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Anglo Irish Bank – the circular transaction explained.


My colleague Michael Farrell has written a nice post explaining the dodgy accounting transactions at Anglo Irish Bank – the bank that was a big part of the Irish financial crisis in recent years.

michaelfarrellonline

anglo_irish_bank_Sept052008.jpg

Former executives from Anglo Irish Bank (“Anglo”) and Irish Life and Permanent (“ILP”) are alleged to have conspired to mislead investors by setting up a €7.2bn circular transaction scheme to bolster Anglo’s balance sheet in 2008.

The simplified debits and credits (from Anglo’s perspective) for the “circular transaction” as it’s being called are as follows:

1) Amount put on deposit with Anglo by ILP: 

Dr Cash €7.2bn

Cr Customer Deposits €7.2bn (shown as a liability)

2) Amount “lent” to ILP by Anglo:

Dr Loans and Advances to Banks €7.2bn (shown as an asset)

Cr Cash €7.2bn

Per the above, the transaction is cash neutral, so what’s the big deal? The issue is that the €7.2bn recorded as a customer deposit with the bank would be (and was) incorrectly interpreted by the bank’s wider stakeholders as a measure of customer confidence in the bank.

So where do the accounting rules stand on…

View original post 252 more words

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About martinjquinn

I am an accounting academic, accountant and author based near Dublin, Ireland.

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