Transcript Slide 1

THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF BANGLADESH
ICAB CPE
on
Presentation of Financial Statements of
banks: Disclosure under IFRS 7
Presented by:
Md Shahadat Hossain, FCA
July 09 , 2008
Objectives of IFRS 7
The main objectives are:
• Providing disclosures that enable
users to evaluate the significance of
financial instruments relating to an
entity's financial position and
performance.
• Disclosing the nature and extent of
risks appearing from the financial
instruments to which an entity is
exposed, and how those risks have
been managed or to be managed.
of IFRS
Basis of Scope
preparation
of 7guideline
The standard in overall sense applies to all
risks arising from all financial instruments,
including those instruments that are not
recognized on-balance sheet.
For example, loan commitments are not within
the scope of Financial Instruments: but their
Recognition and Measurement (IAS 39) are
within the scope of IFRS 7.
Contracts to buy or sell a non-financial item
that are within the scope of IAS 39 (as
derivative financial instruments) are also
within the scope of IFRS 7.
Balance Sheet
• Financial assets at fair value through
profit or loss.
• Held-to maturity investments.
• Loans and receivables.
• Available-for-sale financial assets.
• Financial liabilities at fair value through
profit or loss
• Financial liabilities measured at amortized
cost
Financial assets at fair value
through profit or loss
These include financial assets that the bank
either holds for trading purposes or has
otherwise elected to classify into this
category.
A financial asset is held for trading if the
bank acquired it for the purpose of selling it
in the near future, or it is part of a portfolio
of financial assets subject to trading.
Held-to maturity investments
These include investments in debt
instruments that the company will not sell
before their maturity date, irrespective of
changes in market prices or the
company's financial position or
performance of the Company.
Loans and receivables
These include financial assets with
fixed or determinable payments that
do not have a quoted price in an
active market.
A bank can classify accounts
receivables and loans to customers
under this category.
Available-for-sale financial assets
This category includes financial assets
that do not fall into any of the other
categories, or those assets that the bank
has elected to classify into this category.
For example- a company could classify
some of its investments in debt and equity
instruments as available-for-sale financial
assets
Financial liabilities at fair value
through profit or loss
Financial liabilities at fair value through
profit or loss include financial liabilities
that the bank either has incurred for
trading purposes or has otherwise elected
to classify into this category.
For example- An issued debt instrument
that the bank intends to repurchase soon to make a gain from short-term
movements in interest rates
Financial liabilities measured at
amortized cost
Financial liabilities measured at
amortized cost is the default category for
financial liabilities that do not meet the
definition of financial liabilities at fair
value through profit or loss.
For example- accounts payables, loan
notes payable, issued debt instruments,
and deposits from customers, etc.
Other Sundry Balance Sheet
Disclosures
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Reclassification
Derecognition
Collateral given
Collateral received
Allowances for credit losses
Compound financial instruments
Defaults and breaches
Reclassification
• When a held-to-maturity investment is
classified as available-for-sale, it should
be remeasured at fair value at the date of
reclassification
• The difference between its previous
carrying amount and fair value should be
recognized in equity.
Reclassification-Example
Fair value of Tk 1 million bond (10% of Tk 10,749,395)
1,074,940
Carrying value of Tk 1 million bond (10% of Tk 10,407,192) 1,040,719
------------------Profit on disposal recognized in profit or loss
34,221
Fair value of Tk 9 million bond (90% of Tk 10,749,395)
9,674,395
Carrying value of Tk 9 million bonds(90% of Tk 10,407,192) 9,366,473
Gain on reclassification recognized in equity
307,982
Income Statement
Net gains and net losses on :
–Financial assets or financial liabilities at
fair value through profit or loss
–Available-for-sale financial assets
–Held-to-maturity investments
–Loans and receivable, and
–Financial liabilities measured at amortized
cost
Fair Value
The standard emphasized disclosures
Relating to the methods and significant
Assumption used to determine fair value
for the different classes of financial
instruments.
The required disclosures include:
• Whether the fair value is based on
quoted prices or valuation techniques
Fair Value, Contd….
•
Whether the fair value is based on a
valuation technique that includes
assumptions not supported by market
prices or rates, and, if so, the amount of
the change in fair value recognized in
profit or loss that arises from the use of the
valuation technique
•
The effect of reasonably possible
alternative assumptions used in a
valuation technique
Qualitative Risk Disclosures
The qualitative disclosures should include
a narrative description of the risks the
bank is exposed to and how they arise.
The policies and processes for managing
the risks would typically include:
• The structure and organization of the risk
management function
 The scope and nature of the risk reporting
and measurement systems
Qualitative Risk Disclosures
(Contd)……
• The policies and procedures for hedging or
mitigating risks, including the taking of
collateral
• Processes for monitoring the continuing
effectiveness of hedges and other risk
mitigating devices
• Policies and procedures for avoiding
excessive concentrations of risk.
Quantitative Risk Disclosures
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•
•
•
Credit Risk
Credit Concentrations
Maximum Credit Exposures
Financial Assets that are neither past due
nor impaired
• Financial Assets that either past due or
impaired
• Liquidity Risk
• Market Risk
Liquidity Risk
Factors mentioned in the Implementation
Guidance that the entity might consider in
describing how manages its liquidity risks
include whether the bank (entity):
• expects some liabilities may be paid later than
the earliest contractual due date
• has undrawn loan commitments that are not
expected to be drawn
• holds financial assets for which there is a liquid
market and are, therefore, readily saleable to
meet liquidity needs
• has committed borrowing facilities which it could
use to help provide liquidity
Market Risk
Market risk is defined as “the risk that the fair
value or future cash flows of a financial
instrument will fluctuate because of changes in
market prices” and includes interest rate risk,
foreign currency risk and other price risks,
such as equity and commodity risk.
A separate sensitivity analysis for each type of
market risk to which the bank is exposed at the
reporting date, based on changes in the risk
variable that are considered reasonably
possible at that date
Relation between Basel II and IFRS 7
One of the fundamental objectives of Basel II
is to minimize risk in operation, and with
that end in view different types of risk are
considered to determine the minimum
capital requirements.
Objective of IFRS 7 is also to provide those
disclosures in the financial statements that
may enable users to evaluate the nature and
extent of risks instruments to which an
entity is exposed, and how those are
planned to be managed.
Relation between Basel II and IFRS 7
(Contd…..)
From this it appears that there is a close
relation between Basel II and IFRS 7. So
implementation of IFRS 7 in all banks could
be considered as one step advancement of
implementation of Basel II.
Conclusion
Accounts of a bank are prepared as per
contents of Bank Companies Act (Act of
parliament). Despite that implementation of
IFRS 7 will not be any hindrance because
IFRS 7 is mostly addition to IAS-30.
However, as a regulatory body Bangladesh
Bank (Central Bank of Bangladesh) should
issue circular for mandatory implementation
of IFRS 7.
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