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Barclays isn't the only bank that has taken steps that could inflate its earnings, according to a recent analysis of banks' 2008 financial results.
The British bank said on Wednesday that it would shift $12.3 billion in assets from the category of "available for trading" to the category of "held to maturity" by borrowing against them from a fund run by several former executives. The move allowed Barclays to avoid recording in its earnings any loss in the value on those assets.
But Citigroup shifted $38 billion in assets, or roughly 2 percent of its total and more than 3 times as many as Barlcays, in similar fashion, according to a study released in July by the Georgia Tech Financial Analysis Lab.
"Their classification as a held-to-maturity security could shield the income statement from the losses prior to sale," wrote the authors of the report, Charles Mulford, an accounting professor at Georgia Tech who directs the lab and serves as an editorial advisor to CFOZone, and Eugene Comiskey, a fellow professor at the university.
Under pressure from bank regulators, the Financial Accounting Standards Board earlier this year ruled that banks and other companies didn't need to record on their income statements changes in the value of assets that are classified as available for sale or held to maturity -- so long as auditors can be convinced they are temporary.
Instead, temporary losses on available for sale assets need merely be recorded in comprehensive income on companies' balance sheets. And such losses on assets held to maturity need not be recorded at all. The change in the rules was made in time to affect banks' 2008 results.
Citigroup shifted $33.3 billion in assets in 2008 from the trading category to the held-to-maturity category and another $4.7 billion from the trading category to the available for sale bucket. Wells Fargo shifted a far lesser amount, $544 million, or less than 1 percent of its assets, from available for trading to available for sale.
Some banks took the opposite tack, if only to record gains in the value of assets. Bank of America shifted $10.9 billion, also less than 1 percent of its assets, from held to maturity to available for trading, according to the study.
In that case, Mulford wrote in an email, the bank likely saw gains it wanted to record. It's possible, he said, that B of A "wanted to boost their trading book."
Added Mulford: "I was surprised by the large amount of wholesale and regular transfers being made between classifications by the banks. I think the intent on the part of FASB was that classification decisions were made at purchase and transfers between groups wouldn't be that frequent."
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