“Controversial Accounting Treatment that Erupts Many Critics from Accounting

Professional and Economist”

Abdul Rahman Panjaitan| Annisa Dewi Syafrina | Danil

rahmanawan6@gmail.com | annisadew67@gmail.com| danilalamsyah01@gmail.com

Department of Accounting, Faculty of Economics, Andalas University
• Established in 1864.
• 2nd largest bank in France
• By 2007, have branches in 90
countries, with total assets of
1.1 trillion euro and employ
more than 130,000 personel
worldwide.’
CAC 40 - FRANCE STOCK INDEX

Sanofi GDF Suez Arcelor Mittal Alstom

Total Vivendi PPR Solway
BNP Paribas Pernod Ricard Carrefour Gemalto
LVMH Vinci Lafarge Capgemini
Air Liquide Unibail-Rodamco Publicis Accor
Groupe Danone Orange Technip Bouygues
Schneider Electric Essilor Legrand Vallourec
L’Oreal EADS Renault EDF
AXA Michelin Safran STMicroelectronics
Société Générale Saint-Gobain Crédit Agricole Veolia Environnement
On January 19 and 20, 2008, the Group has uncovered unauthorized and concealed
trading activities of an exceptional scale involving directional positions taken during 2007
and at the beginning of 2008 by a trader responsible for trading on plain vanilla derivative
instruments based on European stock market indices. The identification and analysis of
these positions on January 19 and 20, 2008 prompted the Group to close them as quickly
as possible while respecting the market integrity. The analysis of these unauthorized
activities established, before the closing of the accounts for the financial year ended
December 31, 2007, that the mechanisms of concealment used throughout the 2007
financial year continued until their discovery in January 2008. At the balance sheet date,
Corporate and Investment Banking's activities are currently the subject of various
investigations internally and externally and any new fact will be taken into consideration.

The application of the provisions of IAS 10 " Events after the balance sheet date" and IAS
39 " Financial instruments : Recognition and Measurement", for the accounting of
transactions relating to these unauthorized activities and their unwinding would have led
to recognizing a pretax gain of EUR 1,471 million in consolidated income for the 2007
financial year and only presenting the pre-tax loss of EUR 6,382 million ultimately incurred
by the Group in January 2008 in the note to the 2007 consolidated financial statements.
For the information of its shareholders and the public, the Group considered
that this presentation was inconsistent with the objective of the financial
statements described in the framework of IFRS standards and that for the
purpose of a fair presentation of its financial situation at December 31,
2007, it was more appropriate to record all the financial consequences of the
unwinding of these unauthorized activities under a separate caption in
consolidated income for the 2007 financial year. To this end and in
accordance with the provisions of paragraphs 17 and 18 of IAS 1
“Presentation of Financial Statements” the Group decided to depart from
the provisions of IAS10 “Events After the Balance Sheet Date” and IAS 39
“Financial instrument: recognition and measurement”, by booking in
estimated consolidated income for the 2007 financial year a provision for the
total cost of the unauthorized activities.
Additional information
• At the beginning of the year 2008, the firm faced a crisis by losing 4.9
Billion euro due to a rogue trader, Jerome Kerviel
• Jerome Kerviel worked in the risk management office and later was
promoted as a lower-level trading desk known Delta One
• He invested in unauthorized portfolios which could result in gaining or
losing billions.
Motivation:
• Wanted to show his capacity to
compete with SocGen best traders
• Enhance his reputation and increse his
bonuses
Opportunitites:
• Skills learned from his previous position
at the Back Office
• Lack of controls during several months
due to the resignation of his manager

Jerome Kerviel
Is it fairly & faithfully represented?
 IAS 1: Presentation of
Financial Statements

IAS 39: Financial

IAS 10: Events After the Standards related to the
Instruments: Recognition
Reporting Period SocGen case
and Measurement

IAS 37: Provisions,

Contingent Liabilities and
Contingent Assets
IAS 1 - Presentation of Financial Statements

• The objective of general purpose financial statements is to provide

information about the financial position, financial performance, and
cash flows of an entity that is useful to a wide range of users in
making economic decisions.
• To meet that objective, financial statements provide information
about an entity's assets, liabilities, equity, income and expenses,
including gains and losses, contributions by and distributions to
owners (in their capacity as owners) and cash flows.
• That information, along with other information in the notes, assists
users of financial statements in predicting the entity's future cash
flows and, in particular, their timing and certainty.
Cont.
• An entity cannot rectify inappropriate accounting policies either by
disclosure of the accounting policies used or by notes or explanatory
material.
• In the extremely rare circumstances in which management concludes
that compliance with a requirement in an IFRS would be so
misleading that it would conflict with the objective of financial
statements set out in the Framework, the entity shall depart from
that requirement in the manner set out in paragraph 20 if the
relevant regulatory framework requires, or otherwise does not
prohibit, such a departure.
Fair presentation and compliance with IFRSs

The financial statements must "present fairly" the financial position,

financial performance and cash flows of an entity. Fair presentation
requires the faithful representation of the effects of transactions, other
events, and conditions in accordance with the definitions and
recognition criteria for assets, liabilities, income and expenses set out
in the Framework. The application of IFRSs, with additional disclosure
when necessary, is presumed to result in financial statements that
achieve a fair presentation.

Faithful representation: Complete, neutral and free from error.

IAS 10 – Events After the Reporting Period

Contains requirements for when events after the end of the reporting
period should be adjusted in the financial statements. Adjusting events
are those providing evidence of conditions existing at the end of the
reporting period, whereas non-adjusting events are indicative of
conditions arising after the reporting period (the latter being disclosed
where material).
Key Definition

• Event after the reporting period: An event, which could be favorable or

unfavorable, that occurs between the end of the reporting period and the
date that the financial statements are authorized for issue.

