How can this be?

Profits at Lloyds Banking Group collapsed in the first quarter, crashing 95% after the bank was forced to take a £1.4bn charge to cover a surge in bad debts linked to the Covid-19 outbreak.

The first-quarter provision is meant to cover potential defaults by customers over the coming months, as they struggle to keep up with payments due to the UK’s nationwide lockdown.

The losses haven’t happened yet, they are expected and so provisions are being made.

But only days ago we were told that this isn’t possible:

The FT has two articles this morning highlighting the failure of accounting rules to handle the impact of the coronavirus crisis, most especially in banking.

The problem that is being faced has persisted since 2005 when International Financial Reporting Standards were introduced as the de facto accounting standard system for the UK, the EU and over 100 other countries.

This is not the moment to critique the multitudinous failings of IFRS accounting, although they exist. It is instead the moment to note that they are the very opposite of the reasonably objective standards for reporting that any user of accounts might require, most especially at times like this.

The current problem relates to loss reporting. As Jonathan Ford notes in the FT, when IFRS reporting was introduced the rules on loss reporting were absurdly relaxed:

You may remember the issue that emerged in 2008. Banks hung back from revealing their losses on loans because they claimed the standards then in force required them only to provide for losses when a loan was actually at, or on the threshold of, default.

Sure, in a collision between Spud and reality we know which way to bet but still…..