Not content with having a go at Barclays, Pirc is now taking pot shots at Standard Chartered and my old firm, KPMG:

KPMG IS THE latest Big Four firm to face criticism from shareholder governance group Pirc, which is calling on shareholders to vote against its re-appointment as auditors of Standard Chartered, Accountancy Age has learned.

The shareholder governance group is urging institutional investors to vote against the bank's annual report; auditors and audit committee chair Rudy Markham because it claims it has failed to to provide a "true and fair view" of its financial position.

In the case of Standard Chartered, Pirc is claiming that the bank's overstated profits include bonuses of $828m that have been deferred but not expensed, and provisions for bad debts that amount to $2.8bn.

Now, I'm no particular friend of the Big 4. But I'm afraid to say that Pirc has got it horribly wrong on both counts.

Bonuses under long term arrangements are recognised over the period over which they vest. Now, a particular concern of politicians and the public has been bankers taking big bonuses today when the bank falls over tomorrow. So pressure has been brought to bear to ensure that bankers must wait several years to collect their bonuses. In order to tie bankers in, the bonuses have "strings" attached, conditions that need to be met in order for the bonus to remain payable. Under IFRS, the bank makes an estimate of the likely level of payment and recognises it over the period of vesting, usually three years. The reason the bank hasn't expensed the profits yet is because they haven't been earned yet. They could still not be paid, should the conditions not be met.

Bad debts in banks are recognised on an "incurred loss" model, ie the bank must have some evidence that a debtor is likely to fail to repay their debts. Now this does understate the level of bad debts because there will be some debts for which there is no evidence today but on which the debtor will default in the future. In the bad old days of 1980s accounting, banks were allowed to provide general provisions for such debts. But the intention wasn't better accounting, it was used to smooth profits out of good periods in order to hide some of the dismal performance in bad periods. This flattered profits during periods of downturn and allowed managers more discretion about meeting targets that might trigger bonuses. Unimpressed, the standard setters removed this subjectivity. The loss provision in the accounts isn't "understated"; it's a deliberate approach that the standard setters are demanding in order to prevent management from cooking the books.

But political pressure being what it is, the standard setters are returning to the "expected loss" model and are very likely to reintroduce it at some point. The idea that it will solve bank reporting at a stroke is, shall we say, unproven.

I find the Pirc campaign pretty frustrating. It's a shame that their knowledge of IFRS is so poor that they can make such fundamental errors. It's also a great pity that their ignorance has gone completely unchallenged by the business editors of the major newspapers. Is there anyone (other than me that is) that is prepared to tell the world they have no clothes?

Filed under: Accounting, Current issues with tags banks, barclays, bonuses, expected loss, idiots, ifrs, ifrs 2, incurred loss, kpmg, pirc, share based payments, standard chartered
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A special low rate of UK corporation tax on finance profits from overseas financing within multinational groups will offer a ‘very significant’ benefit to groups setting up a structure that represents, according to a leading tax expert, ‘almost government-approved tax avoidance’.

Although, as you might expect, Ritchie approves heartily, this is just silly.

While, technically, you could have government approved tax avoidance, this ain't it. An example of government approved tax avoidance would be where government instructed HMRC to turn a blind eye to cases of tax avoidance. Imagine the shitstorm that would create in Parliament when it came to light.

What's happening in reality is that the government has proposed changes to the way in which controlled subsidiaries are to be taxed, with a special rate for controlled finance companies. These will be voted on in Parliament. Once passed by Parliament, it's completely idiotic to argue that a company using the structure expressly approved by Parliament is somehow acting against the will of Parliament. So it cannot be tax avoidance, by definition.

Incidentally, George is doing something quite clever. He's trying to hoover up all the finance companies in Europe by taxing them at the cutdown rate. That should see the UK get 5.5% of a much larger pie instead of the standard corporation tax rate on a smaller one. The other European countries should be whining, but no one in the UK should complain. We're bringing economic activity to the UK and taxing it. That's a good news story, no?

