You have just had to announce a profits warning or, worse still, just announced an unexpectedly poor set of results and you return to your desk to hear that your company's debt rating has been reduced.  Not a happy picture, but, wait a moment, in walks your financial accountant to say that as a result of the credit downgrading the fair value of that debt instrument you issued last year has plummeted and you have to book a multi-million pound gain to your P&L.

It is a crazy world at times, isn't it?

The accounting, if that is what you can call it, described above is what is required under the current international standard, IAS 39, but maybe not for much longer.  After much deliberation the IASB seems to be finally getting to grips with this issue and has issued a consultation paper 'Credit Risk in Liability Measurement' which lays out the arguments for and against including credit risk in the measurement of liabilities.

The consultation period is open until 1 September 2009 and if you have any thoughts then I would be glad to hear them before we finalise our response.  My initial thoughts are that the gain that arises in circumstances like those described in the first paragraph should be held in reserves as an unrealised gain until such time as the gain is realised through the buy-back at a discount of the debt.