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Ocena standingu instytucji finansowej na podstawie jej sprawozdań finansowych
Marta Kawecka
Abstract
Counterparties of financial institutions, in order to calculate the price of the product or the required level of collateral, need to assess their standing. The purpose of this article is to present possible causes of incorrect assessment of the financial institution’s standing based on the data publicly disclosed by the institution.
Such causes may result from adopted financial reporting standards (IFRS, US GAAP or other), which differ in matters that are crucial for reporting of the financial institution’s position such as offsetting financial assets and financial liabilities (otherwise known as netting) or derecognition of financial assets, which determines the accounting for repo transactions. This lack of convergence reduces the comparability of financial statements and requires thorough accounting knowledge to understand and eliminate the impact of these differences on the assessment of the financial standing.
The financial institution may also take deliberate actions to present its financial results in a particular way. Transactions may be designed and structured in order to ensure the expected presentation in the financial statements, positive impact on the financial ratios etc., in line with the financial reporting standards, but against the economic substance of a transaction.
Such mechanism has been implemented by Lehman Brothers, who focused on reducing their publicly disclosed leverage ratios. Lehman Brothers employed transactions called “Repo 105” and “Repo 108”, and accounted for these transactions as “sales” under US GAAP, as opposed to financing transactions, based upon the overcollateralization or higher than normal haircut. By recharacterizing the transaction as “sales,” Lehman temporarily removed securities from its balance sheet, to improve their leverage ratio and created a misleading picture of the firm’s financial conditions. Moreover Lehman Brothers did not publicly disclose its use of Repo 105/108 transactions, its accounting treatment for them, volumes and their impact on the firm’s ratios. SEC, FED and rating agencies were also unaware of Lehman’s Repo 105/108 transactions, while by applying them, Lehman temporarily reduced
its net balance sheet at quarter-end by approximately $38.6 billion in the fourth quarter of 2007, $49.1 billion in the first quarter of 2008, and $50.38 billion in the second quarter of 2008.
After “Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner Report” had been released in March 2010, SEC made inquiries of about two dozenfinancial firms to determine whether their repo activities over the past few years had been similar to those of Lehman. Moreover the Financial Accounting Standards Board, which sets U.S. accounting rules, decided to change repo accounting under US GAAP effective from 15 December 2011, making a significant step in the IFRS and US GAAP convergence project and improving the comparability of financial statements.
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