A Report on the Disclosures of Financial Statements of Banks and Similar Financial Institutions

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A Report on the Disclosures of Financial Statements of Banks and Similar Financial Institutions

History of the IAS:

Historically, there have been four accounting standards models in the industrialized countries: The United Kingdom, Continental Europe, and the United States and Latin American models. The International Accounting Standards Committee (IASC) has taken the lead in the standardization of these models. The IASC is the result of efforts begun in 1973 by the United States, Canada and the United Kingdom toward internationalism in accounting standards. Currently there are representatives from accounting bodies in 106 countries and there have been 31 standards issued to date.

Most of these opinions correlate with American Institute of Certified Public Accountants’ (AICPA’s) Accounting Principles Board and Financial Accounting Standards Boards (FASB) statements.

Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). IAS was issued between 1973 and 2001 by the board of the International Accounting Standards Committee (IASC).

In April 2001 the IASB adopted all IAS and continued their development, calling the new standards IFRS. Up to year 2008, IASB adopted 8 IFRS.

Mission of IASB:

Our mission is to develop, in the public interest, a single set of high quality, understandable and international financial reporting standards (IFRSs) for general purpose financial statements.

Conceptual Framework

The IASB’s Framework for the Preparation and Presentation of Financial Statements describes the basic concepts by which financial statements are prepared. The Framework serves as a guide to the Board in developing accounting standards and as a guide to resolving accounting issues that are not addressed directly in an International

Accounting Standard (IAS) or International Financial Reporting Standard (IFRS) or Interpretation.

In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgment in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgment, IAS requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework.

This elevation of the importance of the Framework was added in the 2003 revisions to IAS 8.

THE IASB FRAMEWORK

The Framework:

Defines the objective of financial statements; identifies the qualitative characteristics that make information in financial statements useful; and defines the basic elements of financial statements and the concepts for recognizing and measuring them in financial statements.

General Purpose Financial Statements:

The Framework addresses general purpose financial statements that a Business enterprise (including a state-owned business enterprise) prepares and presents at least annually to meet the common Information needs of a wide range of users external to the enterprise.

Therefore, the Framework does not necessarily apply to special purpose financial reports such as reports to tax authorities, reports to Governmental regulatory authorities, prospectuses prepared in Connection with securities offerings, and reports prepared in Connection with business combinations.

Users and their Information Needs:

The principal classes of users of financial statements are present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the general public. All of these categories of users rely on financial statements to help them in decision making.

The Framework also concludes that because investors are providers of risk capital to the enterprise, financial statements that meet their needs will also meet most of the general financial information needs of other users. Common to all of these user groups is their interest in the ability of an enterprise to generate cash and cash equivalents and of the timing and certainty of those future cash flows.

The Framework notes that financial statements cannot provide all the information that users may need to make economic decisions. For one thing, financial statements show the financial effects of past events and transactions, whereas the decisions that most users of financial statements have to make relate to the future. Further, financial statements provide only a limited amount of the non-financial information needed by users of financial statements. While all of the information needs of these user groups cannot be met by financial statements, there are information needs that are common to all users, and general purpose financial statements focus on meeting these needs.

Responsibility for Financial Statements:

The management of an enterprise has the primary responsibility for preparing and presenting the enterprise’s financial statements.

The Objective of Financial Statements:

The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.

Financial Position:

The financial position of an enterprise is affected by the economic resources it controls, its financial structure, its liquidity and solvency, and its capacity to adapt to changes in the environment in which it operates.

Performance:

Performance is the ability of an enterprise to earn a profit on the resources that have been invested in it. Information about the amounts and variability of profits helps in forecasting future cash flows from the enterprise’s existing resources and in forecasting potential additional cash flows from additional resources that might be invested in the enterprise.

The Framework states that information about performance is primarily provided in an income statement. IAS 1 adds a fourth basic financial statement, the statement showing changes in equity.

Changes in Financial Position:

Users of financial statements seek information about the investing, financing and operating activities that an enterprise has undertaken during the reporting period. This information helps in assessing how well the enterprise is able to generate cash and cash equivalents and how it uses those cash flows.

Notes and Supplementary Schedules:

The financial statements also contain notes and supplementary schedules and other information that:

(a) Explains items in the balance sheet and income statement,

(b) Discloses the risks and uncertainties affecting the enterprise, and

(c) Explains any resources and obligations not recognized in the balance sheet.

