Experts dismiss RBS account ‘distortion’

SENIOR ACCOUNTANTS have hit back at MPs’ concerns over RBS’s accounting under International Financial Reporting Standards.

The bank was accused of using IFRS to massage its accounts in a letter sent by Steve Baker MP and former Tory front bencher David Davis. In it, they pointed out that RBS valued its losses at £32bn whereas the government’s Asset Protection Scheme (APS) estimated them at £57bn.

Experts have said comparing the two figures amounts to comparing apples and oranges, calling the letter “very poorly researched”.

The APS underwrites a number of RBS liabilities, including loans, derivatives and assets available for sale. The protection is in two parts: as a financial guarantee against loans such as mortgages; and as an insurance policy against asset losses. This means the numbers it represents are effectively a combination of two things – products at amortised cost and those at fair value.

For this reason, RBS’s losses (in effect, its insurance policy) are calculated by APS on a different basis to the bank’s accounting, making the two figures non-comparable.

Critics said that IFRS nay-sayers – who argue that the global standards do not allow prudence through accounting for expected losses – are ignoring the fact that UK GAAP worked in exactly the same way.

Both frameworks call on companies to report incurred losses only, and this should not prevent company directors from discharging their fiduciary duties by making prudent accounting decisions if they fear significant future losses.

Commentators dismissed the assumption that UK GAAP would give rise to substantially different accounts, nevertheless, the International Accounting Standards Board is currently moving towards an expected rather than an incurred loss model.

The letter, written by banking expert Gordon Kerr of Cobden Partners, claimed IFRS is at fault but that RBS had applied the rules “more extensively” than other European banks. It is questionable whether or not standards can be applied to differing extents but it is true that the global rules are principles based: this requires the use of judgement and companies are free to estimate more or less conservatively.

Kerr said, when it comes to the issue of incurred and expected loss, “the IASB seems to have become confused to the point of incompetence”, adding that the consultation around the relevant accounting standard – IAS 39 (IFRS 9) – did not make it clear whether an incurred or an expected loss approach was required.

“It may have been that error that led to so many failing to spot that IFRS did not comply with either the Companies Act or even any commonsense accounting standard,” he concluded.

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Fiona Westwood of Smith and Williamson.