IFRS for Banks

If you’re working in a financial institution or in Bank, then the standards about financial Instrument are in reality an ought to for you. The standards which deal with financial instruments are IFRS 9/IAS 39 and IAS 32). The standards are same for companies and banks but the way we deal with them in presentation, application and disclosure is different. Of Course – money is a financial instrument itself! Financial Instruments are very complex and contain lots of consideration topics and subjects.

The fact is that banks enter into many complex transactions, issue various types of compound financial instruments (in which each equity and liability detail are present, e.g. aconvertible bond), generate loans to one of thekind portfolios of customers with different credit risk and many others.

Inside the financial Instruments, the hottest problems are as follows:

In short: IFRS 9 introduced expected credit loss model for recognizing loss allowance to financial assets. And banks are affected significantly.

The majority of other sorts of corporations can use simplified approach accepted by means of IFRS 9 for the impairment of financial assets and calculate loss allowances entirely in the amount of lifetime anticipated credit losses. However, banks cannot use simplified approach for the biggest group in their monetary assets – loans, due to the fact the loans do now not fall within the exception.

Impairment of Financial Assets:-

Bank need to apply three stage general model for recognizing loss allowance:-

Stage 1: Performing

Stage 2: Credit Risk Significantly Increased

Stage 3: Credit Impaired

Financial Asset not yet impaired in first two stages.

Now banks have to decide whether the individual financial asset will be monitored individually or collectively. Individual for big loans while collectively for lots of similar loan with low volumes. After careful analysis of financial asset that where they belong or at what stage they belong among three stages: Performing, with significantly increased credit risk or credit impaired. On based off these stages banks have to evaluate loss allowance equals to 12 months of expected credit loss or lifetime expected credit loss. Banks may additionally need to categorize its loan into various portfolios and display relevant statistics for each portfolio one at a time, based on some not unusual traits.

Classification and Measurement of Financial Assets:-

As per IFRS 9 the classification of financial assets mainly based on two sets: Contractual Cash flow test and Business Model test. The objective of thebusiness model is to hold assets to collect contractual cash flows plus sell while on another hand the objective of contractual cash flow characteristics is cash flow on specific dates that are solely principle plus interest.

After classification now it’s time to measure the financial asset based on this classification. The measurement is a based normally through three ways:-

-Amortized Cost

-Fair Value through profit & loss

-Fair value through other comprehensive income.

 

Distinguished Liabilities from Equity:-

If there is a contractual obligation to transfer benefit then we have to record it as a liability otherwise credited to equity.

Presentation of Financial Statements:-

Banks have a different way of presenting their financial position and financial performance as compared to companies. The comparison is:

CompanyBank
AssetsAssets
Non-Current AssetCash and cash equivalents
Property, plant & EquipmentFinancial Asset holding for trading
Intangible AssetsLoans and advances for banks
Investment in associatesLoans and advances to clients (net)
Deferred Income tax assetsFinancial Asset at fair value through P/L
Total Non-Current AssetsFinancial Asset at fair value through OCI
Current AssetsInvestment in associates
InventoriesIntangible Assets
Trade and other receivablesProperty, Plant & Equipment
Current Income tax assetsDeferred Income tax assets
Cash and Cash EquivalentsCurrent income tax assets
Total AssetsTotal Assets
Equity and LiabilitiesEquity and Liabilities
Authorized Share CapitalLiabilities
Ordinary Share CapitalTrading Liabilities
Retained earningsDeposits and Current account from banks
Other components of equityDeposits from Clients
Total EquityDerivative financial Liabilities
Non-Current LiabilitiesProvisions
Deferred Income Tax liabilitiesDeferred tax Liabilities
BorrowingsTotal Liabilities
Total Non-Current LiabilitiesEquity
Current LiabilitiesShare Capital
Trade and Other PayableReserves and other components of equity
Current Income Tax liabilitiesRetained earnings from previous periods
Total Current LiabilitiesNet profit for the reporting period
Total LabilitiesTotal Equity
TOTAL EQUITY AND LIABILITIESTOTAL EQUITY AND LIABILITIES

Statement of Comprehensive Income and Other Comprehensive Income of Banks (IAS-1)

COMPANYBANKS
ProfitProfit
RevenueInterest Income
Cost of SalesInterest Expense
Gross ProfitNet Interest Income
Other incomeLoss allowances on clients loans
Distribution CostNet Interest Income after loss allowances
Selling expensesFee and commission income
Administrative expensesFee and commission expense
Other expensesNet fee and commission income/(expense)
Profit from operationsNet trading income
Finance CostNet income from other financial Instruments
Share of profit from associatesNet income from investments in associates
Profit before taxPersonnel expenses
Income tax expenseAdministrative and other expenses
Profit for the year from continued operationsProfit before tax
Loss for the year from discontinued operationsIncome tax expense
Profit for the yearProfit for the year
OTHER COMPREHENSIVE INCOMEOTHER COMPREHENSIVE INCOME
Actuarial Gain/(Loss) on pension planActuarial Gain/(Loss) on pension plan
Gain on property revaluationGain on property revaluation
Items classified subsequent to profit and lossItems classified subsequent to profit and loss
Cash Flow hedgesCash Flow hedges
Exchange differences on translation foreign operationsExchange differences on translation foreign operations
Income tax relating to items that may be reclassifiedIncome tax relating to items that may be reclassified
Other Comprehensive income for the year net of taxOther Comprehensive income for the year net of tax
TOTAL COMPREHENSIVE INCOME FOR THE YEARTOTAL COMPREHENSIVE INCOME FOR THE YEAR
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