Underlying Assumptions:

The Framework sets out the underlying assumptions of financial statements:

?Accrual Basis. The effects of transactions and other events are recognized when they occur, rather than when cash or its equivalent is received or paid, and they are reported in the financial statements of the periods to which they relate.

?Going Concern. The financial statements presume that an enterprise will continue in operation indefinitely or, if that presumption is not valid, disclosure and a different basis of reporting are required.

Qualitative Characteristics of Financial Statements:

These characteristics are the attributes that make the information in financial statements useful to investors, creditors, and others. The Framework identifies four principal qualitative characteristics:

? Understandability

? Relevance

? Reliability

? Comparability

Understandability

Information should be presented in a way that is readily understandable by users who have a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently.

Relevance

Information in financial statements is relevant when it influences the economic decisions of users. It can do that both by:

(a) Helping them evaluate past, present, or future events relating to an enterprise and by (b) Confirming or correcting past evaluations they have made.

Materiality is a component of relevance. Information is material if its omission or misstatement could influence the economic decisions of users.

Timeliness is another component of relevance. To be useful, information must be provided to users within the time period in which it is most likely to bear on their decisions.

Reliability

Information in financial statements is reliable if it is free from material error and bias and can be depended upon by users to represent events and transactions faithfully. Information is not reliable when it is purposely designed to influence users’ decisions in a particular direction.

There is sometimes a tradeoff between relevance and reliability – and judgment is required to provide the appropriate balance.

Reliability is affected by the use of estimates and by uncertainties associated with items recognized and measured in financial statements.

These uncertainties are dealt with, in part, disclosure and, impart, by exercising prudence in preparing financial statements. Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated.

However, prudence can only be exercised within the context of the other qualitative characteristics in the Framework, particularly relevance and the faithful representation of transactions in financial statements.

Prudence does not justify deliberate overstatement of liabilities or expenses or deliberate understatement of assets or income, because the financial statements would not be neutral and, therefore, not have the quality of reliability.

Comparability

Users must be able to compare the financial statements of an enterprise over time so that they can identify trends in its financial position and performance. Users must also be able to compare the financial statements of different enterprises. Disclosure of accounting policies is essential for comparability.

The Elements of Financial Statements:

Financial statements portray the financial effects of transactions and other events by grouping them into broad classes according to their economic characteristics. These broad classes are termed the elements of financial statements.

The elements directly related to financial position (balance sheet) are:

?Assets

?Liabilities

?Equity

The elements directly related to performance (income statement) are:

?Income

?Expenses

The cash flow statement reflects both income statement elements and changes in balance sheet elements.

?Asset. An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.

? Liability. A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.

? Equity. Equity is the residual interest in the assets of the enterprise after deducting all its liabilities.

? Income. Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

?Expense. Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an enterprise and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent. Gains represent other items that meet the definition of income and may, or may not, arise in the course of the ordinary activities of an enterprise. Gains represent increases in economic benefits and as such are no different in nature from revenue. Hence, they are not regarded as constituting a separate element in the IASC Framework.

The definition of expenses encompasses losses as well as those expenses that arise in the course of the ordinary activities of the enterprise. Expenses that arise in the course of the ordinary activities of the enterprise include, for example, cost of sales, wages and depreciation.

They usually take the form of an outflow or depletion of assets such as cash and cash equivalents, inventory, property, plant and equipment. Losses represent other items that meet the definition of expenses and may or may not, arise in the course of the ordinary activities of the enterprise. Losses represent decreases in economic benefits and as such they are no different in nature from other expenses. Hence, they are not regarded as a separate element in this Framework.

Recognition of the Elements of Financial Statements:

Recognition is the process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the following criteria for recognition:

?It is probable that any future economic benefit associated with the item will flow to or from the enterprise; and

? The item’s cost or value can be measured with reliability. Based on these general criteria:

? an asset is recognized in the balance sheet when it is probable that the future economic benefits will flow to the enterprise and the asset has a cost or value that can be measured reliably.

? a liability is recognized in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably.

? Income is recognized in the income statement when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably. This means, in effect, that recognition of income occurs simultaneously with the recognition of increases in assets or decreases in liabilities (for example, the net increase in assets arising on a sale of goods or services or the decrease in liabilities arising from the waiver of a debt payable).

? Expenses are recognized when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. This means, in effect, that recognition of expenses occurs simultaneously with the recognition of an increase in liabilities or a decrease in assets (for example, the accrual of employee entitlements or the depreciation of equipment).

Measurement of the Elements of Financial Statements:

Measurement involves assigning monetary amounts at which the elements of the financial statements are to be recognized and reported.

