Monday, October 17, 2011

Citi Reports Gain... Based on Accounting Trick

As if we needed more accounting tricks. Citi reported earnings today, claiming big gains by reporting a rather big  $1.9 billion one-time gain based on how it reevaluated its own debt.

'Third quarter revenues included $1.9 billion of credit valuation adjustment (CVA) reflecting the widening of Citi's credit spreads during the third quarter. Excluding CVA, third quarter 2011 revenues were $18.9 billion, 8% below the prior year period and 8% below the second quarter 2011. CVA increased reported third quarter earnings by $0.39 per share. "

Excerpt from October 17th edition of Barron's Up and Down Wall Street by Randy Forsyth
"WHO SAYS ACCOUNTANTS DON'T have a sense of humor? The rules for bank earnings are as absurd as anything Monty Python ever came up with, but to the market, they're pretty much an unfunny joke.

Take JPMorgan Chase (ticker: JPM), which posted third-quarter earnings of $1.02 a share Thursday, handily beating the consensus estimate of 91 cents. A big factor: a $1.9 billion gain from DVA, or debit valuation adjustment. DVA reflects the change in value of the company's debt securities. A decline is recorded as an addition to income because the presumption is the company would be able to repurchase the debt at a discount and record a gain. Of course, the same holds if that same company's finances deteriorate, according to this accounting theory.

This principle should be applied to Europe. Think of it: Record the decline in the price of Greek government bonds as revenue. That should eliminate Greece's budget deficit. Repeat in Ireland, Portugal, Spain and Italy. Problem solved."

Hat tip to Seamus for the above Barron's piece.

The stock had been up up to 2+% in pre-market and currently +3%, but fluctuating wildly.

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