Brian Hayes (Dublin South West, Fine Gael)

I 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.

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