn King said it was “likely” the UK economy was entering a recession on 21 October. His comments came shortly after Ernst & Young’s ITEM Club said recession was “inevitable”.

‘R’ word II
Gordon Brown followed King’s brevity the next day with a statement to the House of Commons that “We must now take action on the global financial recession, which is likely to cause recession in America, France, Italy, Japan and because no country can insulate itself from it, Britain, too.”

Blame the banks
A report by the Association of Chartered Certified Accountants has blamed banks for creating the credit crunch. “The principal source of the credit crunch is a failure in corporate governance at banks, which encouraged excessive short-term thinking and a blindness to risk,” the report said. The British Bankers’ Association rejected the claim.

Sacré bleu
French finance minister Christine Lagarde ordered an audit of all French banks following the uncovering of a (euro) 600m loss on an unauthorised equity derivatives trade at Caisse d’Epargne. The bank’s finance director Julien Carmona resigned on the news, following chairman Charles Milhaud and CEO Nicolas Merindol to the door.

Joint rate cut
The Bank of England cut interest rates half a percentage point to 4.5% following a special meeting ahead of its scheduled rate meet in early October. It was a co-ordinated effort with the Bank of Canada, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank, which all cut their rates.

Correction: Co-op group
We said in our October 2008 issue that the Co-operative Group owns Aegis Security Services, “a risk management services contractor to the United Nations, the US government and various operations”. This is inaccurate. The Co-operative Group subsidiary Aegis Security Services’ sole business is providing security for the Group's own buildings in the UK and none of the services we stated. We apologise for this mistake.

TECHNICAL UPDATE
Financial reporting
The IASB and US standard setter FASB announced details on their joint approach to financial reporting issues arising from the financial crisis. They announced the creation of a joint advisory group on 16 October and followed that up four days later with a statement that said the group would be comprised of senior leaders, charged with identifying the most urgent accounting issues and those requiring longer-term consideration. Public roundtables will be held around the world. They reiterated their determination to find common solutions.

The IASB and ASB amended, respectively, IAS 39 and IFRS 7 and FRS 26 and 29 to permit reclassification of financial instruments. The hastily-prepared amendments allow certain held-for-trading non-derivative financial assets to be moved out of the ‘fair value through profit or loss’ category, but only in rare circumstances. ‘Rare’ isn’t defined.

The Financial Reporting Review Panel commented on the financial reporting challenges in the current environment, noting that directors ought to pay particular attention to the carrying values of assets and liabilities; revenue recognition criteria; and relationships with special purpose entities. The FRRP’s review of 300 company accounts highlighted a number of issues relating to disclosure of principal risks and uncertainties in the business review.