Citigroup in deferred tax accounting row

Accounting experts and analysts are arguing with the US bank Citigroup over whether it should set aside $50bn (£32.5bn) to cover its deferred tax assets, the FT has reported.

The move will reportedly reduce Citigroup’s capital buffer and weaken its balance sheet. Deferred tax assets amount to more than a third of the bank’s tangible equity and are the biggest held by any US company.

So far, Citigroup has rejected calls to reserve for its deferred tax assets, saying it will earn enough in the future to support maintaining the assets on its books. The bank accumulated the deferred tax assets in part because of its huge losses during the financial crisis.

According to accounting rules Citigroup has to be confident it will earn $99bn (£64.4bn) in taxable income during the next two decades to avoid providing for its deferred tax assets. The dispute has arisen because accounting standards on deferred tax assets are vague, stating that reserves are not needed if management believes it is “more likely than not” the company will earn enough taxable income in the future. However, given that the group’s pre-tax losses exceeded $60bn (£39bn) in 2008 and 2009, coupled with Citigroup’s own assertion that it was “very comfortable with the recording of our deferred tax assets,” some have said the bank is being “too optimistic”.

Lynn Turner, a former chief accountant at the Securities and Exchange Commission, said: “Citigoup’s position defies imagination and logic. Instead of talking about making money, what Citigroup ought to do is to reserve for at least part of the deferred tax assets and reap the benefit of reducing the reserves once it actually makes money.”

However Richard Bove at Rochdale Securities said he did not believe Citigroup’s accounts were “out of order due to a misstatement of its DTAs”.

The SEC looked into Citigroup’s deferred tax assets last year and requested the bank to explain its treatment. The SEC declined to comment on whether it was still pursuing the matter.