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January 27, 2009

Fitch Ratings predicts bellwether year for financial reporting

Further refinements to fair value standards, a keen emphasis on going concern and bringing many off-balance-sheet items back onto US companies’ balance sheets are three accounting issues to look out for in 2009, according to Fitch Ratings.

The global ratings agency said in its annual global outlook that 2009 would be a “bellwether” year for accounting and financial reporting, particularly in relation to fair value and convergence of US GAAP and IFRS.

Fitch Ratings credit policy group director Olu Sonola said while it was highly unlikely that fair value accounting would be reversed, it was increasingly clear that there would be additional refinements to temper some unintended consequences.

Another pressing issue, the ratings agency added, is how best to justify a going concern basis, given the doubts some banks have about companies’ ability to refinance.

Going concern would continue to be particularly sensitive while profitability and regulatory capital adequacy is at stake for many financial institutions.

Fitch also expected new accounting rules on special purpose entities to bring many off-balance-sheet entities back onto US companies’ balance sheets.

“Outside the US, new segment reporting under IFRS will need to be explained well if analysts are to understand the financial performance of a company given everything else that is happening,” managing director Bridget Gandy said.

The good news for analysts and investors was that disclosures are set to improve on multiple fronts, the rating agency reported. It advocated early adoption of any improvements to fair value disclosures produced by the International Accounting Standards Board and US Financial Accounting Standards Board.

Analysts and investors should also be aware of some important longer-term accounting changes that the accounting standard setters will debate in 2009, the agency said. These include financial statement presentation, revenue recognition, distinguishing between liabilities and equity, lease accounting and accounting for insurance contracts.

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