Basic Bank Accounts

BANK ACCOUNTS

Functions of Bank

1.       Borrowing and lending money.

2.       Accepts deposits.

3.       Offering financial advice

4.       Agency services e.g. stock broker.

5.       Foreign exchange.

6.       Fund management e.g. pension funds.

7.       Custodian services e.g. valuable items like certificates, property titles.

Financial statements

1.       IS

      Incomes                                                                                         Sh.

Interest income

-          On loans and advances                                                  XX

-          On treasury bills                                                               XX

-          Other interests                                                                                 XX

Interest expenses

-          On borrowings                                                                  (XX)

-          Other interest expenses                                                              (XX)

Net interest income                                                       XX

Other incomes

-          Investment income                                                        XX

-          Commissions                                                                     XX

-          Fees for services                                                              XX

Total incomes                                                                    XX

Other expenses

-          Administration expenses                                             (XX)

-          Provisions                                                                           (XX)

-          Depreciation                                                                      (XX)

-          Profit                                                                                        XX

2.       Statement of Financial Position

Assets

Arranged in order of liquidity starting with the most liquid and end with the less liquid.

e.g.

-  Loans and advances to customers

- Bank overdraft

- Other assets

Liabilities

-          Customer deposits e.g. Fixed deposits, current A/c deposits, savings deposit.

Definition of terms

1.      Cash credit

-          In some cases the bank may enter into an arrangement with its customers to reserve a specific amount of money for that particular customer such that the customer can withdraw anytime. The bank will charge interest based on the actual amount withdrawn and also charge a small fee for maintaining the reserve for the customer.

2.      Overdraft

-          This is an asset to the bank. It’s a facility given to bank customers to allow them overdraw their a/c up to a certain limit. The bank will charge interest on the actual amount withdrawn.

3.      Discounting of bills of exchange

-          Are assets to the bank. Discounting charges are incomes.

-          Rebate on bills discounted are liabilities- unearned discounting charges.

4.      Advances

-          Includes loans, overdrafts or any money advanced by the bank to its customers. It’s an asset to the bank.

5.      Customer deposits

-          May be in form of fixed, current or savings deposit. They are liabilities to the bank.

6.      Bills for collection

-          A bank may act as an agent and holds bills of exchange on behalf of its customers for collection. On maturity of the bill the bank will collect the money on behalf of the customer.

-          This item will appear as an asset as well as a liability in the P+L because, the bank will collect the cash from the drawee therefore an asset and also the bank is liable to its customer for the same amount of cash, therefore a liability.

-          This item is shown as an off balance sheet i.e. it’s shown in the notes to the a/c.

7.      Liabilities for acceptances, endorsements and guarantees on behalf of customers.

-          Appears as an asset and a liability to the bank therefore shown as an off balance sheet item in the notes.

8.      Money at call and short notice

-          It’s an asset to the bank. Refers to short term lending especially to other banks. E.g. overnight lending.

-          When the money is payable within a single day it is referred to as money at call.

-          When it requires at least a short notice to be paid it is known as money at short notice.

IAS 1 PRESENTATION OF FINANCIAL STATEMENTS

PRESENTATION OF FINANCIAL STATEMENTS

Objective of IAS 1

The objective of IAS 1 is to prescribe the basis for presentation of general purpose financial statements, to ensure comparability both with the entity's financial statements of previous periods and with the financial statements of other entities.

Scope of IAS 1

IAS 1 applies to all general purpose financial statements based on International Financial Reporting Standards.

General purpose financial statements are those intended to serve users who are not in a position to require financial reports tailored to their particular information needs.

Objectives of Financial Statements

The objective of general purpose financial statements is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. To meet that objective, financial statements provide information about an entity's:

·         Assets

·         Liabilities

·         Equity

·         Income and Expenses, including gains and losses

·         Contributions by and distributions to owners

·         Cash flows

That information, along with other information in the notes, assists users of financial statements in predicting the entity's future cash flows and, in particular, their timing and certainty.

Components of Financial Statements

A complete set of financial statements should include:

1.      A statement of financial position (balance sheet) at the end of the period

2. A statement of comprehensive income for the period (or an income statement and a statement of comprehensive income)
3. A statement of changes in equity for the period
4. A statement of cash flows for the period
5. Notes, comprising a summary of accounting policies and other explanatory notes

NB: When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements, it must also present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period.

An entity may use titles for the statements other than those stated above.

Key Terms in IAS 1

1.      Fair Presentation and Compliance with IFRSs

The financial statements must "present fairly" the financial position, financial performance and cash flows of an entity.

