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On July 22, the French wine lobby released a strategy paper in support of a
Ministry of Agriculture initiative to have French wine legally redefined as
a "nutrient" - that is, as a food product with nourishing components
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There's lots of food value in those grands crus, for sure. But the
motivation to rewrite reality is clearly commercial: An industry with a
product glut and reduced consumption, at home and abroad, seeks a new
definition to obtain relief from anti-alcohol health warnings on its labels
and restrictions on its advertising.
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French academics pioneered the field of semiotics, the analysis of the
meaning of signs in language. French conversation and debate are pervaded by
the exploration of theory through flexible adaptation of the facts. So it's
not strange to find in France the intellectual agility of this rhetorical
panache.
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This attempt to legislate that "wine is food" illustrates a European
propensity to modify reality to fit the needs of the moment, which bears on
a number of live issues in financial reporting.
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The first example comes out of Italy, and the troubled finances of its
beleaguered soccer clubs, whose top teams lost a total of E948 million, or
$1.14 billion, last season. In February the Italians passed the "salva
calcio" (save football) law, to permit professional sports clubs to amortize
the cost of player contracts over as much as ten years - irrespective of the
length of the contracts themselves, which typically average two to three
years.
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With player salaries eating up 85 percent of revenue, the bookkeeping effect
of this law would be immediate and dramatic. Hypothetically, E10 million of
amortizable contract costs, spread over ten years rather than two, would
reduce the first-year charge to E1 million from E5 million - and so bump up
net income by the difference, or E4 million.
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This current benefit would carry with it a corresponding back-end burden, of
course. The annual charge of E1 million would persist for the whole decade,
long after the players had left the field.
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This might not matter so much in a private-company environment. But Prime
Minister Silvio Berlusconi owns AC Milan, and three other top Italian clubs
are public companies with shares traded on the Milan stock exchange.
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Little wonder that in July, the European Commission gave the Italian
government two months to reverse this law that would mask the true cost of
players' wages.
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Second, and of broader interest and application, the same politically
motivated mindset pervades the infighting over accounting standards for
derivative financial instruments.
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The International Accounting Standards Board has labored to issue global
standards that are intellectually sound, politically acceptable, and
adoptable as an alternative to the otherwise dominant American standards.
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But European banks and other institutions have successfully lobbied the
European Commission, which - in contrast to its rigorous position on Italian
soccer accounting - is ready to block application of key aspects of the
IASB's proposed guidelines..
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The IASB favors the U.S.-style "mark to market" approach to derivatives, on
the basis that changes in market value should be reflected immediately. The
European banks, however, say management should have discretion to report
changes when they do the least damage to earnings.
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This approach could be noncontroversial if any changes are smooth and
gradual. But events - such as the Mexican peso devaluation and the Russian
bond default - show that dramatic crises can and do happen.
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Accounting rules that try to assume stability cannot forestall historical
reality, any more than long-term contract accounting can extend a player's
career on the pitch. Nor is the essential quality of a wine-seller's
inventory transformed by relabeling.
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As a trial lawyer, before moving on to electoral politics, Abraham Lincoln
admonished jurors that their perceptions should not be shaped by misuse of
language: “How many legs does a dog have, if you call its tail a leg? Four.
Calling a tail a leg doesn't make it a leg.”
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Consumers probably know what wine is, no matter what the label says. But in
making decisions for the pocketbook rather than the palate, investors - in
Italian football clubs or European banks or elsewhere - look to their
politicians and regulators for guidance. They deserve responsible
convergence between disclosure and reality.com.
The
traditional summer holiday in Europe carries the risk that important news
can slip by. The news clippings for July included a little-noticed example
of the European capacity for separate worlds of language and reality, which
may or may not be aligned.