Posted from WordPress for Android. Post may be amended or reformatted later.

Filed under: Taxation with tags banks, government, idiots, parliament, richard murphy, tax avoidance, tax journal
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The young man cleared his throat and adjusted his tie, then knocked on the door.

“Come!”

He opened the door and went inside. The Chancellor of the Exchequer sat behind his desk. He pointed at a chair.

“HMRC, isn’t it?” said the Chancellor.

“Yes, sir. I had a few questions about income tax that I wanted to run by you.”

“Fire away.” The Chancellor was very proud of his income tax idea. It would ensure that the very richest would pay their fair share towards the nation’s coffers.

“Well sir, it’s like this. You announced to the House that you would be taxing the rich’s business profits. But we’ve received some questions about the way that those profits should be calculated.”

“It’s very simple,” the Chancellor replied. “You recognise all income and then you deduct business expenses. The difference is your profit.

“Yes, sir. But some of these businesses have borrowed money from banks. That means they’re paying interest to those banks. Does that reduce their taxable profits?”

The Chancellor felt a wave of irritation but used his experience to hide it. “Of course it does. Interest is a business expense, so it gets deducted just like any other business expense. Anyway, the interest income will end up in the bank’s profits, so we’ll get our tax back there.”

“That’s what we thought too, sir, but it’s always better to check these things with you first. Anyway, we had another question.” He paused for a moment, before continuing, “Businesses have been asking us what to do about losses. You see, we tax them when they make profits. Should we give them a refund when they make losses?”

The Chancellor laughed out loud. “No, dear boy, of course not! We’d go out of business before we know it. But I understand their concern. It’s clearly unfair to tax them in good times but not to relieve them in hard times. So, I’ll tell you what we’ll do. Any business that makes a loss can claim relief for that loss against its future profits. In the long run it’ll all even out.”

The Chancellor sat back in his chair smugly.

“Thank you, sir. There was just one more thing. On the personal tax side.”

“Yes, what is it?”

“Some of the charities have been asking us whether charitable donations can be made before the tax is payable, or whether they’re only paid out of post-tax income. They seem to think that it’ll encourage people to give more if they can give money to charity before tax.”

“I already covered this with the Archbishop of Canterbury!” snapped the Chancellor. “I made it abundantly clear to him that charity comes before the State. I’m not the bad guy here!” he exclaimed.

“Again, sir, I just wanted to be clear with you before we draft the legislation. We’d hate for this to come back to bite us in the future.”

“No, of course. Thank you for your caution. Good day!”

Epilogue

The Chancellor picked up the report from HMRC on tax avoidance by the super rich. It claimed that the super rich were using clever tax avoidance schemes to reduce their tax bills, sometimes down to as little as 10%. He flicked through the executive summary. There were three main tax avoidance techniques being used: utilisation of brought-forward losses, deduction of loan interest expense and charitable donations. This was an outrage! How dare they use clever accountants to avoid their obligations under such a simple tax system!

He picked up the phone. “Get me HMRC, please”

Filed under: Entertainment, Taxation with tags banks, charities, gift aid, income tax, interest, losses, tax avoidance
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The Telegraph runs an unsurprising story:

Barclays and HSBC will record a gain as a result of the cut in corporation tax, despite George Osborne saying big banks would not benefit from the move.

Well, duh. Corporation tax is based on taxable profits. Whereas the bank levy is based on the bank's balance sheet. They're two totally different bases. Osborne can increase the levy so as to offset the estimated profits that specified major banks will make, but he cannot prevent:

1. banks making more taxable profits;
2. banks having smaller balance sheets; or
3. some banks gaining while other banks lose.

So The Telegraph's "scoop" is pretty underwhelming stuff, really.