• Adjusting event: An event after the reporting period that provides further
evidence of conditions that existed at the end of the reporting period,
including an event that indicates that the going concern assumption in
relation to the whole or part of the enterprise is not appropriate.

• Non-adjusting event: An event after the reporting period that is indicative

of a condition that arose after the end of the reporting period.
Accounting

• Adjust financial statements for adjusting events - events after the

balance sheet date that provide further evidence of conditions that
existed at the end of the reporting period, including events that
indicate that the going concern assumption in relation to the whole
or part of the enterprise is not appropriate.

• Do not adjust for non-adjusting events - events or conditions that

arose after the end of the reporting period.
Disclosure

• Non-adjusting events should be disclosed if they are of such importance that

non-disclosure would affect the ability of users to make proper evaluations and
decisions. The required disclosure is (a) the nature of the event and (b) an
estimate of its financial effect or a statement that a reasonable estimate of the
effect cannot be made.
• A company should update disclosures that relate to conditions that existed at the
end of the reporting period to reflect any new information that it receives after
the reporting period about those conditions.
• Companies must disclose the date when the financial statements were
authorized for issue and who gave that authorization. If the enterprise's owners
or others have the power to amend the financial statements after issuance, the
enterprise must disclose that fact.
IAS 39 - Financial Instruments: Recognition and Measurement

Outlines the requirements for the recognition and measurement of

financial assets, financial liabilities, and some contracts to buy or sell
non-financial items. Financial instruments are initially recognized when
an entity becomes a party to the contractual provisions of the
instrument, and are classified into various categories depending upon
the type of instrument, which then determines the subsequent
measurement of the instrument (typically amortized cost or fair value).
Special rules apply to embedded derivatives and hedging instruments.
Common examples of financial instruments within the scope of IAS 39
• cash
• demand and time deposits
• commercial paper
• accounts, notes, and loans receivable and payable
• debt and equity securities. These are financial instruments from the perspectives of both the
holder and the issuer. This category includes investments in subsidiaries, associates, and joint
ventures
• asset backed securities such as collateralised mortgage obligations, repurchase agreements, and
securitised packages of receivables
• derivatives, including options, rights, warrants, futures contracts, forward contracts, and swaps.
IAS 39
A derivative is a financial instrument:
• Whose value changes in response to the change in an underlying
variable such as an interest rate, commodity or security price, or
index;
• That requires no initial investment, or one that is smaller than would
be required for a contract with similar response to changes in market
factors; and
• That is settled at a future date. [IAS 39.9]
IAS 37 Provisions, Contingent Liabilities and
Contingent Assets
• The objective of this Standard is to ensure that appropriate recognition criteria and measurement
bases are applied to provisions, contingent liabilities and contingent assets and that sufficient
information is disclosed in the notes to enable users to understand their nature, timing and
amount.

• A provision is a liability of uncertain timing or amount.

• A provision shall be recognized when:
(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation.

• If these conditions are not met, no provision shall be recognized.

• A contingent liability is:
(a) a possible obligation that arises from past events and whose existence
will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity; or
(b) a present obligation that arises from past events but is not recognised
because:
(i) it is not probable that an outflow of resources embodying
economic benefits will be required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with
sufficient reliability.
Measurement
• The amount recognised as a provision shall be the best estimate of the
expenditure required to settle the present obligation at the end of the
reporting period.

• Reimbursement
Where some or all of the expenditure required to settle a provision is expected to be
reimbursed by another party, the reimbursement shall be recognised when, and only
when, it is virtually certain that reimbursement will be received if the entity settles the
obligation. The reimbursement shall be treated as a separate asset. The amount
recognised for the reimbursement shall not exceed the amount of the provision.

In the statement of comprehensive income, the expense relating to a provision may be

presented net of the amount recognised for a reimbursement.
Conclusion
Recognition and measurement of provision on trading activity
is established in IAS 39 and IAS 37. But, the presentation of the
loss in this case occurred in 2008 must be recorded in 2008
regarding to the IAS 10.

IAS 10: Non adjusting event (if material, must be disclosed in

note of financial statement).
Market Condition
The New York Times:
There is nothing true about reporting a loss in 2007 when it clearly occurred
in 2008.
Berate the Bank's management and auditors for apparently attempting to
"appease" investor and other parties by backdating the january 2008 loss.
The former member of FASB and IASB:
Bank's reporting of 6.4 billion euros loss was "inappropriate" and the
prominent bank was "manipulating earnings."
Sentiment note "This raises a question as to just how creative they are in
interpreting accounting rules in other areas."
What SocGen and its auditors have perpetrated would be regarded here
(the U.S) as the accounting equivalent of pornography."
Recommendation
Recommendation for Societe Generale

The causes of this fraud:

• Fraudulent position
• Lack of supervision
For the Auditor:
• This case reflects the inappropriate
decision and reasoning and resulting in
critics from many experts
• Auditor, as agent of compliance have to
hold their integrity and ethics to
protects stakeholder and shareholders
Recommendation - FASB and IASB
• A Canadian Journalist : “Tricks”, one of many others
• Another IASB : "Simply put, if you give management
and auditors the opportunity to obfuscate, they will
take it."
• The New York Times : "How well can international
accounting standards be policed in a world with no
international regulatory body?."
"The Beauty of Accounting: An Endless Contentious
Struggle Towards the Best Practice."