Kashmir Kaur

This is difficult choosing: the value of your choices is measured differently? REFERENCED: "Picture." Photograph. How to Compare Roofing Estimates. Unknown. Mr. Roof Repair, 2010. Web. 14 Oct 2011..

Financial Accounting is not that geeky man recording small numbers with a fountain pen, it is a tabulation of transactions for mainly external stakeholders – whether investors, banks or the IRS. Yet, like your mum’s overcooked tuna bake, there are many ways to value assets or “things;” so the accounting world has a set of general rules to create consistency – GAAP. But what happens if one of those external stakeholders – the banks – is the very culprit of valuation inconsistencies?

The financial crisis in Greece is sending despair across Europe – but the problem arises when banks measure this despair differently. With Greece sinking towards insolvency and therefore not being able to fully pay their bonds, banks – such as BNP Paribas  and U.K.’s Royal Bank of Scotland – are forced to devalue their assets of Greek debt. What’s the catch? Each bank “devalued” their assets differently – some (BNP) are devaluing by the decreased market price (writing off 50% of their greek debt)  and others (UK RBS) are using their own models (writing off just 21%.) The problem? The banks are valuing these same assets differently, creating inconsistencies. Imagine being an investor trying to compare banks’ results – without knowing the true quality of assets on a banks’ balance sheet? Would you want to enter a competition to guess which jar has the most jelly beans when all the jars are different sizes or when all the jars are the same? Which begs the question: who really wants to invest in an inconsistently-valued Greece?

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