There's another point too. Corporation tax is intimately linked to financial reporting, with companies required to account for any timing differences between recognition for accounting purposes and recognition for tax purposes via something called "deferred tax". So, if you record a gain in your accounts today but don't pay tax on it for another year, you record a notional tax charge against that item in the profit and loss account and set up a deferred tax liability on the balance sheet. Next year, this item will reverse, all things going according to plan. Now, you're required to record the deferred tax at the expected tax rate. Now that Osborne has changed that rate, you have to go back and revalue all your deferred tax assets and liabilities. To the extent that there will be deferred tax liabilities being reduced, this will be recorded as a reduction in the tax charge line.

The bank levy, by contrast, is accounted for differently. There's no deferred tax accounting for it. So the increase in the levy won't impact the accounts until the year it's due.

Update: Jaimie Kaffash has an alternative perspective on the bank levy.

Filed under: Accounting, Taxation with tags bank levy, banks, budget2012, corporation tax, deferred tax, george osborne, jaimie kaffash, telegraph
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Oh, Jill...

Most of the focus was on Barclays after the bank also paid £5.7m to cover Diamond's tax bill and he was awarded more in shares which will pay out, according to performance, in coming years.

Liberal Democrat peer Lord Oakeshott said: "The only tax Barclays pays seems to be for Bob on his bonus."

Jill Treanor wants to leave us with the impression that Barclays decided to pay all of Bob Diamond's tax bill for the year.

Now, I've warned readers about the corrosive and irredeemable fuckwittery of Jill Treanor before and this is no exception. It's not his entire tax bill for the year that Barclays is paying. It's because they wanted him to relocate from the US to the UK to run the bank. In order to get him to do that, they needed to agree to cover his expenses, one of which happened to be tax. That's why Barclays describes the payment as 'tax equalisation' in the accounts. It's not to put him ahead of lesser mortals like us. It's to make sure that he doesn't lose out.

The word on the tweet is that it's to do with the sale of his house in the States which, had he not had to move to London, he wouldn't have had to sell.

Filed under: Taxation with tags banks, barclays, bob diamond, bonuses, guardian, idiots, james quinn, jill treanor, us
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There's a piece in today's City AM by me on the Barclays tax issue.

I argue that the real story isn't the broken promise over the bank code of conduct on tax, but that it demonstrates that disclosure of tax avoidance schemes works. So we don't really need to change the regulation substantially, as Ritchie has been peddling all day. 

Go read it.

Filed under: Other blogs with tags banks, barclays, city am, hmrc, meta, richard murphy, shameless self-promotion, tax avoidance
5 Comments »

Second, this shatters the myth that voluntary codes with people like banks work.

So says Ritchie, in relation to two abusive tax avoidance schemes that were being undertaken by a bank.

HMRC is now closing the loopholes to remove the benefits offered by these schemes. But how did HMRC get wind of these schemes?

The bank that disclosed these schemes to HMRC has adopted the Banking Code of Practice on Taxation which contains a commitment not to engage in tax avoidance. The Government is clear that these are not transactions that a bank that has adopted the Code should be undertaking.

Yes, that's right. A bank that disclosed two tax avoidance schemes to HMRC under the Banking Code of Practice on Taxation is proof that voluntary codes with banks don't work.

The man truly has mastered whole new planes of idiocy.

Filed under: Taxation with tags banks, hmrc, idiots, richard murphy, tax avoidance
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On Twitter and elsewhere, armchair commentators have been abuzz. How can RBS pay bonuses to its staff while it's still loss-making?

This view, while superficially charming, betrays a profound misunderstanding of RBS's results and the realities of running a large global bank:

Firstly, the very question itself is idiotic. Bonuses are an expense. So they're a deduction in arriving at profit or loss, not an appropriation of profit or loss. So, unlike dividends, which require there to be distributable profits before you can pay one, bonuses can be paid even if the company has losses.

Secondly, if you adjust for various one-time items, the group was profitable. By the bank's preferred measure, it made operating profits of £1,892 million, including profits in the core, ongoing business of £6,000 million. That looks pretty bonus-worthy to me.

