NEW YORK: The European Central Bank recently reported its first annual operating loss since 2004. Its losses for 2023 amounted to 1.3 billion euros ($1.41 billion), following the release of 6.6 billion euros from its provision for financial risks. In its accounting treatment of this loss, the ECB is relying on the same misleading fudge as the US Federal Reserve Board, which has conjured up a "deferred asset" category to deal with excessive losses.
As the ECB press release explains, this loss "will be carried forward on the ECB's balance sheet to be offset against future profits." This means that a loss was entered as a positive asset, even though the sensible alternative would have been to enter it as negative retained earnings in the shareholders' equity section on the liabilities side of the balance sheet. Total net equity — the sum of paid-up capital, any amounts held in the financial risks and general reserve funds, the revaluation accounts, any accumulated losses from previous years, and any profit/(loss) for the year — should be on the liabilities side of the balance sheet.
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