Fair presentation requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework.

The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation.

2.      Going Concern

An entity preparing IFRS financial statements is presumed to be a going concern. If management has significant concerns about the entity's ability to continue as a going concern, the uncertainties must be disclosed.

If management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis, in which case IAS 1 requires a series of disclosures.

3.      Accruals Basis of Accounting

IAS 1 requires that an entity prepare its financial statements, except for cash flow information, using the accrual basis of accounting. That is, costs should be recognized when incurred but not when money expense has been paid while income should be recognized when it has been earned but not when revenue has been received.

4.      Consistency of Presentation

The presentation and classification of items in the financial statements shall be retained from one period to the next unless a change is justified either by a change in circumstances or a requirement of a new IFRS.

5.      Materiality and Aggregation

Each material class of similar items must be presented separately in the financial statements. Dissimilar items may be aggregated only if they are individually immaterial.

6.      Set – Offs (Offsetting)

Assets and liabilities, and income and expenses, may not be offset unless required or permitted by an IFRS.

7.      Comparative Information

IAS 1 requires that comparative information shall be disclosed in respect of the previous period for all amounts reported in the financial statements, both face of financial statements and notes, unless another Standard requires otherwise. If comparative amounts are changed or reclassified, various disclosures are required.

Structure and content of financial statements in general

Clearly identify: the financial statements

1. The reporting enterprise
2. Whether the statements are for the enterprise or for a group
3. The date or period covered
4. The presentation currency
5. The level of precision (thousands, millions, etc.)

Reporting period

There is a presumption that financial statements will be prepared at least annually. If the annual reporting period changes and financial statements are prepared for a different period, the entity must disclose the reason for the change and a warning about problems of comparability.

Notes to the Financial Statements

The notes must:

• Present information about the basis of preparation of the financial statements and the specific accounting policies used
• Disclose any information required by IFRSs that is not presented elsewhere in the financial statements and
• Provide additional information that is not presented elsewhere in the financial statements but is relevant to an understanding of any of them

IAS 1suggests that the notes should normally be presented in the following order:

1. A statement of compliance with IFRSs
2. A summary of significant accounting policies applied, including:
• The measurement basis (or bases) used in preparing the financial statements
• The other accounting policies used that are relevant to an understanding of the financial statements
3. Supporting information for items presented on the face of the statement of financial position (balance sheet), statement of comprehensive income (and income statement, if presented), statement of changes in equity and statement of cash flows, in the order in which each statement and each line item is presented
4. Other disclosures, including:
• Contingent liabilities (see IAS 37) and unrecognized contractual commitments
• Non-financial disclosures, such as the entity's financial risk management objectives and policies (see IFRS 7)

Terminology

The 2007 comprehensive revision to IAS 1 introduced some new terminology. Consequential amendments were made at that time to all of the other existing IFRSs, and the new terminology has been used in subsequent IFRSs including amendments.

Term before 2007 revision of IAS 1	Term as amended by IAS 1 (2007)
Balance Sheet	Statement of financial position
Cash Flow Statement	Statement of cash flows
Income Statement	Statement of comprehensive income (income statement is retained in case of a two-statement approach)
Recognised in the income statement	Recognised in profit or loss
Recognised [directly] in equity (only for OCI components)	Recognised in other comprehensive income
Recognised [directly] in equity (for recognition both in OCI and equity)	Recognised outside profit or loss (either in OCI or equity)
Removed from equity and recognised in profit or loss ('recycling')	Reclassified from equity to profit or loss as a reclassification adjustment
Standard or/and Interpretation	IFRSs
On the face of	In
Equity holders	Owners (exception for 'ordinary equity holders')
Balance sheet date	End of the reporting period
Reporting date	End of the reporting period
After the balance sheet date	After the reporting period

                                                 

                                                      

Regulatory framework of accounting

REGULATORY FRAMEWORK

The Regulatory System

Structure of the International Regulatory System

The IASC Foundation

 

IASB

IFRIC

SAC

 

The International Accounting Standards Committee (IASC) Foundation

The IASC Foundation:

·         Is a supervisory body for the new structure

·         Has 22 trustees

·         Is responsible for governance issues and ensuring each body is properly funded

Objectives of IASC Foundation

1)      Develop a set of global accounting standards which are of high quality, are understandable and are enforceable

2)      Which require high quality, transparent and comparable information in financial statements to help those in the world’s capital markets and other users make economic decisions

3)      Promote using and applying of these standards

4)      Bring about the convergence of national and international accounting standards

