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Accountants warned to value bonds properly

Accountants in major Irish companies have been warned they must properly value European sovereign bonds they are holding on their balance sheets.

The Irish Auditing & Accounting Supervisory Authority -- which promotes standards in the auditing and accountancy profession -- has issued its observations on financial reporting issues which featured in 2011, among them the eurozone debt crisis.

The organisation said companies that have holdings of sovereign debt needed to consider a range of factors when they reported their 2011 results.

Chief among these was the need to assess at the reporting date whether there was 'objective evidence' that holdings of sovereign debt had been impaired (reduced in value).

If there is evidence, the companies must be aware of the difference between the current balance sheet amount of the asset and the present value of its future cash flows.

A downgrade of an entity's credit rating is not, of itself, evidence of impairment, the organisation pointed out. "Although it may be evidence of impairment when considered with other available information,'' it added.

The companies are also asked to consider any restructuring or 'haircuts' on bonds, which has been mooted in the case of Greec, for instance.

"In instances where a restructuring plan is in place, such assessment should be based on the restructuring plan details. In instances where a restructuring plan is not yet agreed, issuers should ensure that the estimated cash flows are based on best estimates''.

The organisation said the whole issue of sovereign debt was becoming more important to companies in their financial statements.

Irish Independent