Question

After graduation, you work for a few years at a major accounting firm and advance to Senior.

However, as part of this role, you start working on a client that is different from your other

background: specifically, a major bank located in San Francisco. This bank primarily takes

deposits from retail and business customers and lends money out to others. The accounting seems

to be completely different from what you are used to and so you go to the Codification to find out

what the accounting standards for this industry consist of. Describe the major classes of

transactions undertaken by this sort of entity and how they should be accounted for.

Answer 1

Financial Instruments (IFRS 9/IAS 39, IAS 32) - If you are working in a bank, then the standards about financial instruments are absolutely a MUST for you. financial instruments are very complex and involve lots of considerations and topics. Not only banks face financial instruments – any trading company has some financial instruments, too (if selling and invoicing). The truth is that banks enter into many complicated transactions, issue various types of compound financial instruments (in which both equity and liability element is present, e.g. convertible bond), generate loans to different portfolios of clients with different credit risk and many others. IFRS 9 Financial Instruments, which will have a significant impact on the balance sheet, along with accounting systems and processes.

2 Presentation of financial statements (IAS 1, IAS 7, IFRS 7) - Banks present their financial position and financial performance in totally different way than other companies. The standard IAS 1 Presentation of Financial Statements does not prescribe the format of the statement of financial position – however, it brings some examples of accepted formats, as soon as you include items mandatorily required by IAS 1, you are OK with your selected format. When you look at the statement of financial position of any bank, you will not see the balance sheet that you are used to in other types of companies, starting with non-current assets (property, plant and equipment, intangibles), followed by current assets (inventories, receivables, cash), and then the second part starting with equity, non-current liabilities finishing with current liabilities. What you would see instead is the statement in which individual items are ordered by their liquidity, starting from the most liquid assets, finishing with the least liquid ones. The equity & liabilities part corresponds with the assets – it starts with the current liabilities in a descending order of liquidity and finishing with equity.

3 Consolidation and special purpose entities IFRS 10, IFRS 12) - Banks love to use special purpose entities. Before some time, it was a “great and creative” way of hiding some undesirable or toxic assets from the eyes of public, as the special purpose entities were usually not included in the consolidation (understand: no one saw them).However, after a few accounting scandals (for example, Enron), there were new and strong rules adopted. In IFRS, we have the standards IFRS 10 Consolidated Financial Statements and IFRS 12 Disclosure of Interests in Other Entities, that require inclusion of structured entities in the consolidation when they meet the conditions (basically, when banks has control over SPE).Even today, many banks use literally hundreds of SPEs for various purposes, mostly for securitization of their loan receivables, holding some tax-efficient leases, for asset-backed financing, etc.

Major classes of transactions undertaken by the banks are as follows –

1. Interest income and expenses
2. Lending and borrowing
3. Fees and commission income and Expenses
4. Income from financial Instruments
5. Income from investments in associates.

Major classes of transactions undertaken by this entity is Lending and borrowing of money.

Accounting treatment of above is as follows.

  

For Lending money

Loans and advances A/c     Dr

      To Customer current A/c       Cr

(Journal entry for Loan given by the Bank)

Customer Current A/c    Dr

   To Cash /Bank   A/c

(Amount paid by the bank)

Customer A/c         Dr

        To Interest Earned A/c     Cr

(Interest Received by the bank from Customer)

Cash   A/c    Dr

   To Advances Received (Loan)   Cr

( Being Money borrowed by the bank)

Interest paid A/c Dr

     To Customer A/c

( Interest Paid To customer