Financial Reporting and Disclosures For Banks - IFRSDisclosure requirements relating to financial statements of banks and similar financial institutions had long been set forth by IAS 30. Commencing with years beginning on or after January 1, 2007, however, a new, unified financial instruments disclosure standard, IFRS 7, has superseded the former standard.

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A broad definition of the term “bank” was set forth by IAS 30, and it covers all those enterprises (whether or not officially called a bank):

  • Which are financial institutions,
  • Whose principal activities are to accept deposits and borrow money for the purpose of lending and investing, and
  • Which are within the scope of banking and similar regulations.

 

Since banks’ operations differ in many material respects from other commercial enterprises, with liquidity and solvency being of paramount importance, the financial reporting by these entities inevitably will be somewhat specialized in nature.

In recognition of their special needs, IAS 30 established a number of disclosure requirements. Some of these disclosures are unusual when compared to those of other commercial enterprises, and may even be perceived by users of the banks’ financial statements as excessive or superfluous.

However, these disclosures have been made mandatory for banks, based on the unique characteristics of banks’ operations and the role banks play in maintaining public confidence in the monetary system of the country through their close relationship with regulatory authorities (such as the country’s central bank) and the government.

Further, a bank is exposed not only to liquidity risks but even risks arising from currency fluctuations, interest rate movements, changes in market prices, and counterparty failure. These risks arise not only in connection with assets and liabilities that are recognized on a bank’s statement of financial position, but also due to various off-balance-sheet items. Thus, certain disclosure requirements as outlined by IAS 30 relate to off-balance-sheet items as well.

Under previous standard IAS 30, the accounting and disclosures by banks and other financial institutions was set forth with substantial specificity. Much of this guidance has been eliminated, since the replacement standard, IFRS 7 (which became effective in 2007), deals with financial instrument disclosures in general. The actual form of the financial statements to be presented by banks and other financial institutions (e.g., the captions of revenue and expense categories) is no longer explicitly addressed. (Revised IAS 1 is thus the source for such guidance.)

This post offers certain of the guidance that had been provided under IAS 30. This should be understood as being only suggestions, not requirements, in determining the form and content of financial institution financial statements. IAS 1, most recently amended in 2007, applies to financial statements of all commercial, industrial, and business enterprises, including banks and similar financial institutions. It requires that disclosure be made of all significant accounting policies that were adopted in the preparation and presentation of an entity’s financial statements.

 

For financial institutions, appropriate disclosure of accounting policies would typically include the following:

1. The accounting policy setting forth the recognition of the principal types of income. An example of this disclosure follows:

Interest income and loan commitment fees are recognized on a time proportion basis* taking into account the principal outstanding and the rate applicable. Other fee income is recognized when due.

Note: * IAS 18 specifically requires that interest income be recognized on a time proportion basis.

2. Accounting policies relating to the valuation of investments and dealing securities. Example of accounting policy relating to valuation of investments is as follow:

Trading investments

Trading investments are carried at fair values with any gain or loss arising from changes in fair values being taken to the Statement of Comprehensive Income.

3. Accounting policy explaining the distinction between transactions and events that result in the recognition of assets and liabilities on the statement of financial position versus those that give rise to contingencies and commitments, including off-balance-sheet items. Example of accounting policy relating to off-balance-sheet items are as follow:

Commitments

Undrawn lending facilities, such as lines of credit extended to customers, that are irrevocable according to agreements with customers (and cannot be withdrawn at the discretion of the bank), are disclosed as commitments rather than as loans and advances to customers. If, and to the extent, the facilities are utilized by customers before year-end, these will be reported as actual loans and advances.

4. Accounting policy that outlines the basis for the determination of (a) The provision for possible losses on loans and advances; and (b) Write-off of uncollectible loans and advances. Example of accounting policies (adapted from published financial statements):

Impairment of loans and advances

Loans and advances are reviewed periodically at the date of each statement of financial position to determine whether there is objective evidence of impairment. If there is evidence of such impairment, it is to be estimated as set forth below:

a. In case of “originated loans and advances” based on the present value of the expected cash flows discounted at the instrument’s original effective interest rate.

b. In case of other “loans and advances” specific allowances are provided against those loans and advances that are identified as impaired based on reviews of the outstanding balances and in case of portfolios of similar loans and advances the expected cash flows which are estimated based on previous experience taking into consideration the credit rating of the underlying customers and their payment history and are discounted at original effective interest rates.

In subsequent years if the impairment losses reverse the provision is written back through the statement of comprehensive income.

5. Accounting policy explaining the basis for determining and setting aside amounts toward general banking risks and the accounting treatment accorded to this reserve.

Regulatory bodies, such as the central bank of the country in which the bank is incorporated, or local legislation may require or allow a bank to set aside amounts for general banking risks, including future losses or other unforeseeable risks or even reserves for contingencies over and above accruals required by IAS 37. It would not be proper to allow banks to charge these additional reserves to the statement of comprehensive income, as this would distort the true financial position of the bank. An example is:

Note 1. Statutory Reserves

As required by the Companies Commercial Code of Nation XYZ, and in accordance with the Bank’s articles of association, 10% of the net income for the year is set aside as a statutory reserve annually. Such appropriations of net income are to continue until the balance in the statutory reserve equals 50% of the bank’s paid-up capital.

 

The following suggestions have their origin in the requirements first set forth by IAS 30. These remain, imho, reasonable guidance for the preparation and presentation of the financial statements of banks.

 

Statement of Comprehensive Income of a Bank

The statement of comprehensive income of a bank should be presented in a manner that groups income and expenses by nature and discloses the amounts of the principal types of income and expenses.

