Northern Rock wrangle signals trouble for new accounting rules

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The Independent Online

The mortgage lender Northern Rock is at loggerheads with analysts at Credit Suisse First Boston (CSFB) over the impact of accounting changes on its earnings, foreshadowing the confusion that is set to arise from the introduction of the new rules next year.

The mortgage lender Northern Rock is at loggerheads with analysts at Credit Suisse First Boston (CSFB) over the impact of accounting changes on its earnings, foreshadowing the confusion that is set to arise from the introduction of the new rules next year.

Northern Rock played down potential reductions to 2004 profit after Jonathan Pierce at CSFB predicted that earnings would be cut by 8-10 per cent when they are restated next spring under the new international accounting standards (IAS). Adam Applegarth, the chief executive of Northern Rock, said the difference "really is going to be not a lot. This is a storm in a teacup."

The bank said its 2004 pre-tax profits would probably vary by less than 5 per cent - up or down - when they are restated next April or May. Mr Pierce said pre-tax profits would benefit from "spurious" gains under the new rules. However, he predicted that earnings per share would fall by at least 8 per cent, because upfront fees paid by mortgage customers would be spread over the expected life of the loan, probably about three years.

But he thinks the new rules will benefit other banks such as HBOS and Alliance & Leicester, which have been accounting more prudently, and they could see their restated profits going up on changes to income recognition.

"Northern Rock's problem is it has a more aggressive approach to recognising revenue than most of the sector," Mr Pierce said.

At the same time, he said Northern Rock's trading performance had been very good and that it was "extremely well-positioned for a slowdown in the housing and mortgage markets". The bank said yesterday it was on track to meet the typical analyst forecast of £429m in pre-tax profits this year.

A spokesman for Northern Rock said the accounting changes would not affect cash flow and underlying profitability. He said the company was awaiting further clarification in areas such as taxation and regulatory capital. The new IAS book-keeping rules were drawn up to make companies' accounts more transparent and easier to compare, but there could be a lot of confusion next year when earnings are restated and analysts and investors struggle to judge companies' underlying performances.

The confusion will be exacerbated by two different versions of IAS 39, an accounting standard that governs the treatment of derivatives. The European Union caved in to pressure from French banks to amend the standard, and the International Accounting Standards Board will clarify the issue only in January.

Northern Rock was the first bank in the UK to issue guidance on how the new standards would affect its results. Barclays and HBOS will make presentations to investors on 7 December and 14 December respectively.

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