Why did Nordstjernan start the Resistance Movement against IFRS?

Tomas Billing May 15, 2012 Stockholm School of Economics

PwCs seminar for listed companies 2010 (I)

PwCs seminar for listed companies 2010 (II)

It was not because we oppose the idea of one standard for Europe or for the world

It was because IFRS has

1. an inadequate objective 2. an inadequate basic principle 3. an inadequate organisation

4. many inadequate rules (not all )

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!

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!

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

1. Yesterday you learnt that IASBs 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 snmos 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 snmos

2. An inadequate basic principle (I)

Market valuation of balance sheet (fair value) vs

cash flow generation

Example Polstjernan

Land 100

Equity 100 Profit 10 Cash flow 0

Land 110

Equity 110
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2. An inadequate basic principle (II)

Land 100

Equity 100 Profit 10 Cash flow 10

Land 100 Cash 10

Equity 110

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2. An inadequate basic principle (III)

IFRS increases the possibility of management to fix profits IFRS has nothing to do with cash flow

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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
Long term investment is a short term investment that has gone sour Management will influence. Do bonuses effect behaviors?

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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 Positive undertone?! My translation: Despite difficult conditions, UBS managed to generate a profit
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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 UBSs 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-onpayments in a transaction (tillggskpeskillingar)

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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IFRS needs
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

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