I'm like reading Barclays 08 annual report and i'm feeling irritated. This is why. Pg59 reports on the performance of barcap (Barclays capital investment bank). Apart from a principal transaction gain of 2bn (due to their heavily discounted Lehman acquisition), they would have made a lost of 960m GBP. Now look down at Performance ratios- Return on average economic capital. Why did they include the transaction gain? Isn't it a one off?
Dissidents might argue that economic capital include the risks of the investments, including that of Lehman, therefore validating the inclusion of the transaction gain. But from the New York Times, its seems that the purchases included a mere 207m GBP residential real-estate mortgage securities. In which case the economic capital should have increase from the previous year. But it didn't. In fact it fell by 626m GBP (owner est.) from 2007. It is unfair to reflect the gain in a discounted asset as economic reality when it has no part of your operations till recently. Barcap should be honest and say they (like the rest of the banks) didn't do well.
There must be a certain justification management used, probably some accounting methodology which we will never know of, but nonetheless, the observation is a interesting one. To a large extent, the principles of accounting are used to justify the economic behavior ( perceived by managers) of the firm.
