Accounting News

Monday, May 7, 2012
Fair Value Accounting for RBS

The Royal Bank of Scotland Group (RBS) has issued a quarterly loss of $2.46 billion. This is compared to a loss of $854 million for the same period last year. The loss is largely from its fair value accounting of its $4 billion in debt. Without the accounting change the bank would have posted a pre-tax profit of $1.78 billion.

The bank is complaining about the new accounting rules in the International Financial Reporting Standards (IFRS). The rule requires the bank to adjust earnings to show the cost to buy back their debt. The say this leads to poor performing banks to have an decrease in the value of the debt and thus decreases the expense. The opposite is true of a well performing bank.

This rule as lead to large quarterly swings in the profits reported by banks. But it is expected that the swings will even out over time based on the accounting models. The International Accounting Standards Board (IASB) has approved the new rule but is has not been put into effect in every European country.

While it may be a change for the executive team of the bank it is poor to blame the accountant. Accounting is designed to illuminate the truth. This reveals how volatile the market for bank debt is. A good manager should learn to mitigate the volatility for their investors and shareholders.

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