The 2011 Annual Report produced by NAMA yesterday really shouldn’t have been very surprising to us. After all, we had the unaudited accounts for 2011 at the end of May 2012, and you might just have expected the odd tweaking of figures in the final report – after all, other than the impairment provision, that was our experience in 2010. But there were three major differences yesterday(illustrated in the table above which shows the audited and provisional results for 2011 and 2010) – the €467m increase in the impairment provision, the €235m tax credit and the third is the focus of this blogpost, the €200m of additional profit booked.
Now the impairment provision published in the unaudited accounts at the end of May 2012, was indeed “provisional” and NAMA made it clear that the €810m impairment provision then reported would be subject to scrutiny from the Comptroller and Auditor General – the CAG is responsible for auditing NAMA’s accounts. And we know in the previous year’s accounts for 2010 that the CAG increased the impairment provision from €1bn in the provisional accounts to €1.485bn in the final audited accounts, so we knew that for 2011 when we saw the provisional accounts in May that the impairment provision could change, and change substantially. No great surprise there.
What is regarded as suspicious on here is the €235m tax credit, which will shortly be the subject of its own separate blogpost. This blogpost focuses on the additional €200m other income which was “found” between the provisional accounts and the final accounts published yesterday, and I use the air quotes in “found” because normally when you produce the provisional accounts three months after year end – NAMA produced its Q4,2011 provisional accounts on 31st March 2012 and they were published at the end of May – you have a very good fix on income. Take a look at the previous year, 2010 and you will see how little change there was between the provisional and audited accounts.
So where did the extra €200m of income come from?
NAMA was asked earlier today, and there is as yet no response.
The Annual Report doesn’t offer any clue. The income reported just happens to be €200m more than in the provisional accounts. It is a fact that the Paddy McKillen case against NAMA – where Paddy was claiming NAMA’s sale of the €800m Maybourne loans to the Barclay brothers was unlawful – was seemingly settled in June 2012, when Paddy lost his appeal in London, and it might be that NAMA had refrained from booking any profit on this sale until the matter was settled. But having said that, NAMA apparently paid close to the book value for these loans, so it would be surprising if there was €200m of profit available there. Also, the NAMA accounts were signed off on 27th June 2012 – that is the date of the NAMA CEO and chairman’s signature on the accounts – and we only learned of Paddy’s defeat in Britain’s appeal court on the morning of 27th June, 2012. So if the late recognition of profits on the sale of the Maybourne loans has contributed to the enhanced profit at NAMA, then the Agency was cutting it very fine indeed!
If it weren’t for the fact that the NAMA accounts are audited by the Comptroller and Auditor General which hopefully hasn’t been the victim of “regulatory capture” by having 10 staff permanently on site at the NAMA HQ, then there might be suggestions of shenanigans at NAMA motivated by a desire to show positive results at the Agency. Or more precisely, some massaging of provisions including provisional profit on some sales which has not yet been recognised by NAMA.
Still, with an accountant’s cap on, and in light of the relatively minor changes in the previous year’s reporting of provisional and final audited results, it looks odd.
UPDATE: 26th July, 2012. Thanks to commenter Ahura M below who points out that NAMA has provided a reconciliation between its provisional impairment reported at the end of May 2012 and the audited impairment, and this shows that NAMA, when it was preparing its provisional accounts, deducted a gain on the disposal of loans/property of E243m, and that NAMA has now reclassified this. So, one mystery solved!
Table 19 on page 40 reconciles ye impairment charge with Q4. From the text below this table: “The €810m net impairment charge included in the S55 accounts was net of realised gains of €243m, which have now been reclassified to gains on loans and receivables on the face of the income statement.”
I don’t understand the labels, but might this account for the 200m? I may be wide of the mark but is a good whack of this 243m increase in impairment getting puched through as income?
“Ahura, yes that would be it. Well spotted!
Cheers, but I still don’t understand the process. They use the description “Reclassification of realised gains” which kinda sounds positive but ,nevertheless, increases the impairment which can’t be good. If this is then used to pump income, it seems odd/creative (but not in a good way). Any ideas?
@Ahura,
It looks odd but what seems to have happened is that NAMA calculated the impairment charge for year end and deducted “realised gains”. So in the provisional accounts for 2011 showed impairments at E1053m and NAMA deducted “realised gains” of E243m to get a “net” impairment charge of E810m.
“Net” impairment charge – that’s a new expression!
@NWL,
I’m still trying to get to grips with this.
This is my current thinking (plenty of assumptions):
NAMA reduced the existing impairment charge on some loans by 243m euro. Rather than reducing or ‘netting’ the overall impairment charge, they’re running this reduction through as income. (Question: would this overstate the actual amount set aside for impairments?) So such income isn’t cash but calculated!
If I’m right, then it begs the question of how conservative the impairment charges are? Market prices would not suggest impairment charges should be reduced. It may be that an initial broad brush approach to calculating reserves resulted in 2010 reserves being set too high and ‘better information’ assembled during the course of 2011 has enabled reducing reserves on some loans.
A potential problem is that sometimes accounts and calculating reserves can be more formula driven than you’d like. We noticed in the quarterly accounts in 2011 that NAMA were making additional payments to lenders on portfolios already transferred. Is it possible that these ‘revised’ higher acquisition values were popped into ‘de spreadsheet’ resulting in reduced impairment charges?
Could I please ask a question that someone might be able to answer in relation to Sean Quinn.
On the Namawinelist list of persons included in NAMA Sean Quinn and his family are included on the spreadsheet. That meaning that their debt is in NAMA.
1) Why is it that IBRC / Anglo are doing all the chasing of the Quinns. Why is it not Nama ?
2) Also in the case of a company taking out extensive borrowings, why is there no evidence of an EGM being held to accept the borrowings by the directors and shareholders of Quinn ? I stand to be corrected here. BOI had to convene an EGM to forward €2 billion to the Irish state.
3) If the shareholders agreed to take on borrowings of €500m and not €2.5billion
as is being touted in the press is there documents backing up that number ?
The Quinns agree on €500 million but not €2.5 billion.
This whole saga has started to smell just a tad.
@John K, Sean Quinn is shown on the developers spreadsheet under “Not Flagged for NAMA” and NAMA has not, to the best of my knowledge, touched his loans, which is itself a bit of mystery.
http://namawinelake.wordpress.com/2012/01/10/sean-quinn-northern-ireland-bankruptcy-order-annulled-by-belfast-judge/