Accounting and The Gold Price - Fair Value - Valuation Problems to be Expected

Summary

As the price of gold rises on a week on week basis  one can expect to see ramifications in the accounting arena. There are a number of  investment products sold in the market which are linked to the price of  gold and its physical holding. In this analysis I look at the nature of  problems to be expected  - especially in relation to fair value disclosures.

Analysis

1. The  referred article speaks of the price of  gold at a new high and further expected price increases. It also says that the physical holding of gold by investors in gold linked funds has increased.

2. This brings to my mind  a  number of new situations which auditors, analysts and accountants will have to face while evaluating the financial statements of  entities which include:

• The basis of valuation of  the instrument linked to the gold price
• The purity of the gold held in the denominated instrument
• Whether the gold is in a  form which can be easily traded
• The downside risk in the gold denominated security
• The relationship of  the gold denominated security to interest rates
• Currency risks
• The exchange on which gold is traded and its trading rules
• Whether the ETF actually holds gold in respect of the securities issued by it

3. The above are some of  the factors should be considered when evaluating any gold linked ETF  or  security.

4. The fair  value of  gold or  of  securities  linked  to the metal would be difficult to arrive at in a market  where the price is constantly increasing week after week. Auditors would have a difficult time in arriving at  what  should  really be a fair value in respect  of  the metal. Because one must remember that the price of gold can  go down just as it  can go up.

5. Arriving at  the fair value of  such instruments would in my opinion be a major challenge for auditors and accountants alike.