Last week, we revealed a significant discrepancy between the Greek government’s net debt as reported by the International Monetary Fund’s World Economic Outlook database and what you’d get if you replicated the IMF’s standard methodology for netting out “financial assets corresponding to debt instruments” using data published by the Bank of Greece.
Neither the IMF nor the Bank of Greece had responded to our requests for an explanation of the discrepancy at the time we wrote our original post, nor did either institution respond in time for our follow-up discussion of the Greek government’s equity portfolio. Four days after we’d emailed our original question (while we were on holiday) we finally got some responses. Read more
According to the International Monetary Fund, the Greek government’s financial assets were worth around €3bn in 2015, or less than 2 per cent of GDP. That’s what you get if you take the difference between general government gross debt and net debt, as reported in the latest version of the World Economic Outlook Database.
Yet according to our independent analysis of data from the Bank of Greece — and using the IMF’s preferred definitions of what should and shouldn’t be counted — the Greek government’s financial assets appear to be worth around €30bn in 2015, or about 16 per cent of GDP. Read more
Time is a flat circle, which is why the Greek government is set to run out of money before debt payments are due to the European Central Bank in July — just like last year, and despite last summer’s supposed deal between the Greek government and its various “official sector” creditors.
As before, the immediate cause of this latest crisis is the persistence of disagreements about the size of the budget surpluses (excluding interest) the Greek government is expected to generate, the specific “reforms” the government needs to implement, and the need for debt relief. The fundamental cause, however, is that the Greek government can’t raise money from the private sector at reasonable rates.
Why? Read more
The invention of modern accounting in Renaissance Venice was arguably one of the prerequisites to the development of capitalism, so it’s interesting to discover that Chinese merchants developed methods distinct from those employed by their European counterparts that nevertheless made it possible to run successful and growing businesses.
That knowledge comes to us from scholars at the Chinese Academy of Social Sciences and the London School of Economics, who recently found and dug into a remarkably complete archive of business records going back to the late 1700s. This is far from the first study of Chinese accounting but it is the first comprehensive look at a firm that was run by people who probably never encountered European bookkeeping techniques. Read more
Citi analysts have read 38 European banks’ annual reports for last year.
People who value their sanity are not supposed to do that. (HSBC’s 2013 report, all 590 pages of it, is pictured below.) So it’s interesting to note what Citi found. Read more
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
“We haven’t forgotten who keeps us in business,” reads the slogan on the website of Zions Bancorp, Utah’s biggest bank. Read more
Alternate title – Did Goldman Sachs lose $1.3bn in currency trades in the third quarter, or not? Read more
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
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
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 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
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
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
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
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
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
The UK’s Office for Budget Responsibility is in desperate need of a graphic designer…
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.
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
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
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 Forelle. Read more
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
“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
“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
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
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
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.
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’ 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.”