Posts tagged 'Accounting'

DVA, CVA and FVAaaaaaaargh!

Much accounting intrigue in JPMorgan’s recently-released fourth-quarter results.

According to the bank, it incurred a $1.5bn hit to net revenue after “implementing a funding valuation adjustment.” Read more

Zions Bancorp and some biblical bank accounting

 

We haven’t forgotten who keeps us in business,” reads the slogan on the website of Zions Bancorp, Utah’s biggest bank. Read more

Goldman’s not-so-great currency caper

Alternate title – Did Goldman Sachs lose $1.3bn in currency trades in the third quarter, or not? Read more

Accounting convergence – lost?

Enjoy! Some 148 pages of accounting-for-loan-losses reading:

It’s the IASB’s latest version of its attempt to make banks recognise “lifetime expected” losses on loans or bonds as soon as there are “significant” signs of a credit going bad, instead of waiting until it’s too late and risking a sudden wave of defaults. Read more

Goodwill for all European companies

The European Securities and Markets Authority has squinted at the amount of goodwill on the balance sheets of 235 listed European companies, and it’s not happy with what it found. Not only were the companies seemingly too optimistic, given prevailing economic conditions, but some of their disclosures contained insufficient detail. It’s the sort of thing that makes it hard for investors and analysts to understand what’s going on.

That’s the boring explanation. Let’s go over it again, but this time with pictures! Read more

Sales, repurchases, and duct tape

Cast your mind back to the Valukas report into the collapse of Lehman Brothers. Back to Repo 105, and the immortal lines, “It’s basically window‐dressing. We are calling repos true sales based on legal technicalities.”

If it could be called a sale, it could be removed from the balance sheet whenever a reporting date — and inconvenient questions about leverage — threatened. Read more

Operating leases: the old skool of off balance sheet vehicles

Operating leases may not sound all that sexy, but they are a great way to get liabilities off balance sheet. Even better, loads of companies use ‘em! Everyone does it, from airlines to clothing stores, so no need to feel like the odd naughty one out. All it takes is a little structuring to ensure that a finance (aka capital) lease — which does significantly raise liabilities — is booked as an operating lease, keeping debt levels down.

Why then do accounting standard setters want to spoil the parrr-tay by requiring operating leases to come back onto balance sheets? Read more

Overly processed accounting — who eats this stuff?!

Heavily processed foods are generally unhealthy. Those looking after their waistline may wish to read ingredients lists and follow food journalist Michael Pollan’s advice: “Don’t eat anything that your great-great grandmother would not recognize as food.”

Could the same be said of financial accounts? That is: “Don’t trust anything your grandparents wouldn’t recognise as a justifiable line item.” Read more

‘The new form of corporate alter ego’: SPEs, encore

We qualify ‘new’. This paper is a full 30-year history of the special-purpose entity in banking, from Mike Milken to the Abacus CDO, via Bistro — up to the denouement of FAS 167.

Penned by William Bratton and Credit Slips blogger Adam Levitin, it also points out that corporate law continues to lag the accountancy profession in understanding the implications of SPEs. That weakness is important when the original purpose of many SPEs — for banks to replace equity with contracts as a means of controlling assets taken off-balance sheet, in order to gain relief from regulatory capital — is as relevant as ever. Read more

State-backed bond-buyers?

It’s been a while since FT Alphaville looked at ICO, or the Instituto de Crédito Oficial.

This is Spain’s state-owned lender for ‘any economic activity which, on account of its social, cultural, innovative or ecological significance, merits promotion and development.’ Read more

‘If this is going to unravel…’

Oh, those international accounting standard-setters. Such drama queens.

On Wednesday, the International Accounting Standards Board (IASB) and its US counterpart, the Financial Accounting Standards Board (FASB), held a joint meeting to discuss impairment. Read more

Goodwill to all men, and Microsoft

Microsoft posted the first quarterly loss, of some $0.06 per share, in the company’s publicly-listed history on Thursday. Its flagged $6.2bn writedown of goodwill on the acquisition of aQuantive got the blame.

(Actual underlying earnings were $0.73 per share, while net cash generation is worth highlighting: $31.6bn) Read more

Accruing an old lady

The UK’s Office for Budget Responsibility is in desperate need of a graphic designer…

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Angels and debtors

Sovereign deficit du jour (all figures in euros unless stated otherwise):

The consolidated financial statements of the Holy See for 2011 closed with a deficit of 14,890,034. The most significant items of expenditure were those relative to personnel (who as of 31 December 2011 numbered 2,832) and to the communications media considered as a whole. The result was affected by the negative trend of global financial markets, which made it impossible to achieve the goals laid down in the budget. Read more

“They haven’t got a handle on what is happening in the Länder.”

We take our headline from Sharon Bowles MEP.

The Member of the European Parliament was talking to Public Service Europe about this ominous move in transparent sovereign accounting: Read more

Accruing better sovereign credit

Here’s a distinction you tend not to see on the front pages of the sovereign crisis…

Cash-based sovereign accounting: recognising a cost only when cash changes hands. Accrual-based: recognising a cost when it’s incurred in the first place. Read more

Sovereign debt stats in the stocks

It’s all about stock-flow adjustments, or SFAs — the curious cases when a government’s stock of debt increases without a corresponding change in its deficit to explain it.

Attached to its most recent release on EU debt and deficit numbers, Eurostat has penned quite an interesting note on how these SFAs work (while pointing out that SFAs “have legitimate accounting explanations”). Hat-tip the WSJ’s Charles ForelleRead more

The (crumbling) walls of Nama: another Irish accounting reel

God, but Ireland must simply hate Eurostat. The pesky statistics agency keeps forcing it to recognise all of those expenses it would otherwise prefer to ignore.