The Framework acknowledges that a variety of measurement bases are used today to different degrees and in varying combinations in financial statements, including:

? Historical cost

? Current cost

? Net realizable (settlement) value

? Present value (discounted)

Historical cost is the measurement basis most commonly used today, but it is usually combined with other measurement bases. The Framework does not include concepts or principles for selecting which measurement basis should be used for particular elements of financial statements or in particular circumstances. The qualitative characteristics do provide some guidance.

Description of IAS 30

International Accounting Standard (IAS) 30 is used in Bangladesh as Bangladesh Accounting Standard (BAS) 30 namely “Disclosures in the Financial Statements of

Banks and Similar Financial Institutions”.

Scope:

1. This Standard shall be applied in the financial statements of banks and similar financial institutions (subsequently referred to as banks).

2. For the purposes of this Standard, the teen “bank” includes all financial institutions, one of whose principal activities is to take deposits and borrow with the objective of lending and investing and which arc within the scope of banking or similar legislation. The Standard is relevant to such entities whether or not they have the word “bank” in their name.

3. Banks represent a significant and influential sector of business worldwide. Most individuals and organizations make use of banks, either as depositors or borrowers. Banks play a mayor role in maintaining confidence in the monetary systemthrough their close relationship with regulatory authorities and governments and the regulations imposed on them by those governments. Hence there is considerable and widespread interest in the well-being of banks, and in particular their solvency and liquidity and the relative degree of risk that attaches to the different types of their business. The operations, and thus the accounting and reporting requirements, of banks are different from those of other commercial entities. This Standard recognizes their special needs. It also encourages the presentation of a commentary on the financial statements which deals with such matters as the management and control of liquidity and risk.

4. This Standard supplements other Standards which also apply to banks unless they are specifically exempted in a Standard.

5. This Standard applies to the separate financial statements ^­and the consolidated financial statements of a bank. Where a group undertakes banking operations, this Standard is applicable in respect of those operations on a consolidated basis.

Background:

6. The users of the financial statements of a bank need relevant, reliable and comparable information which assists them in evaluating the financial position and performance of the bank and which is useful to them in making economic decisions. They also need information which gives them a better understanding of the special characteristics of the operations of a bank. Users need such information even though a bank is subject to supervision and provides the regulatory authorities with information that is not always available to the public. Therefore disclosures in the financial statements of a bank need to be sufficiently comprehensive to meet the needs of users, within the constraint of what it is reasonable to require of management.

7. The users of the financial statements of a bank are interested in its liquidity and solvency and the risks related to the assets and liabilities recognized on its balance sheet and to it’s off balance sheet items. Liquidity refers to the availability of sufficient finds to meet deposit withdrawals and other financial commitments as they fall due. Solvency refers lo the excess of assets over liabilities and, hence, to the adequacy of the bank’s capital. A bank is exposed to liquidity risk and to risks arising from currency fluctuations, interest rate movements, and changes in market prices and from counterparty failure. These risks may be reflected in the financial statements, but users obtain a better understanding if management provides a commentary on the financial statements which describes the way it manages and controls the risks associated with bank.

Accounting Policies:

8. Bank use differing methods for the recognition and measurement of items in their financial statements. While harmonization of these methods is desirable, it is beyond of this Standard. In order to comply with BAS 1 Presentation of Financial Statements and thereby enable user to understand the basis on which the financial statement of a bank are prepared, accounting policies dealing with the following items may need to be disclosed:

(a) The recognition of the principal types of income (see paragraphs 10 and 11);

(b) The valuation of investment and dealing securities (see paragraphs 24 and 25)^­

(c) The distinction between those transactions and other events that result in the recognition of assets and liabilities on the balance sheet and those transactions and other events that only give rise to contingencies and commitments (see paragraphs 26-29);

(d) The basis for the determination of impairment losses on loans and advances and for writing off uncollectible loans and advances (see paragraphs 43­ – 49); and

(e) The basis for the determination of charges for general banking risks and the accounting treatment of such charges (see paragraphs 50-52).

Some of these topics are the subject of existing Standards while others may be dealt with at a later date.

Income Statement:

9. A bank shall present an income statement which groups income and expenses by nature and discloses the amounts of the principal types of income and expenses in conformity with the Bank Companies Act and amendments made these.