1. Disclosures in the statement of comprehensive income or in the footnotes should include, but are not limited to, the following items:

  • Interest and similar income
  • Interest expense and similar charges
  • Dividend income
  • Fee and commission income
  • Fee and commission expense\
  • Gains less losses arising from dealing securities
  • Gains less losses arising from investment securities
  • Gains less losses arising from dealing in foreign currencies
  • Other operating income
  • Losses on loans and advances
  • General and administrative expenses
  • Other operating expenses

These disclosures, to be incorporated into the bank’s statement of comprehensive income, are of course in addition to disclosure requirements of other international accounting standards.

2. Separate disclosure of the principal types of income and expenses, as above, is essential in order that users of the bank’s financial statements can assess the performance of the bank.

3. The offsetting of income and expense items is prohibited, except those relating to hedges and to assets or liabilities wherein the legal right of setoff exists and the offsetting represents the expectation as to the realization or settlement of the asset or liability. If offsetting of items of income and expense had been allowed, it would prevent users from assessing the return on particular classes of assets; this, in a way, would restrict users of financial statements in their assessment of the performance of the bank.

4. The following statement of comprehensive income items are, however, allowed to be presented on a net basis:

  • Gains or losses from dealings in foreign currencies
  • Gains or losses from disposals of investment securities
  • Gains or losses from disposals and changes in the carrying amount of dealing securities

 

Bank’s Statement of Comprehensive Income Example

Income Statement Example for Banking 

 

Statement of Financial Position of a Bank (Balance Sheet)

The statement of financial position of a bank should group assets and liabilities by nature and list them in the order of their respective liquidity. This is explained further as follows:

1. Disclosure of the grouping of assets and liabilities by their nature and listing them by their respective liquidity is made either on the face of the statement of financial position or in the footnotes.

Assets:

  • Cash and balances with the central bank
  • Treasury bills and other bills eligible for rediscounting with the central bank
  • Government and other securities held for dealing purposes
  • Placements with, and loans and advances to, other banks
  • Other money market placements
  • Loans and advances to customers
  • Investment securities

Liabilities:

  • Deposits from other banks
  • Other money market deposits
  • Amounts owed to other depositors
  • Certificates of deposits
  • Promissory notes and other liabilities evidenced by paper
  • Other borrowed funds

 

These disclosures, to be incorporated into the bank’s statement of comprehensive income, are of course in addition to disclosure requirements set forth by other international accounting standards.

2. Grouping the assets and liabilities by nature does not pose a problem and, in fact, is probably the most logical way of combining financial statement items for presentation on the bank’s statement of financial position. For instance, deposits with other banks and loans/advances to other banks are combined and presented as a separate line item on the asset side of a bank’s statement of financial position and referred to as placements with other banks. These items would, however, be presented differently on financial statements of other commercial enterprises since deposits with banks in those instances would be combined with other cash and bank balances, and loans to banks would probably be classified as investments. On the other hand, balances with other banks are not combined with balances with other parts of the money market, even though by nature they are placements with other financial institutions, since this gives a better understanding of the bank’s relations with and dependency on other banks versus other constituents of the money market.

3. Listing of assets by liquidity could be considered synonymous with listing of liabilities by maturity, since maturity is a measure of liquidity in case of liabilities. For instance, certificates of deposits are liabilities of banks and have contractual maturities of perhaps, one month, three months, six months, and one year. Similarly, there are other bank liabilities, such as promissory notes, that may not be due, perhaps, for another three years from the date of the statement of financial position. Thus, a relative maturity analysis would suggest that the certificates of deposit be listed on the bank’s statement of financial position before or above the promissory notes since they would mature earlier. Similarly, assets of a bank could be analyzed based on their relative liquidity, and those assets that are more liquid than others (i.e., will convert into cash faster than others) should be listed on the statement of financial position above the others. Thus, cash balances and balances with the central bank are usually listed above other assets on the statement of financial position of all banks, being relatively more liquid than other assets.

4. Offsetting of assets against liabilities, or vice versa, is generally not allowed unless a legal right of setoff exists and the offsetting represents the expectation as to the realization or settlement of the asset or liability. This is a requirement established by IAS 1, which applies to all entities reporting in accordance with IFRS, and was not intended only for financial institutions.

5. The since-superseded IAS 25 had previously provided that entities not normally distinguishing between current and long-term investments in their statements of financial position were nevertheless to make such a distinction for measurement purposes. Under IAS 39, the current versus long-term distinction is no longer important, but it will instead be necessary to assign all such investments to the trading, available-for-sale, or held-to-maturity portfolios. IAS 30 stipulates that banks must disclose the market value of investments in securities if different from the carrying values in the financial statements. Since both trading and available-for-sale securities are carried in the statement of financial position at fair value, this added disclosure requirement now only impacts held to maturity securities, which are maintained at amortized cost.

Bank’s Statement of Financial Position (Balance Sheet) Example

Statement of Financial Position - Balance Sheet Example

 

 
Statement of Cash Flows for Banks and Other Financial Institutions

Statements of cash flows are an integral part of financial statements. Every entity is required to present a statement of cash flows in accordance with the provisions of IAS 7. Although the general requirements of IAS 7 are common to all entities, the standard does contain special provisions that are applicable only to financial institutions. These specific provisions deal with reporting of certain cash flows on a “net basis.” The following cash flows are to be reported on a net basis:

  • Cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the enterprise; the standard refers to “the accepting and repayment of demand deposits of a bank.
  • Cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity date
  • The placement of deposits with and withdrawal of deposits from other financial institutions
  • Cash advances and loans made to customers and the repayment of those advances and loans

 

Example of statement of cash flows for banks

Example of Statement of Cash Flows for Banks