PracticeConsultingBusiness – Northern Rock accounts change criticised

Business - Northern Rock accounts change criticised

Northern Rock has been slammed by analysts and accounting experts over an accounting policy change which is expected to boost its profits, writes Lucinda Kemeny.

Under the change, aimed at smoothing earnings, the bank will write off incentivised mortgage products over their redemption period, rather than over the previous maximum of three years. The new policy would have boosted last year’s profits by £15m to £217m. Analysts said it would also increase 1999 profits.

The bank claimed this week it was reacting to growing demand for short-term incentive products. The extended amortisation would, it said, allow it to remove the volatility of earnings and help it meet customer demand for new products.

But one analyst rejected the bank’s reasons because the change inflated profits. ‘They should write off these incentives in the first year. All they are doing is buying market share with incentives which are being hidden for a longer period,’ he said.

The analyst admitted the move would smooth profits, and added that the underlying problem was that the UK mortgage market had too many players taking too little business. Such incentivised products should therefore be reflected up front, he argued.

ACCA technical officer Richard Martin also questioned the switch but on the basis that Northern Rock’s reasoning may not strictly abide by ASB guidelines governing when a company should change its financial reporting.

He said: ‘There needs to be consistency in accounting treatment; smoothing profits does not seem like an ideal reason for a change in policy.’

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