10. In addition to the requirements of other Standards and Bank Com_panies Act the disclosures in the income statement or the notes shall include, but are not limited to, the following items of income and expenses:

• Interest and similar income;
• Interest expense and similar charges;
• Dividend income,
• Fee and commission income;
• Fee and commission expense;
• Gains less losses arising from dealing securities;
• Gains less losses arising from in vestment securities;
• Gains less losses arising from dealing in foreign currencies;
• Other operating income;
• Impairment losses on loans and advances;
• General administrative expenses showing salaries of managing direction and other operating expenses.
• Income from non-banking assets.

11. The principal types of income arising from the operations of a bank include interest, fees for services, commissions and dealing results. Each type of income is separately disclosed in order that users can assess the performance of a bank. Such disclosures are in addition to those of the source of income- required by BAS 14 Segment Reporting.

12. The principal types of expenses arising from the operations of a bank include interest, commissions, losses on loans and advances, charges relating to the reduction in the carrying amount of investments and general administrative expenses. Each type of expense is separately disclosed in order that users can assess the performance of a bank.

13. Income and expense items shall not be offset.

14. Offsetting in cases other than those relating to hedges and to assets and liabilities that have been prevents users from assessing the performance of the separate activities of a bank and the return that it obtains on particular classes of assets.

15. Gains and losses arising from each of the following are normally reported on a net basis:

(a) Disposals and changes in the carrying amount of dealing securities:

(b) Disposals of investment securities; and

(c) Dealings in foreign currencies.

16. Interest income and interest expense are disclosed separately in order to give a better understanding of the composition of, and reasons for changes in, net interest.

17. Net interest is a product of both interest rates and the amounts of borrowing and lending. It is desirable for management to provide a commentary about average interest rates, average interest earning assets and average interest-bearing liabilities for the period. In some countries, governments provide assistance to banks by making deposit and other credit facilities available at interest rates which are substantially below market rates. In these cases, management’s commentary often discloses the extent of these deposits and facilities and their effect on net income.

Balance Sheet:

18. A bank shall present a balance sheet that groups assets and liabilities by nature and lists them it’s an order that reflects their relative liquidity.

19. In addition to the requirements of other Standards, Bank companies Act the disclosures in the balance sheet or the notes shall include, but are not limited to, the following assets and liabilities.

Assets:

• Cash and balances with the central bank;
• Treasury bills and other bills eligible for rediscounting with the central bank;
• Government and other securities held for dealing purposes;
• Placements with, and loans and advances to, other banks;
• Other money market placements;
• Loans and advances to customers; and Investment securities.

Liabilities:

• Deposits from other banks;
• Other money market deposits;
• Amounts owed to other depositors; Certificates of deposits;
• Promissory notes and other liabilities evidenced by paper; and
• Other borrowed funds.

20. The most useful approach to the classification of the assets and liabilities of a bank is to group them by their nature and list them in the approximate order of their liquidity;

this may equate broadly to their maturities. Current and non-current items are not most assets and liabilities f a bank can be realized or settled in the near future.

21. The distinction between balances with other banks and those with other parts of the money market and from other depositors is relevant information because it gives an understanding of a bank’s relations with, and dependence on, other banks and the money market. Hence, a bank discloses separately:

(a) Balance with the central bank;

(b) Placements with other banks

(c) Other money market placements;

(d) Deposits from other banks;

(e) Other money market deposits; and

(f) Other negotiable paper

22. A bank generally does not know the holders of its certificates of deposit because they are usually traded on an open market.

23. Hence, a bank discloses separately deposits that have been obtained through the issue of its own certificates of deposit or other negotiable paper.

24. A bank shall disclose the fair values of each class of its financial assets and liabilities25. Four classifications of financial assets: can be loans and receivables, held-to-maturity, investments, financial assets at fair value through profit or loss, and available-for-sale financial assets. A bank shall disclose the fair values of its financial assets for these four classifications, as a minimum.

Contingencies and Commitments Including Off Balance Sheet Items:

26. A bank shall disclose the following contingent liabilities and commitments:

(a) The nature and amount of commitments to e-wend credit that are irrevocable because they cannot be withdrawn at the discretion of the batik without the risk of incurring significant penalty or expense; and

(b) The nature and amount of contingent liabilities and commitments arising from off balance sheet items including those relating to:

(i) Direct credit substitutes including general guarantees of indebtedness, bank acceptance guarantees and standby letters of credit serving as financial guarantees for loans and securities;

(ii) Certain transaction-related contingent liabilities including performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions;

(iii) Short-term self-liquidating trade-related contingent liabilities arising from the movement of goods, such as documentary credits where the underlying shipment is used as security; and

(iv) Other commitments, note issuance facilities and revolving underwriting facilities.