A big drag on profit was the provision for PPI-misselling of £850 million. They also took a writedown of £1 billion on its sovereign debt and restructuring costs of another £1 billion. Although there wasn't a huge tax charge (cash taxes paid globally of £184 million in the year), the group was subject to the bank levy for the first time this year. Under IFRS, the bank levy is an operating expense, not a tax charge, so it reduces profit even though to the general public (and HM Treasury) it feels very much like tax. RBS paid £300 million for the year.

You can read the rest of RBS's results for yourself here.

Filed under: Accounting, Current issues with tags bank levy, banks, bonuses, hm treasury, ifrs, provisions, royal bank of scotland
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Well, nothing, of course. But nonetheless Lord MacGregor thinks he might like a dabble in accounting standards:

The government is facing fresh questions about whether current accounting rules are suitable for banks, amid claims that they permit the overstatement of profits and fail to provide a proper picture of losses.

The issue is being raised by Lord MacGregor, chairman of the House of Lords economic affairs committee, in a letter to Norman Lamb, the newly appointed employment minister, who also has responsibility for auditing.

Drawing upon quotes from Bank of England executive Andy Haldane, who used a speech last month to argue that accounting rules had helped in "both over-egging the financial upswing and elongating the financial downswing", the chairman of the committee asked whether the international financial reporting standards (IFRS) were "in conformity with UK law".

OK, so he's had a long and distinguished career as an MP and minister. And he's probably a smart guy, being chair of the House of Lords Economic Affairs Committee. But what  does he know about accounting standards that makes him feel qualified to opine on the matter? According to the Wikipedia article on him, he was a merchant banker before becoming an MP at the age of 37. He's got no accounting experience and no relevant banking regulation experience. Is it really too much to ask that he stick to the sodding knitting and keep his nose out of things that he clearly does not understand?

Filed under: Accounting, Politics, Regulation with tags banks, economic affairs committee, guardian, house of lords, idiots, lord macgregor
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I wrote a while back about the Whole of Government Accounts project. As you'll recall, government received a number of qualifications in the auditor's report on the accounts because of the way it had failed to account for some things properly. And one of those qualifications was for failing to consolidate the nationalised banks into government's results.

OK, let's clear up some of the jargon in case you're struggling. "Consolidation" is the process of showing the results and financial position of a group of companies as if they were a single entity. This means you remove all balances and transactions between group companies and only show the true external position. In the case of RBS, that means removing the investment in government's books and bringing in instead all the revenues and costs and assets and liabilities.

Now, government really did not want to do this. They argued that this would lead to a strange set of accounts, given how big the figures are compared to the rest of government spending. Too bad, says the accounting standard in question, IAS 27, which explicitly forbids subsidiaries from being excluded from consolidation just because they're very different to the rest of the group ¹.

Indeed, the only exclusion that might apply to WGA is the concession that subsidiaries that are being held for disposal within 12 months need not be consolidated. But, if they're still there after 12 months, you have to consolidate them from the date of acquisition and restate your accounts accordingly.

This was all true even before the Hester bonus kerfuffle. But what the interference over his pay demonstrates is that government won't be a passive investor while the banks get back on their feet. Instead  it will be getting its hands very dirty by meddling in all sorts of operational decision-making. The remuneration committee had already approved his bonus, in accordance with the terms of the contract he signed with the previous Labour government. That contract is shredded today, thanks to Labour's naked and hypocritical opportunism, and the Tories' shameful lack of backbone.

Yet it makes it all the more difficult today to argue that RBS is a soon-to-be-disposed arm's length business. It's quite clearly just another political operation. So government will face increasing pressure to consolidate RBS when it issues the next set of WGA later this year.

Filed under: Accounting, Politics with tags banks, bonuses, conservatives, labour, royal bank of scotland, stephen hester
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