Differences in Regulatory Accounting Principles

Not all accounting principles are created equal: In many cases, different standards are used in different areas or for particular industries. Even in the United States, where accounting principles are highly regulated, there may be separate types of standards used for varying businesses. These standards can differ both from each other and from the overarching Generally Accepted Accounting Principles, or GAAP. While there is usually a good reason for this difference, it can also pose long-term accounting difficulties for the companies involved.

Regulatory Accounting Principles or Procedures, often abbreviated to RAP, are particular accounting standards that apply to specific businesses. In most cases the reference applies to standards chosen by the Federal Home Loan Bank Board to apply to Savings and Loan financial institutions, governing the way they show their income and account for expenses, especially when it comes to taxes.

The changes made for RAP for Savings and Loan businesses were not all made at once, which means that at certain times there were key differences in requirements. For example, 1989 saw the adoption of risk-based capital frameworks for the companies based on the international Basil Accord, while 1994 saw the implementation of the Riegle Community Development and Regulatory Improvement Act to make guidelines more uniform. When banks are supervised by the Office of the Comptroller of the Currency, the Federal Reserve System and the Federal Deposit Insurance Corporation, among others, standards can vary as the agencies create and attempt to match various legislation.

In general, RAP allows for amortization of key items that are not allowed to be amortized according to GAAP. Large gains or losses from sales can be distributed over periods of time in RAP so that the capital of Savings and Loan institutions appears more stable and allows the businesses to meet various capital requirements for the government. According to GAAP, however, all items, including gains and losses, must be matched to the time frame and activity that they are most directly linked to.

While RAP was designed to help Savings and Loan institutions by giving them a boost in capital, at least according to book values, it did not always have a beneficial effect. Essentially, by moving away from GAAP, RAP allowed businesses dangerously close to insolvency to report better figures than were applicable, creating both outside confidence and internal confidence that was unjustified and doing damage to the entire industry.