27. BAS 37 Provisions, Contingent Liabilities und Contingent Assets deals generally with accounting for, and disclosure of, contingent liabilities. The Standard is of particular relevance to banks because banks often become engaged in many types of contingent liabilities and commitments, some revocable and others irrevocable, which are frequently significant in amount and substantially larger than those of other commercial entities.

28. Many banks also enter into transactions that are presently not recognized as assets or liabilities in the balance sheet but which give rise to contingencies and commitments. Such off balance sheet items often represent an important part of the business of a bank and may have a significant bearing on the le% el of risk- to which the bank is exposed. These items may add to, or reduce, other risks, for example by hedging assets or liabilities on the balance sheet.

29. The users of the financial statements need to know about the contingencies and irrevocable commitment of a bank because of the demands they may put on its liquidity and solvency and the inherent possibility of potential losses. Users also require adequate information about the nature and amount of off balance sheet transactions undertaken by a bank.

Maturities of Assets and Liabilities:

30. A bank shall disclose an analysis of assets and liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date.

31. The matching and controlled mismatching of the maturities and interest of assets and liabilities is fundamental to the management of a bank. It is unusual for banks ever to be completely matched since business transacted is often of uncertain term and of different types. An unmatched position potentially enhances profitability but can also increase the risk of losses.

32. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of a bank and its exposure to changes in interest rates and exchange rates. In order to provide information that is relevant for the assessment of its liquidity, a bank discloses, as a minimum, an analysis of assets and liabilities into relevant maturity groupings.

33. The maturity groupings applied to individual assets and liabilities differ between banks and in their appropriateness to particular assets and liabilities. Examples of periods used include the following:

(a) Up to 1 month;

(b) From 1 month to 3 months;

(c) From 3 months to 1 year;

(d) From 1 year to 5 years; and

(e) From 5 years and over.

Frequently the periods are combined, for example, in the case of loans and advances, by grouping those under one year and those over one year. When repayment is spread over a period of time, each installment is allocated to the period in which it is contractually agreed or expected to be paid or received.

34. It is essential that the maturity periods adopted by a bank are the same for assets and liabilities. This makes clear the extent to which the maturities are matched and the consequent dependence of the bank on other sources of liquidity.

35. Maturities could be expressed in terms of:

(a) The remaining period to the repayment date;

(b) The original period to the repayment date; or

(c) The remaining period to the next date at which interest rates may be changed.

The analysis of assets and liabilities by their remaining periods to the repayment dates provides the best basis to evaluate the liquidity of a bank. A bank may also disclose repayment maturities based on the original period to the repayment date in order to provide information about its funding and business strategy. In addition, a bank may disclose maturity groupings based on the remaining period to the next date at which interest rates may be changed in order to demonstrate its exposure to interest rate risks. Management may also provide in its commentary on the financial statements, information about interest rate exposure and about the way it manage, and controls such exposures.

36. Deposits made with a bank may be withdrawn on demand and advances given by a bank may be repayable on demand. However, in practice, these deposits and advances are often maintained for long periods without withdrawal or repayment; hence, the effective date of repayment is later than the contractual date. Nevertheless, a bank discloses an analysis expressed in terms of contractual maturities even though the contractual repayment period is often not the effective period because contractual dates reflect the liquidity risks attaching to the bank’s assets and liabilities.

37. Some assets of a bank do not have a contractual maturity date. The period in which these assets are assumed to mature is usually taken as the expected date on which the assets will be realized.

38. The users’ evaluation of the liquidity of a bank from its disclosure of maturity groupings is made in the context of local banking practices, including the availability of funds to banks, Short-term funds may ~c available, in the normal course of business, from the_, money market or, in an emergency, from the center bank. In other countries, this is not the case.

39. In order to provide users with a full understanding of the maturity groupings, the disclosures in the financial statements may need to be supplemented by information as to the likelihood of repayment within the remaining period.

Hence, management may provide, in its commentary on the financial statements, information about the effective periods and about the way it manages and controls the risks and exposures associated with different maturity and interest rate profiles.

Concentrations of Assets, Liabilities and Off Balance Sheet Items:

40. A bank shall disclose any significant concentrations of its assets, liabilities and off balance sheet items. Such disclosures shall be made in terms of geographical areas; customer or industry groups or other concentrations of risk. A bank shall also disclose the amount of significant net foreign currency exposures.

