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:
| Company | Bank |
| Assets | Assets |
| Non-Current Asset | Cash and cash equivalents |
| Property, plant & Equipment | Financial Asset holding for trading |
| Intangible Assets | Loans and advances for banks |
| Investment in associates | Loans and advances to clients (net) |
| Deferred Income tax assets | Financial Asset at fair value through P/L |
| Total Non-Current Assets | Financial Asset at fair value through OCI |
| Current Assets | Investment in associates |
| Inventories | Intangible Assets |
| Trade and other receivables | Property, Plant & Equipment |
| Current Income tax assets | Deferred Income tax assets |
| Cash and Cash Equivalents | Current income tax assets |
| Total Assets | Total Assets |
| Equity and Liabilities | Equity and Liabilities |
| Authorized Share Capital | Liabilities |
| Ordinary Share Capital | Trading Liabilities |
| Retained earnings | Deposits and Current account from banks |
| Other components of equity | Deposits from Clients |
| Total Equity | Derivative financial Liabilities |
| Non-Current Liabilities | Provisions |
| Deferred Income Tax liabilities | Deferred tax Liabilities |
| Borrowings | Total Liabilities |
| Total Non-Current Liabilities | Equity |
| Current Liabilities | Share Capital |
| Trade and Other Payable | Reserves and other components of equity |
| Current Income Tax liabilities | Retained earnings from previous periods |
| Total Current Liabilities | Net profit for the reporting period |
| Total Labilities | Total Equity |
| TOTAL EQUITY AND LIABILITIES | TOTAL EQUITY AND LIABILITIES |
Statement of Comprehensive Income and Other Comprehensive Income of Banks (IAS-1)
| COMPANY | BANKS |
| Profit | Profit |
| Revenue | Interest Income |
| Cost of Sales | Interest Expense |
| Gross Profit | Net Interest Income |
| Other income | Loss allowances on clients loans |
| Distribution Cost | Net Interest Income after loss allowances |
| Selling expenses | Fee and commission income |
| Administrative expenses | Fee and commission expense |
| Other expenses | Net fee and commission income/(expense) |
| Profit from operations | Net trading income |
| Finance Cost | Net income from other financial Instruments |
| Share of profit from associates | Net income from investments in associates |
| Profit before tax | Personnel expenses |
| Income tax expense | Administrative and other expenses |
| Profit for the year from continued operations | Profit before tax |
| Loss for the year from discontinued operations | Income tax expense |
| Profit for the year | Profit for the year |
| OTHER COMPREHENSIVE INCOME | OTHER COMPREHENSIVE INCOME |
| Actuarial Gain/(Loss) on pension plan | Actuarial Gain/(Loss) on pension plan |
| Gain on property revaluation | Gain on property revaluation |
| Items classified subsequent to profit and loss | Items classified subsequent to profit and loss |
| Cash Flow hedges | Cash Flow hedges |
| Exchange differences on translation foreign operations | Exchange differences on translation foreign operations |
| Income tax relating to items that may be reclassified | Income tax relating to items that may be reclassified |
| Other Comprehensive income for the year net of tax | Other Comprehensive income for the year net of tax |
| TOTAL COMPREHENSIVE INCOME FOR THE YEAR | TOTAL COMPREHENSIVE INCOME FOR THE YEAR |
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