Lebanon Businessnews News
 

Losses at Central Bank
amortized as future earnings
Follows European Central Bank guidelines
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The Central Bank (BDL) has issued a statement clarifying losses it carries on its balance sheet.

“BDL does not consider these amounts as losses. These amounts are carried forward and amortized against future revenues. BDL is entrusted with the general mission of safeguarding the national currency in order to ensure the basis for sustained social and economic growth,” it said.

BDL said that it is following accounting standards set by guidelines issued by the European Central Bank (ECB).

BDL cited several examples of other nations resorting to recording losses as assets rather than a direct impairment to equity.

Examples of cases where losses were recorded as assets or negative liabilities rather than as reductions in equity are Costa Rica in the early 1980s, Peru in the 1980s, Thailand after the 1997 crisis, and Hungary in the 1990s. In each of these cases, future income was not assured. The Fed has recently clarified that losses that lead to shortfalls in the reserves (the ‘surplus’) relative to their required level would be registered as an asset. Other central banks have also used this treatment such as the Deutsche Bundesbank in the 1970s.

CENTRAL BANK FULL STATEMENT

Introduction

Banque du Liban (BDL), like European Central Bank (ECB) and many other central banks, has adopted since 2007 new accounting standards.
International Financial Reporting Standards (IFRS) are written primarily for commercial entities; its application to central banks is not straightforward (Sermon, 2005). This was the main reason for the creation of separate accounting standards determined by the Guideline of the ECB on the legal framework for accounting and financial reporting in the European System of Central Banks (ESCB).

BDL, like many other central banks, has partially adopted IFRS presentation and disclosure. Full implementation conflicts with the disclosure of market sensitive activities, therefore Just like many other central banks, BDL has opted to exclude certain standards and accounting treatments in its partial application of IFRS. BDL is not restricted to international accounting standards as it is recognized by law and by decision No. 9172 dated 24/10/2005 as an “independent moral personality” within the public sector that has the duty to preserve the safety of the currency and play the role of lender of last resort.

Loss carry forward

Losses can continue for several years, and ways to cover it include the utilization of accumulated reserves and, where these are exhausted, offsetting carried losses against future profits until such time as the former are liquidated. Based on a study conducted by the EUROPEAN CENTRAL BANK about profit distribution and loss coverage rules for central banks, the following treatments were identified in a sample of 131 banks:

• Loss carried forward, meaning that a (remaining) loss in a particular year, which cannot be covered from specific or general buffers, is carried over to the next year(s) and possibly offset against part or all of the future annual profits. This could result in negative equity pending completion of the process (28 banks);
• Claims against future profits, which is similar to the loss carried forward treatment, with the presentational difference in the balance sheet that the losses are reported as claims against the national government, and therefore no negative equity is reported (9 banks).

The Fed, The Bank of England, the ECB and the Euro system’s national central banks were also faced with a string of financial crises, albeit of somewhat different origins. These central banks too have resorted to unconventional measures that are larger and financially riskier than any previously undertaken.

During the financial crisis, central banks around the globe undertook a number of non-standard operations of an unprecedented magnitude. As a result, the balance sheets of many central banks expanded considerably, changing their risk profiles substantially. These events put central banks’ published financial information in the public spotlight and raised questions about their financial soundness

Unstable political circumstances in the country, along with regional unrest and the burdens of the Syrian crisis, have impaired the Lebanese economy for several years now. Lebanon’s singularity, however, continues to lie in its resilience and ability to prevail under exceptionally arduous social, political, and economic pressures.

BDL amortization of monetary policy cost
Throughout the year interest expense on financial instruments are carried forward and recorded on the asset side in transitory accounts; part of it to be offset by the end of the year and the remaining amortized against future profits from different sources of revenue that BDL acknowledged such as Seigniorage on currency and open market operations and intangible assets.

Examples of cases where losses were recorded as assets or negative liabilities rather than as reductions in equity are Costa Rica in the early 1980s, Peru in the 1980s, Thailand after the 1997 crisis, and Hungary in the 1990s. In each of these cases, future income was not assured. These special assets often grew to be very large components of the balance sheet (over 50% in the Costa Rican case, 25% in the Peruvian case; in Hungary, the unserviced notional claim on the government ended up by swamping accounting capital by a factor of 20). In these cases, such treatments confused analysis of the underlying economic situation, and contributed directly to a worsening of the Central Banks’ finances by allowing continued distributions to the government despite significant and growing financial weakness.

The Fed has recently clarified that losses that lead to shortfalls in the reserves (the “surplus”) relative to their required level would be registered as an asset that represents the amount of the reduction in future transfers to the Treasury that is needed to rebuild reserves. With this practice, which is allowed by US GAAP (on the presumption that future earnings are sufficiently certain that the claimed value of the asset will be realized), accounting equity would not fall in the face of a temporary negative shock to earnings. Other central banks have also used this treatment, i.e. the Deutsche Bundesbank in the 1970s.

Conclusion:

BDL does not consider these amounts as losses; these amounts are carried forward and amortized against future revenues. BDL is entrusted with the general mission of safeguarding the national currency in order to ensure the basis for sustained social and economic growth.(Article 70 of the Code of Money and Credit (CMC).



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Date Posted: Apr 14, 2020