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Monday, 9 February 2009

More tax payer funded bonuses at Barclays?

Not so obvious because Barclays has not gone to the government for cash, but the Quakers at Barclays Bank were always quick off the mark when it came to making a fast buck of the tax man (see the activities of Roger Jenkins, Ian Abrahams and Michael Keeley mentioned elsewhere on this blog).

Today, Barclays announced a £6.1 billion profit, which sounds impressive in the circumstances, only a tad down on last year. But wait a mo. A quick look at the accounts shows that £2.6 billion of this came from a gain on acquisition of certain assets and liabilities of Lehman Bros. Fair enough, and it looks like they got it at a good price because Barclays decided that they could mark up the fair value of the assets.

Note 11 to the accounts says “The excess of the fair value of net assets acquired over consideration paid resulted in £2,262m of gains on acquisition”, which translated into English reads, “This was a steal!”.

To which one might well respond, “Well if that is the price you paid, and nobody else matched you, how can you be so sure you can sell those assets for £2.2 billion more?”. So this £2.2 billion of profit is just an accounting valuation adjustment and nothing to do with business profits. Best of all Note 11 states:

“The initial accounting for the acquisition has been determined only provisionally. Any revisions to fair values that result from the conclusion of the acquisition process with respect to assets not yet received by the Group will be recognised as an adjustment to the initial accounting. Any such revisions must be effected within 12 months of the acquisition date and would result in a restatement of the 2008 income statement and balance sheet.”

In other words:

"We don’t really know what this is worth. We will tell you later, but for
argument’s sake, let’s say we are up by £2.2 billion"

The next bit of good news for the directors (who didn’t want to be bailed out by the government because they might have lost a bonus or two) is that the acquisition results in a recognition of a £400m deferred tax asset previously unrecognised that can be set against deferred tax liabilities acquired with Lehman Brothers resulting in a tax credit for the year. In simple English, Barclays previously had some losses which they couldn’t use to reduce their tax bill, but by buying Lehmans means that they will have some future income on which they will pay no tax because of the old losses.

Or to put it another way, that is £400 million of tax the taxman (which particular taxman is not quite clear) will never collect. Not as big as an equity injection or a loan, but you don’t have to pay this one back. Best of all, although there is no £400 million of cash paid to the company (a bit like the £2.2 billion of unrealised gain on the Lehmans assets) the £400 million number goes straight to the bottom line and is available to pay directors’ bonuses.


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