BBC news reports on Royal Bank of Scotland's results this morning as follows:

Royal Bank of Scotland (RBS) has announced losses for 2009 of £3.6bn, after struggling with billions of pounds of bad loans.

The figure is lower than the £5bn loss many experts were expecting and is well below the £24bn it lost in 2008.

The UK taxpayer owns 84% of RBS after the government bailed out the bank at the end of 2008.

RBS is the second major UK bank to report 2009 results, after Barclays announced record profits of £11.6bn.

This is a pretty fat-headed commentary from the Beeb here. There are two kinds of loss at play here, which we'll call cashlike losses and non-cashlike losses. Needless to say, non-cashlike losses are much less 'serious' than cashlike losses.

Non-cashlike losses occur when a business has to write down an asset that it had bought with something other than cash. Usually these occur when a business buys another business with its own shares. Without getting too technical accountingwise, the acquiring business values everything it's paying over (usually a big load of its own highly-valued shares) and everything it can recognise in the acquired company. The difference between the two is called 'goodwill' and is stuck on the group balance sheet of the acquiring company. Why do we always get a balancing number? Because there are usually things that accounting standards don't let you recognise as an asset but which have value, such as acquired research projects, you usually get goodwill in a business purchase, and it's usually a positive number. And fairly often a big one.

Back to RBS. RBS, you'll recall, paid a vast amount for ABN Amro thanks to Sir Fred's frolic. Last year's loss was swelled by a writedown (we call it an 'impairment') of goodwill of £16 billion. It's bad, for sure, but it's not that bad. A lot of it is market downturn, so RBS has finally had to face up to Sir Fred overpaying for ABN Amro, but it did so with its own shares, which were inflated at the time.

The equivalent goodwill impairment figure for 2009 was a mere £363 million. The rest is due to cashlike losses. These are the bad guys. These are assets that the business expected to turn into cash but it has had to devalue. For example, loans that the bank has made to customers or businesses but which will now not be repaid. In 2008, RBS impaired £7.4 billion of loans. Yet in 2009, we learn that RBS impaired nearly £14 billion of loans - almost twice as bad.

The bank did substantially better on its trading activities - £3.8 billion of income compared to a loss of nearly £9 billion in 2008.

But to report all this as "a £3.6bn loss is better than a £24bn loss" is just plain silly.

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Filed under: Accounting 101, Current issues with tags banks, bbc, goodwill, impairment, royal bank of scotland