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05 Nov 2010
RBS POSTED a loss in Q3 that its chief executive attributed to accounting rules obscuring improved performance at the bank. RBS took an £858m charge on the fair value of its own debt.
The bank also suffered an £825m charge on the fair value of its government-backed insurance policy the Asset Protection Scheme (APS). The APS is structured as a credit derivative, and movements in the fair value of the contract led to the charge. The value fell due to tightening credit spreads across the portfolio of assets covered by the scheme.
Further reading
RBS' core operating profit for the period stood at £1.7bn, but posted a loss of nearly £1.4bn before tax.
Chief executive Stephen Hester (pictured), a former FD at Abbey National, said that accounting had covered up the improving operating performance at the bank, reported Sky News.
"The accounting treatment of some balance sheet items is volatile and can sometimes obscure our underlying story," said Hester.
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Fair value hit on own debt
This is the counterintuitive result of an improvement in RBS credit rating, leading to a larger fair value of their debt, but recorded as a loss in the their P&L a/c. A good example of why the new IFRS 9 standard requires fair value gains and losses on an entity's own debt to be passed through Other Comprehensive Income. But RBS, in common with many entities in the EU will not be able to use the new standard until at the earliest next year, or even later, when the EU gets round to endorsing it. So much for a level playing field, where the rest of the world gets to use a much improved standard, but not any of the listed companies in Europe.
Posted by: Ian Charles, 05 Nov 2010 | 18:41