A look at Northern Rock and Positive Accounting Theory.

2. Group 5

3.  Northern Rock was first established as a
Building Society in 1850
 It was then converted into a Mortgage Bank in
1997
 Northern Rock was located in England
 There rely heavily on Securitization and
Wholesale short-term borrowings instead of
they deposit to facilitate lending.

4. Bank was funded by Wholesale short-
term borrowings
Borrowed globally, loaned locally
Use of Covered CDOs

5.  When main funding source suffered
Northern Rock was forced to acquire a
loan from the Bank of England in
September 2007
 However, within six months during
February 2008 they where taken into
state ownership by Bank of England
they were unable to attract a buyer.

6. Changed from UK-GAAP to IFRS
January 01, 2005 – IAS 39 adoption
Implications of IAS 39 adoption

7.  IAS 39 – was implemented on January 1 2005 and
applicable by all entities following UK standards
IAS 39 states :
 All Derivatives, Financial Assets and Financial Liabilities
held for trade be measured at the Fair Market.
 Gains or Losses should be recognized immediately within
the Income statement
 All other Financial liabilities be recognized at Fair value
but consequently measured at cost base.

8.  Change in value in Inventory due to revaluation.
 Recalculation of taxes due to the income change.
 Addition cost due to the need to revalue assets.
 How well existing assets will fear over time.
 What type of securities are accepted.

9. Restatement of 2004 financials
Tier 1 Capital and total capital reduced,
but still above regulatory requirement
Net Income reduced by 11.4%
Dividends ratio increased to 40%

10. Impact of change from UK-GAPP to IFRS
Treatment of Development costs
 GAPP: Costs capitalised; Intangibles amortised up to 20 years
 IFRS: Cost expensed; Intangibles amortised up to 10 years
Treatment of Fixed assets
GAPP: Fixed assets revalued through Gains & Loss statement
IFRS: Historic cost used; no provision for revaluation

11. Impact of change from UK-GAPP to IFRS
Treatment of Financial instruments
 GAPP: Financial instruments are measured at cost
 IFRS: Cash and receivables measured at cost;
Derivatives measured at market value
Economic impact on organisation
 IFRS: Fee income deferred;
 Mortgage introducer fees are amortised under a
shorter timeframe

12. Northern Rock’s demise
2007 - Experienced liquidity issues
- Run on the bank
2008 – lost 90% of share value
2010 – Split into two banks
2011 – Put up for private sale
2012 – Purchased by Virgin Money

13. Questions...?

14. Deegan, Craig, Unerman, Jeffrey. Financial Accounting Theory.
McGraw Hill. 2011. Berkshire
Northern Rock PLC IFRS 2004 Restatement. Retrieved 03, 01 from:
http://www.investegate.co.uk/ArticlePrint. aspx?id=
200505130900012438M
Financial instruments — General hedge accounting. IASPlus. Retrieved
from: http://www.iasplus.com/en/projects
/completed/fi/general-hedge-accounting
Clarke, Robert and Stewart, Steven. Spotting the differences between
UK/ Irish GAAP and IFRS for SMEs. Tue, Sep 21, 2010
Financial Market Turmoil and Banking Reform. Retrieved from:
http://www.bankofengland.co.uk/publications/Pages/northern
rock/default.aspx