International Accounting Standards Board (IASB)

The IASB:

·         Is solely responsible for issuing International Accounting Standards (IASs)

·         Standards now called International Financial Reporting Standards (IFRSs)

·         Is made up of 14 members

·         Has the same objectives as the IASC Foundation

The IASB and National Standard Setters

The intentions of the IASB are

·         To develop a single set of understandable and enforceable high quality world wide accounting standards, however

·         The IASB cannot enforce compliance with its standards, therefore

·         It needs the co-operation of national standard setters

In order to achieve this IASB works in partnership with the major national standard setting bodies:

·         All the most important national standard setters are represented on the IASB and their views are taken into account so that a consensus can be reached

·         All national standard setters can issue IASB discussion papers and exposure drafts for comment in their own countries, so that the views of all preparers and users of financial statements can be represented

·         Each major national standard setter ‘leads’ certain international standard setting projects

The IASB intends to develop a single set of understandable and enforceable high quality worldwide accounting standards.

International Financial Reporting Interpretations Committee (IFRIC)

·         Issues rapid guidance on accounting matters where divergent interpretations of IFRSs have arisen

·         Issues interpretations called IFRIC 1, IFRIC 2, etc

In 1997 the IASC formed the Standards Interpretation Committee (SIC) to ensure proper compliance with IFRSs by considering points of contention where divergent interpretations have emerged and issuing an authoritative view; 33 interpretations (entitled SIC 1, SIC 2, etc) were issued by the SIC before its change of name (see below).

SICs are important because IAS 1 (revised) states that financial statements cannot be described as complying with IFRSs unless they comply with each IAS/IFRS and each interpretation from the SIC/IFRIC.

In 2002 the SIC changed its name to the International Financial Reporting Interpretations Committee (IFRIC). Interpretations are now designated IFRIC 1, IFRIC 2, etc.

Standards Advisory Council (SAC)

The SAC provides a forum for a range of experts from different countries and different business sectors to offer advice to the IASB when drawing up new standards.

The procedure for the development of an IFRS is as follows:

1)      The IASB identifies a subject and appoints an advisory committee to advise on the issues

2)      The IASB publishes an exposure draft for public comment, being a draft version of the intended standard

3)      Following the consideration of comments received on the draft, the IASB publishes the final text of the IFRS

4)      At any stage the IASB may issue a discussion paper to encourage comment

5)      The publication of an IFRS, exposure draft or IFRIC interpretation requires the votes of at least 8 of the 14 IASB members

Status of IFRS’s

Neither the IASC Foundation, the IASB nor the accountancy profession has the power to enforce compliance with IFRSs. Nevertheless, some countries adopt IFRSs as their local standards, and others ensure that there is minimum difference between their standards and IFRSs. In recent years, the status of the IASB and its standards has increased, so IFRSs carry considerable persuasive force worldwide.

Benchmark Treatment and Allowed Alternative Treatment

Some older IASs have two choices of treatment of items in the financial statements:

·         Benchmark treatment

·         Allowed alternative treatment

In future IFRSs:

·         If different treatments are allowed they will be given equal status

·         No treatment will be designated as the benchmark treatment

This is the case in IFRS 3 (revised), issued in 2008, which provides a choice of treatment with regard to goodwill

The Regulatory Framework

The regulatory framework of accounting in each country which uses IFRS is affected by a number of legislative and quasi-legislative influences as well as IFRS:

·         National Company Law

·         EU directives

·         Security Exchange Rules

Why a Regulatory Framework is Necessary

A regulatory framework for the preparation of financial statements is necessary for the following reasons:

1)      Financial Statements are used by a wide range of users – investors, lenders, customers, etc.

2)      They need to be useful to these users

3)      They need to be comparable

4)      They need to provide at the least some basic information

5)      They increase users’ understanding of, and confidence in, financial statements

6)      They regulate the behavior of  companies towards their investors

Accounting standards on their own would not be a complete regulatory framework. In order to fully regulate the preparation of financial statements and the obligations of companies and directors, legal and market regulations are also required

Principles Based and Rules Based Framework

Principles based Framework:

·         Based upon a conceptual framework such as the IASB’s Framework

·         Accounting standards are set on the basis of conceptual framework

Rules based framework

·         Cookbook approach

·         Accounting standards are a set of rules which companies must follow

For Example: In the UK there is a principles based framework in terms of the statement of principles and accounting standards and a rules based framework in terms of the Companies Acts, EU directives and Stock Exchange Rules.