Regulatory Accounting Principles (RAP)

What Are Regulatory Accounting Principles?

Regulatory accounting principles (RAP) were presented by the former Federal Home Loan Bank Board (FHLBB) for the savings and loan industry (thrifts) that it directed during the 1980s with heartbreaking outcomes. Regulatory accounting principles were made to help low net-worth savings and loan associations with meeting capital requirements. The imperfect accounting procedures that the FHLBB allowed the thrifts to generously utilize were highlighted as one of the underlying reasons for the savings and loan industry debacle in the late 1980s.

Figuring out Regulatory Accounting Principles (RAP)

The casual rules of RAP enabled numerous generally indebted institutions to increase their reported profits and net worth falsely. A portion of the shocking accounting principles that the thrifts were permitted to apply were:

• Recording a loss from a sale of a mortgage loan as an asset that could be amortized over the excess life of the mortgage. During the 1980s, thrifts held large arrangement of long-term mortgages carried at cost on their balance sheets. The sharp rise in interest rates during the decade caused drops in the market value of these mortgages substantially below book value, yet RAP allowed losses to be classified as assets. Besides, the deferral of losses allowed the thrifts to keep utilizing assets at a capital requirement of 3%, and to create tax shields from the amortization of realized losses.
• Whole and immediate recognition of income from construction loan fees. Active in the real estate market during the 1980s, thrifts had the option to book fees (2.5% of the loan amount) from starting construction loans altogether upfront rather than partial recognition to match the costs incurred in beginning the loan and afterward ratably for the balance of the fee over the life of the loan.
• Inclusion of "appraised equity capital" for calculation of regulatory net worth. Appraised equity capital, an original concept, was the amount that certain capital assets like PP&E had valued over their book values. Thrifts were allowed to be particular, just recording these unrealized appreciation gains for capital assets whose market values increased above book values; assets whose market values declined below book values could be overlooked.
• Forty-year goodwill amortization of acquired thrifts. Troubled thrifts that were acquired carried huge amounts of mortgage assets far below book values. By buying one more thrift with such assets at a heavy discount (fair market value minus book value), the thrift had the option to record income over the estimated life of the assets on an interest-strategy basis of 10 years. Goodwill amortization, then again, could be spread out north of 40 years, which intended that during the 10-year period after acquisition, the acquirer could book profits since annual goodwill amortization expense was a lot more modest than under a 10-year requirement that existed before the implementation of RAP.

In the aftermath of the savings and loan crisis, Congress disposed of the FHLBB and, along with it, RAP. The Resolution Trust Corporation was set up and the thrifts that endure were forced to begin utilizing GAAP rules.