Barclays is going to report a profit in its forthcoming accounts. We know: it has already said so. And how did it achieve this feat? By abusive accounting, of course.
Sure it has written down some assets (although no one in the market seems to believe they have done it properly). But they've also used the rules of fair value accounting to write down their own debt too. As the Sunday Times notes:
In the second half of last year Barclays is likely to admit to write-offs of potentially £3 billion to £4 billion against the carrying value of assets and loans. However, it will set these off against a series of exceptional gains. There will be some £2.6 billion against a fair-value adjustment in bonds that the bank has issued. There will be a further £1.5 billion benefit from negative goodwill resulting from the acquisition of the US operations of the American investment bank Lehman Brothers.
In plain English, it means that its liabilities in terms of overvalued assets are matched by writing back other assets. It implies its underlying performance is strong and that the bank is still making good money. In addition to this, the Financial Services Authority has relaxed the tier-one capital ratio from 10% to 6%. This has created a £20 billion cushion to help Barclays weather the storm.
That is the reason why the bank is saying it doesn't need to raise additional capital.
Note though: Barclays owes exactly as much as it ever did. It's just used trickery to revalue its obligations. The situation will reverse as Barclays' debt approaches maturity. Today's profit will be tomorrow's loss in that case - meaning in my book that provision for that loss should be made now - completely negating this wholly false book keeping exercise.
This is an example of the misinformation that Sir David Tweedie and the International Accounting Standards Board promote under International Financial Reporting Standards and yet no one seems to be profiling him as a major contributor to the credit crunch. They should. He was the man who let these banks book profits they had never made. He was the man who let them book their securitisation off balance sheet. He was the man who therefore allowed the massive growth of the securitisation market.
He got a knighthood for that. Right now financial services knighthoods are the surest signs of who the villains are. Perhaps he, Fred Goodwin and the others who were lauded should be stripped of them as symbols of the contrition they should, but apparently do not, feel. But I can't see it happening.
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“abusive accouting” is an interesting concept. Do you plan to expand on what this means, or are you relying on overactive imaginations to join up the dots?
Alastair
I am obviously one of those with overactive imaginations because I whilst I reckon a set of accounts should tell it like it is, abusive accounting would mean telling it like it isn’t. Now whilst having an overactive imagination is undoubtedly a bad thing, having no imagination at all is also not too great either!
Alastair
James has got it
Why didn’t you?
Richard
Richard,
although no one in the market seems to believe they have done it properly
“Someone” in the market seems to believe they have done something properly today, the BCS share price is up 65+%.
Georges
Georges
So the hedgies bought short – having done an each way bet
Do you really think that changes anything?
Richard
Richard,
If one bought the stock last week and are up 65+% it does indeed changes things considerably for that individual.
This market is giving money away to those who are willing to take the risk, in a good way.
If you are looking for long-term: sell the pound, buy gold, and relax.
Georges
The concept of abusive accounting seems to be ever more prevalent, and to my untutored investors (not accountants) eye seems to stem from the balance sheet.
I have invested in businesses, and built and sold some and always its the balance sheet that causes issues is subject to manipulation. I really think its time that we accepted as it is presented today its not a document fit for purpose. After all if the balance sheet of bank created and audited as it is by the finest accounting brains cannot be trusted what can be?
So what can be done? Well a start would be to make it more dynamic, showing interest and capital going forward over the full period debt is outstanding or at least 10 years whichever is the shorter, shown against forecast profits over the period.
James. in what sense “tell it like it is”? I know of no accounting standard that talks in terms like this. Re your point about imagination I guess you are alluding to balance, but speaking professionally I don’t think imagination has much of a place in financial reporting – even in your “tell it like it is” world. Of course, Barclays was responding to the overactive imaginations that caused a rather large fall in its share price at the end of last week. I’m not sure how Richard infers what he does from their announcement – and it will be interesting to see both the published results they are referring to, and the audit report that goes with it.
