Dáil Éireann Debate, Wednesday - 22 February 2012
5Deputy Pearse Doherty asked the Minister for Finance if he accepts that the use of the effective interest rate methodology by the National Assets Management Agency in the Q3 of 2010 accounts rather than reporting interest actually received on performing loans, leads to an overstatement of their profits for that quarter and as a result provides a misleading picture to the general public of their operations during that time. [10285/12]
View answerI assume that the Deputy is referring to the recently published third quarter 2011 accounts.
NAMA presents its financial statements in accordance with international financial reporting standards, IFRS. It is required to do so under EU legislation owing to the fact it has listed debt securities. In accordance with the IFRS, NAMA uses the effective interest rate, EIR, methodology for the recognition of interest income on its loan portfolio. The Comptroller and Auditor General has certified that the 2010 financial statements have been properly prepared in accordance with the IFRS and give a true and fair view.
NAMA accounts for the loans it has acquired by reference to the acquisition price from the financial institutions, not the original par value of the loans. NAMA acquired a distressed loan portfolio at a significant discount to the original par value using a collateral based valuation model which projected the expected property related cash flows and the expected receipts from the ultimate disposal of the underlying property collateral. A significant portion of the loans that NAMA acquired are not expected to perform in accordance with their contractual terms. As a result, NAMA expects that the most significant portion of the cash generated will be through the future disposal of the property collateral underlying the loans, not from the receipt of contractual interest.
Interest income is recognised on loans in accordance with the EIR method by reference to the expected property related cash flows on a proportionate basis over the life of the loans, rather than on a cash received or contracted interest basis, so as to accurately reflect the effective rate of return over the expected life of the loans. Thus the aim of the EIR methodology is to allocate interest income on NAMA's loan book proportionately over the life of a loan, regardless of the timing of cash receipts, ensuring performance is reported on a consistent basis between accounting periods.
Additional information not given on the floor of the House.
The Deputy suggested reporting interest actually received. However, NAMA advises that actual cash interest received is not an accurate reflection of performance because it does not reflect the fact that the return to NAMA is principally based on the sale of the underlying property. If actual cash interest received was used, income would be significantly understated in the period up until the disposal of the underlying property and overstated in the period when the disposal actually took place.
In accordance with the IFRS accounting standards, the effective interest rate is set on the acquisition of the loan. To the extent that subsequently there is a change in the timing or amount of NAMA's cash flow expectations, whether it be favourable or unfavourable, the IFRS requires that NAMA adjust the carrying value of the loan and recognise an impairment charge or gain in its income statement. This estimate of impairment is made on an annual basis. I understand NAMA is carrying out a detailed annual impairment review for the period to the end of 2011.
In the circumstances outlined, I do not consider that the use of the EIR methodology by the agency overstates its profits or gives a misleading picture of its operations. However, following comments made at the Committee of Public Accounts, NAMA has advised that it is examining with the Office of the Comptroller and Auditor General how it could enhance its disclosures on the movement in the original par value of NAMA's loans.
I find this bizarre. I have listened to the Minister of State's response in explaining how the EIR accounting practice works. In the first three quarters of 2011 NAMA reported an operational profit of €526 million. This is before impairment charges which are likely to wipe out that profit and result in NAMA having an operational loss are taken into account. We can all accept this. Let us forget about the impairment charges. Of the operational profit of €526 million NAMA states it made, it did not receive €249 million. It is booking interest on loans it has not received because it is using the EIR accountancy method. It may never receive this money. Does the Minister of State agree that, at a minimum, NAMA should report the actual amount in interest received on the loans during those quarters alongside what is projected in order that there would be a clearer and truer picture for the public?
NAMA is following an international model where a vehicle such as this purchases loans at a hugely discounted rate to reflect the fact that the assets have been totally impaired. This is in line with the international standard to which we have signed up. Furthermore, the Comptroller and Auditor General would not certify accounts if he considered there was something untoward about the accounting procedures involved. Is the Deputy suggesting we move to using new methodology? The immediate impact would be a radical increase in the administrative and legal charges associated with the management of the property portfolio. I am not suggesting the Deputy is arguing for this, but it would be the impact of what he is suggesting. That would not be a useful exercise at a time when we are all trying to minimise costs. There is nothing untoward in the way the information is reported, either in terms of our domestic procedures or international obligations. This vehicle which I call the NAMA ship as it leaves port uses existing legislation to reflect the fact that the assets were purchased at a discount.
The public wants to see what is going on within the ship of NAMA, a body which is costing €1 million a day to run. It wants to know the income it received in interest on loans. The report shows that €276 was received in the first quarter, but I have discovered that NAMA actually received only €178 million. In the second quarter it reported that it had received €255 million in interest, but it had actually received only €184 million. For the third quarter the corresponding figures were €255 million and €175 million. NAMA is still not subject to the Freedom of Information Acts which should be a matter of urgency for the Government. For a member of the public who is disposed to look at what NAMA is costing and the profit it is making, alongside the EIR figures which are guesstimates of what NAMA might receive some time in the future, there should be a record of what it actually receives in interest during the various quarters.
The Deputy has a fair point to make on the Freedom of Information Acts. I have heard similar comments being made by other Members of the House. This is something at which the Government is looking. We have given a commitment to amend the legislation. In that context, we will look at applying freedom of information legislation to NAMA, or parts of it. This would lead to the provision of useful information for all Deputies and the public.
Are we comparing apples and oranges? NAMA has purchased the assets at supremely discounted prices. The Deputy's question is whether this should be reflected in the actual value they once had or at their current market value. We can look at that aspect.
That is not the question.
We can look at whether additional reportage would make much difference. The discounted value reflects the fact that a significant portion of the loans NAMA acquired were not performing on acquisition and are not expected to perform in accordance with their contractual terms. This must be reflected in NAMA's accounting procedures. If the Comptroller and Auditor General had a difficulty with this or believed an unusual accountancy procedure was involved, this would have been reflected in the ongoing reports his office produces. We will keep the matter under review.
