Some financial servi–ces companies are feeling the bite of the new accounting rules.
Under the new rules, changes in the fair market value of financial instruments classified as “available for sale” are now included in shareholders’ equity, labelled as “other comprehensive income.” Previously, these changes appeared on the income statement or were left out.
The aim is to eliminate potential volatility in earnings that comes from changes in the value of these holdings. Only when these investments are sold will the gains or losses be recorded in income. This change is in line with practices in the U.S. and other countries.
Changes in the value of financial instruments classified as “held for trading” are not included in other comprehensive income. Companies are now required to record these changes on their income statements.
Besides changes in the value of financial instruments available for sale, other comprehensive income includes changes in income resulting from the translation of the results of subsidiaries operating in foreign currencies. This used to be a separate item in shareholders’ equity.
The impact of these changes, which come into effect Oct. 1 but aren’t retroactive, is not large for most financial services companies — but there are exceptions.
For example, they are responsible for most of the drop in E-L Financial Corp. ’s net income in the quarter ended March 31 to $30.6 million from $88.3 million a year earlier. This year, the company recorded a loss of $33.1 million in the value of trading investments, only partially offset by $18 million in gains. The $9.4 million gain on the value of available for sale investments was not included as it went into comprehensive income. A year earlier, $47.5 million in appreciation of investments was included in income.
Guardian Capital Group Ltd. was dramatically affected. It recorded an opening amount in comprehensive income of $170.8 million in unrealized gains on securities available for sale. This resulted in shareholders’ equity of $387.6 million as of Mar. 31, vs $219.1 million on Dec. 31 and $200.3 million a year earlier. IE
Accounting changes take toll
- By: Catherine Harris
- July 3, 2007 July 3, 2007
- 10:00