In announcing its annual results the banking giant presented its investment
business figures under embedded value criteria in addition to IFRS requirements.
Analysts backed the group’s move this week, saying that the IFRS valuation
methods were ‘misleading.’
The embedded value (EV) rules mean that
HBOS can provide more detail
on the value of contracts with future expected revenues.
IFRS only allows for the recording of the revenues once they have been
Ian Gordon of Dresdner Kleinwort said: ‘The reported numbers under IFRS are
misleading. The move to IFRS has been unhelpful. The issue is more damaging for
HBOS than for other banks because this part of its operation is growing very
fast. IFRS overstates the profitability of businesses which have a more mature
profile. It is inappropriate to punish businesses which are growing fast.
They’ve now had to go the extra mile in providing the disclosure and it’s a
significant change of perception.’
HBOS has said that underlying profit before tax for the UK investment
business under EV parameters was £262m higher than reported under IFRS and the
contribution from new business in the UK Investment arm was £474m higher than
reported under IFRS – the full EV contribution being £245m compared to a loss of
£229m under the IFRS basis.
The full EV basis, unlike the IFRS basis, recognises profits on new business
at the point of sale with the contribution from existing business only including
changes in the value of future cashflows compared to predictions.
Under IFRS, insurance contracts are accounted for under IAS 39. In relation
to UK GAAP, this delays the recognition of profit in respect of some investment
contracts leading to significant ‘losses’ for HBOS.
Deloitte technical partner Ken Wild emphasised the need for a happy medium to
‘I think it’s great that companies are deciding to disclose both, but it
questions the way in which standards such as IAS are devised where you have
fairly robust principles such as these. I think the most useful thing is an
understanding of both elements.’