2 + 2 = ?.....Answer depends on whom you are asking this question

An Accounts professor once in the college canteen, over a cup of coffee, asked a group of three students, in their first year of management studies, a simple question - How much do you thing is 2 + 2 ?..... been post-graduate management students, they were sure that professor was not looking for simple straight forward answer ......

First student from a Engineering background said the answer to this to be precise will be between 3.999 and 4.001,

Second student from Advertising and Mktg. background, was very loud and confident that it will be 22,

Finally third student from Accounting & Finance background in a low tone answered in professor's ears - How much you want it to be ?

.......but jokes apart, I was searching for similar answers when i saw some great results been declared by US Banks for qtr. ended Mar'09, who till few months were struggling to survive and US Govt. had to pitch in and lend funds so that they can see the next day.

After some reading I got some clarity and I thought of sharing the same with you. The case in point is that of Citibank....

CITI reported net income of $1.6 billion (appro. Rs. 8,000 crores) during the first quarter (Jan-Mar09), up from a loss of $5.1 billion (Jan-Mar08) a year ago...digging deeper into the numbers reveled the following:

1. It has booked profit of $2.7 Bn on decline of its own debt.

The Bond (Tradeable Debt) issued by it say at $100 is traded in Mkt. at $30, hence under US accounting rules, it can book one-time gain, equivalent to the decline in its bonds because, in theory, it could buy back its debt cheaply.

However in reality it is just a paper profits, it would be real profit, if it actually buys it from the open mkt. and cancel the bonds in its books.

2. Bank has made lower provisions for future loses. Loss provision was reduced to $2.1 Bn in Jan-Mar'09 from $3.4 Bn provided in Oct-Dec'08. Thus improving profit for the qtr. by $2.1 Bn.

This is surprising because on one hand we see the US economy is in negative growth path (-ve 6.1% for Jan-Mar09 qtr. & -ve 6.3% for qtr. Oct-Dec'08, to be specific), job losses nearing 10% (presently at 8.5%). These job losses will result in rising defaults in Housing EMI, Credit card dues, Auto loans, personal loan EMI and other consumer loans.

3. FASB altered rule # 157 provides more flexibility

This is mother of all flexibility and subjectivity allowed in accounting in recent history. This altered rule allows American banks to value toxic assets "at their own discretionary judgement".

This "mark-to-mkt" provision is now more of "mark-to-make-believe" accounting, which enable US Banks to conceal losses and use obscure methods and models to inflate their balance sheets. The amount that has been hidden behind this rule is left to your own judgement and quantification.

As the CITIBANK commercial Ad. runs....."CITI never sleeps.....indeed accounting creativity has been put to good use, during these tough times."

Jetha N.Punjabi