Mark, I think you are misunderstanding the purpose of a balance sheet, although I guess if you have brought and sold businesses, or even invested in their shares, and made money, then I guess you at least get good advice from those that do? Not sure “fit for purpose” is fair – I’m no fan of Mr Tweedie, but he does al least have a clear and unabiguous view as to the purpose of the balance sheet. As to whether you can trust it? Would have to refer you back to those advisors again, but I am sure you are aware that the balance sheet is only a small part of understanding the value of a company’s shares!
Alastair
Come on – even Tim Worstall agreed I’d got this accounting right
As do the Sunday Times
If you don’t know that IFRS allow you to book a profit on the fall in value of your debt where have you been, given you’re an accountant?
Richard
I am sure I will eat my hat if the audited report for Barclays does not afford quite astonishingly idenitcal numbers to those issued and infered today.
If they dont I think the CEO and or CFO are likley to find themselves enjoying the less generous hand outs offered by Her Majestys Prison Service.
As stated audited accounts do not challenge or warn of risk, they record degrees of adherance with a set of rules, which in turn are theortical and lack practical rigour. I am sure Barcalys acconting tema probably knows the rules better than thier auditors.
Well, I said that you were describing what they were doing with the values of the bonds that they themselves had issued correctly, yes.
I just differed on what that meant. If we’re going to have mark to market then it’s necessary that they conduct these revaluations. For the holders of the bonds their value has gone down and they will be marking them to market. If we’re going to keep the accounting for the whole system in balance then there needs to be another entry somewhere, showing the other side of that loss that the investors are recording. That is, the profit (potential only, unless they start buying the bonds in below par, but then the losses to the investors are potential only if they intend to keep them to maturity) available to the issuer.
The only way I can see out of this is if we don’t have a mark to market system. Which I agree, Richard does often argue…..although I have to admit that I’m not all that sure. At some point we have to mark to market.
Alistair
I was being a little glib, yes I do understand balance sheets, and their central function in unifying a set of financial statements. My problem is that in modern business their role and importance seems very confused. For me this is at the heart of the problem, they are essential and yet management and investors and auditors seem to have very different and often divergent views of their purpose use and meaning.
Take for instance the problem of the balance sheet as a statement of the companies assets at a point in time. I wonder how much of the tangible and intangible value held on the balance sheet of Woolworths at the last set of management accounts was realised when everything was sold? Then look at banks, the assets and liabilities on the fixed rate mortgage books were perfectly matched in accounting terms but not in commercial commitment.
So I understand the process and maths that mean a balance sheet is important and that as part of a set of statements it can be illuminating, I just remain to be convinced that it reflects the real value of a company not least because in the case of even relatively modest sized operations there are so many variables used in its creation as to make it almost impossible to interpret realistically even with the notes to the accounts.
So I confess a love of cash. If more comes in than goes out over a time agreed between managers and shareholders it always seems to make people richer. Fluctuations in balance sheet valuations only consistently make advisers richer, and the odd snake oil salesmen who convinces people that the balance sheet is as good as gold in your hand, after all a cleverer man than you has signed off that it is!
I am certainly prepared to own up to not being an accountant. However the implication of some comments here is that accountancy is a close circle. Accountants prepare accounts according to rules they create but which have little relevance to anyone else. Any critique from outside the profession which doe snot use their language can be written off. My comments failed to conform to any recognised accounting atandard and could then be dismissed. This is like a kind of priesthood of the worst sort. The effects of accounting policies can certainly make themselves felt on the lives of those in the world outside accounting and so I am sorry Alastair, but accountants cannot merely dismiss any comments from outside the priesthood.
Well said James
Accountants forget that their job is to communicate information, not hide it
Richard
I was thinking a little more about yesterdays exchange and it reminded me of a conversation I had a while ago with senior executive in the finance section of UBS, of whom I have had acquaintance for a few years.
She was very proudly relating to us how UBS was being robust with its treatment of its CDO position. I cannot remember the exact numbers but broadly the story went like this:
We have not just written down our exposure at UBS as you saw today we took and actual loss in selling $15bn of debt to Blackrock for $11bn. This is real accounting and which brings real credibility to our balance sheet.
