BoI profits to be hit by new accounting

The introduction of new accounting standards this year will cut Bank of Ireland's pretax profits by €85 million, the bank said yesterday.

From April 1st, the beginning of the bank's next financial year, it will apply international financial reporting standards (IFRS) to its accounts. Bank of Ireland currently uses Irish standards, known as Irish Gaap.

The bank issued a statement yesterday saying that the impact of the new standards would be to cut pretax profits for the year to the end of March 2006 by around €85 million and earnings per share by 10 cent. It expects no impact on tier-one capital.

The bank will present its first full-year accounts under IFRS in 2006. However, its 2005 interims will also be prepared using the international standards. Bank of Ireland said yesterday that it would restate its 2004 interims where appropriate when this year's are published in the autumn.

The introduction of IFRS will have a significant impact on the way in which Bank of Ireland and other financial institutions account for bad debts.

Currently, Irish Gaap allows the bank to account for losses it has made on specific bad debts that it has identified, and make a general provision against probable bad-debt losses that it has not identified.

This means that the bank's provisions for bad-debt losses remain relatively consistent from year to year, no matter how volatile they may be in reality. Under IFRS, it will only be able to account for losses made against specific bad debts identified.

This will make the loan book, and its impact on earnings, more volatile. However, analysts say that this is a more transparent system of accounting for bad debts.

Some €40 to €50 million of the total pretax profit reduction will result from a change in the way that the bank will have to account for pension provision.

Currently, it spreads surpluses or deficits in its employee pension fund over 14 years. Under IFRS, it will have to charge changes in the fund against the profit and loss account at market value. IFRS will require that the bank accounts for some employee share schemes on its profit and loss account, which it is currently not obliged to do. This will cost it €15 million.

Some investments, sold largely by its life business, are accounted for using the embedded value system which applies to insurance products.

This means, it accounts for the full profit up-front, even if it earns it over a period of years. Under IFRS, it will have to defer the profit and account for it as it is actually received. This will result in a €15 million charge next year.

The changes will also result in a reduction of €140 million in shareholders' funds.