And the agency is at it again. In a report released Monday Eurostat announced that Ireland was the proud owner of the biggest budget deficit in the euro area in 2011 – a deficit inflated by capital injections into the country’s broken banks. Read more

Accounting for credit risk before the crisis – a case of a gateway drug?

“The question is,” said Alice, “whether you can make words mean so many different things.”

In a recent Alphaville post, I made the claim that if the monolines had been required to mark the credit risk that they had taken to market, they would not have played such a prominent role in the financial crisis. Here I want to provide some support for that claim. Read more

Now you see the promissory notes in the deficit, now you don’t

“We’ll avoid the accounting implications of this deal, though we think it might be an interesting study,” we said last week of Ireland’s circuitous non-deferral deferral of a €3.06bn cash payment to a dead bank under the infamous promissory notes.

Oops. Read more

Groupon in accounting mess shocker

It is, at pixel time, getting quite late on Friday in the States.

What better time for Groupon – the business school accounting cautionary tale masquerading as an online discount deals-maker – to slip out an earnings revision accompanied by a “material weakness” in its internal controls. Just six months after its going public. Read more

Now you see the headline fiscal deficit, now you don’t

So, in case you missed it, the IMF released an excellent, pithy staff note on ‘Accounting Devices and Fiscal Illusions’ this week – all about book-cooking of sovereign debt stats.

It touches on almost any accounting trick you can think of, where the effect is that ‘this year’s reported deficit is reduced, but only at the expense of future deficits,’ as the IMF note says. ’The result is that the reported deficit loses some of its accuracy as a fiscal indicator,’ it drily adds. Read more

Plus ça (accounting) change at Goldman

What’s this? Something you haven’t seen before in Goldman Sachs’ results?

Net revenues in Investing & Lending were $2.14 billion for 2011. Results for 2011 included a loss of $517 million from the firm’s investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC) and net gains of $1.12 billion from other investments in equities, primarily in private equity positions, partially offset by losses from public equities. In addition, Investing & Lending included net revenues of $96 million from debt securities and loans. This amount includes approximately $1 billion of unrealized losses related to relationship lending activities, including the effect of hedges, offset by net interest income and net gains from other debt securities and loans. Results for 2011 also included other net revenues of $1.44 billion, principally related to the firm’s consolidated entities held for investment purposes. Read more

Is Basel 2.5 hitting the bond market?

What can be confusing about the carnage in eurozone sovereign bond prices, is that there are so many factors at work all pushing the same way.

There are technical and fundamental factors on top of the blind panic and fear. And that’s not all. There are a number of regulatory factors too, and it’s these demons of our own design that FT Alphaville would like to discuss with you. Read more

Barclays asks for fair treatment on fair value accounting

Barclays’ finance director has called for an overhaul of “opaque and complex” accounting rules that artificially boosted the profits of big European and US banks by billions of pounds in the third quarter of this year. In a letter published in today’s Financial Times, Chris Lucas said the requirement for banks to adjust their figures to reflect the market value of their own debt was widely believed to distort their actual profits. (The fact that banks elected to use this accounting method rather than accrual accounting isn’t mentioned, an area we discussed in this FT Alphaville post.) From the gallant letter: “We urge the European Commission, the IASB, regulators and other interested parties to consider taking the straightforward step of amending current requirements in IAS 39. Addressing this issue will improve investor confidence and increase transparency in financial reporting by banks. We look forward to being able to adopt the new rules as soon as possible.”

  Read more

Goldman Sachs and Morgan Stanley reconsider marking-to-market, says report

Mark-to-market accounting for financial assets has caused large fluctuations in profit and loss accounts for both Goldman Sachs and Morgan Stanley due to volatility in markets. While this would have been par for the course for broker dealers, the two firms became bank holding companies at the height of the crisis. Their peers within this group, such as J.P. Morgan Chase and Wells Fargo, account for less than half of their assets using mark-to-market, making their earnings less prone to swings. By contrast, Goldman Sachs uses mark-to-market for 97 per cent of its assets, the WSJ reports. Both former broker dealers are now contemplating a move away from mark-to-market to historical cost accounting for some of their assets, such as loan commitments. Regulatory approval isn’t needed for such a change which could impact their accounting results as early as the first quarter.

Find out what credit adjustments can do for you

Valuation adjustments were the hot new item during New York bank earnings week.

Everywhere we looked, bank CDS spreads were widening, leading — paradoxically — to a positive adjustment to earnings. Read more

Greek bond accounting, encore (et enfin?)

Or, more fun with Greek bond impairments as Rome (or Athens) burns.

BNP Paribas has sold billions of euros of Italian and Spanish bonds, with a few (€362m) losses according to its Q3 2011 results. That’s a huge move. Though the bank’s impairing of its Greek bonds is as interesting as ever. ING also wrote down its holdings of Greek debt today. Read more

Building a better bank recap, discount curve edition

At some point on Wednesday, eurozone governments will say they want banks to find an unspecified amount capital, based on revised sovereign haircuts which… we still don’t know a lot about.

We know that sovereign bond positions will be marked down, or up, according to market values. (When the values will be taken, we don’t know either. Imagine marking five-year Italian debt at dates before and after this summer’s ECB intervention, for example.) We know at the very least that this all fits into a 9 per cent core tier one capital ratio target. Read more

The pictorial UBS beat

UBS beat profit forecasts with their Q3 results on Tuesday, coming in with a SFr 1.02bn ($1.13bn) of net profit.

In the absence of unauthorised gains to offset them, unauthorised (er) losses from the trading scandal cost the group SFr 1.85bn. All more or less as expected, and in a tough market environment (click to expand):