I had had cause to read the paper following the deal, and my immediate questions was how could the balance sheet position have been improved as UBS had leant Black Rock $10bn to buy the CDOs.
The response I got was telling. “well of course that’s a better position we no longer own the CDOs Black Rock does.”
To an everyday run of the mill sort of guy this seems at odds with reality. Surely if the asset was not viewed as being worth much how does transferring it another person to manage make it more valuable? I would argue the balance sheet for an investor is worse, they still effectively own the assets (they bear the risk on a default through the loan) but now they have no ability influence the management team who are managing the asset (if asset it is)
To me this illustrates a simple fact. Complex number manipulation like this adds nothing, accounting is focussed too much on rules and too little on practical impacts and outcomes.
I think there is an interesting debate to be had about IFRS and the purpose of a balance sheet, not least because of the problems in trying to make it suitable for all the different uses that balance sheets are put to, and not least because of the conflict with the P&L. I think there is an equally interesting debate to be had about mark to market accounting. And I think the current problems are relevant to that debate. BUT I don’t however think it is appropriate to villify Barclays in having that debate.
Richard, I am prepared to accept your credentials as an accoutant, whilst disagreeing with (some of) your analysis. In attempting to question my credentials I think you are not upholding the high standards you seem to require of others.
James, I think you highlight the problem of non accountants trying to debate something without having the requisite knowledge. It is much too easy to fall into the “it stands to reason” trap. Unfortunately financial statements do not “stand to reason”. They are complied according to the narrow remit provided by the ever more complex accounting standards. Personally I agree with your sentiments – I see no reason why we should not be preparing accounts that a layman can make sense of, but unfortunately the law precludes that.
Tim, there is only one important mark to market, and that is when you actually go to market. I saw nothing wrong with the old impairment rules – I think we are guilty of fixing something that was not broken – to the detriment of users of accounts.
Alastair
Come, come!
First you patronise James.
Then you say I must respect you becasue you are an accountant.
Then you argue accountants should not be on a pedestal.
What are you trying to say?
You’re really being utterly inconsistent and incoherent
Are you surprised I might challenge you?
Richard
Of course the problem with not marking tradeable securities to market is that otherwise profit is manipulated. Deciding to hold on to loss making securites and hiding the losses whilst selling profitable securities and booking the profits is hardly a good way to account – albeit it is the old way. The same the other way around applies to debt.
Alastair
I guess from your generally measured tone the comment “non accountants trying to debate something without having the requisite knowledge” was not seeking to inflame or patronise but rather highlight (tounge in cheek) the sheer nihilism of having an expensive process which does nothing to enlighten anyone except the people responsible for the process?
Even this would be acceptable if the fellow professionals, I think we called them advisors earlier, could also accurately interpret them. Where were the auditors declaiming the weakness in the UK banking sector, or indeed those doing the same in Iceland? Or were they too busy developing mark to market rules.
In respect of the later I rather agree with your recent point a market price is what someone is prepared to pay for something, its value on the other hand is what it can generate in cash. So a not in default bond paying 4% is worth either:
Nothing because no one else will buy it because the market has no appetite
A computed sum equal to the yield to maturity
A computed sum equal to the yield to an estimated point of default
I would see either of the last two are more relevant than the first, is that an unreasonable assumption?
Hi Mark, I think you have understood my comments in a way that Richard chose not to!
To be fair to auditors they have the unenviable task of establishing whether financial statements have been prepared in accordance with the relevant laws, and show a true and fair view. I think that is challenging enough even without the current problems.
Thank you Richard for putting what started with the concept of ‘creative accounting’ into a nutshell whilst hitting the nail on the head. At last, someone who can see what is really going on.
Without wishing to appear patronising, and I apologise if it is taken that way by some, to my mind, all those who don’t or can’t agree are either using the same tactics themselves, are in denial or simply do not have the knowledge and insight to identify the truth when they see it.