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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » EPF investments in stock market should be reflected as a loss or profit in its annual accounts, bankers say

EPF investments in stock market should be reflected as a loss or profit in its annual accounts, bankers say

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Vice President - Equity Analytics
Vice President - Equity Analytics
Sri Lankan financial experts and bankers say that the Central Bank’s assertion of the ‘loss’ of Rs. 11.7 billion in EPF investments made in 58 companies in the stock market highlighted in the 2011 Auditor General’s report as ‘mark-to-market’ unrealised losses but not realised losses cannot be accepted as it should be termed as a ‘loss’ for the accounting year according to International Financial Reporting Standards (IFRS).

A senior banker told the Business Times that ‘mark-to-market’ is a concept under, which “you are declaring the actual value of your assets at the market rates”.

Citing an example, he said that if a bank purchased some 100 shares two years back at Rs. 20 per share, at the time of purchase the value of the asset would be Rs. 2000 (Rs. 20 x 100 = Rs. 2000). However suppose as at today, the market value of the stock has declined to Rs.10, then, today the bank is holding assets worth Rs.1000 (10×100= Rs. 1000) only.

The bank has incurred a loss of Rs. 1000. It has to reduce Rs.1000 from its profit and for the accounting year and that Rs. 1000 will be termed as a loss, he said.

The value of share may increase the following day (or year) or regain its original value, but true accounting cannot run on assumption, he said adding that banks use to take into account fluctuations of the original value daily and include the latest value on the date of ending the financial year terming it as a profit or loss in the balance sheet without considering it as a unrealized loss or profit, he disclosed.

Sri Lanka Banks’ Association Secretary General, Upali de Silva said that banks follow the concept of “mark-to-market” in accounting procedure when dealing with investments in the stock market and government securities and foreign exchange trading, and profits and losses should be clearly indicated in the balance sheet.

Meanwhile the Free Trade Zones & General Services Employees Union demanded that the Monetary Board of the Central Bank be immediately removed from its responsibility of managing the EPF as the Governor of the Central Bank and the Board had been publicly accused of not only inefficiency and mismanagement but also of serious corruption.

Issuing a media release, joint secretary of the union Anton Marcus says that irresponsible and high handed investments made by the EPF as stock market investments possibly leading to heavy corruption as well, has led to a decrease of Rs. 5,049, 303, 683 in investment income to the workers in 2011 as compared to 2010.

He noted that the EPF is what workers would eventually have as saving at the time of retirement and therefore no one should be allowed to fiddle with these workers contributions in the EPF.

gamaya


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
'mark to market' loss is an actual loss for someone with a slight idea about opportunity cost.

For example, EPF investment(By the expert panel, of course) on PC House for 3+ rupees last year could have bought 10 times more shares this year if they could have kept the money without any investment.

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