41. A bank discloses significant concentrations in the distribution of its assets and in the source of its liabilities because it is a useful indication of the potential risks inherent in the realization of the assets and the funds available to the bank. Such disclosures are made in terms of geographical areas, customer or industry groups or other concentrations of risk which are appropriate in the circumstances of the bank.

A similar analysis and explanation of off balance sheet items is also important. Geographical areas may comprise individual countries, groups of countries or regions within a country; customer disclosures may deal with sectors such as governments, public authorities, and commercial and business entities. Such disclosures are made in addition to any segment information required by BAS 14 Segment Reporting.

42. The disclosure of significant net foreign currency exposures is also a useful indication of the risk of losses arising from changes in exchange rates.

Losses on Loans and Advances:

43. A bank shall disclose the following:

(a) The accounting policy that describes the basis on which uncollectible loans and advances are recognized as an expense and written off.

(b) Details of the movements in any allowance for impairment losses on loans and advances during the period. It shall disclose separately the amount recognized as an expense in the period for impairment losses- on uncollectible loans and advances, the amount charged in the. Period for loans and advances previously written off that have been recovered.

(c) The aggregate amount of any allowance account for impairment losses on loans and advances at the balance sheet date.

44. Any amounts set aside in respect of losses on loans and advances in addition to impairment losses recognized on loans and advances shall be accounted for as appropriations of retained earnings. An r credits resulting from the reduction of such amounts result in an increase in retained earnings and arc not included in the determination of profit or loss for the period in conformity with the Bank Company Act.

45. Local circumstances or legislation may require or allow a bank to set aside amounts for impairment losses on loans and advances.

46. Any such amounts set aside represent appropriations of retained earnings and not expenses in determining profit or loss. Similarly, any credits resulting from the reduction of such amounts result in an increase in retained earnings and are not included in the determination of profit or loss.

47. Users of the financial statements of a bank need to know the impact that impairment losses on loans and advances have had on the financial position and performance of the

bank; this helps them judge the effectiveness with which the bank has employed its resources.

Therefore a bank’s discloses the aggregate amount of any allowance account for impairment losses on loans and advances at the balance sheet date and the movements in the allowance account during the period. The movements in the allowance account, including the amounts previously written off that have been recovered during the period, are shown separately.

48. When loans and advances cannot be recovered, they are written off and charged against any allowance account for impairment losses.

49. In some cases, they are not written off until all the necessary legal procedures have been completed and the amount of the impairment loss is finally determined. In other cases, they are written off earlier, for example when the borrower has not paid any interest or repaid any principal that was due in a specified period. As the time at which uncollectible loans and advances are written off differs, the gross amount of loans and advances and of the allowance account for impairment losses may vary considerably in similar circumstances. As a result, a bank discloses its policy for writing off uncollectible loans and advances.

General Banking Risks:

50. Any amounts set aside for general banking risks, including future losses and other unforeseeable risks or contingencies shall be separately disclosed as appropriations of retained earnings. Any credits resulting from the reduction of such amounts result in an increase in retained earnings and shall not be included in the determination of profit or loss for the period.

51. Bangladesh Bank may require or allow a bank to set aside amounts for general banking risks, including future losses or other untraceable risks, in addition to the charges for losses on loans and advances determined in accordance with paragraph 45, A bank may also be required or allowed to set aside amounts for contingencies. Such amounts for general banking risks and contingencies do not qualify: for recognition as provisions under BAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Therefore, a bank, recognizes’ such mounts as appropriations of retained earnings. This is necessary to avoid the overstatement of liabilities, understatement of assets,undisclosed accruals and provisions and the opportunity to distort net income and equity.

52. The income statement cannot present relevant and reliable information about the performance of a bank if profit or loss for the period includes the effects of undisclosed amounts set aside for general banking risks or additional contingencies, or undisclosed credits resulting from the reversal of such amounts. Similarly, the balance sheet cannot provide relevant and reliable information about the financial position of a bank if the balance sheet includes overstated liabilities, understated assets or undisclosed accruals and provisions.

Assets Pledged as Security:

53. A bank shall disclose the aggregate amount of secured liabilities and the nature and carrying amount of the assets pledged as security.

54. In some cases, banks are required, either by law or national custom, to pledge assets as security to support certain deposits and other liabilities. The amounts involved are often substantial and so may have a significant impact on the assessment of the financial position of a bank.

Trust Activities:

55. Banks commonly act as trustees and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. Provided the trustee or similar relationship is legally supported, these assets are not assets of the bank and, therefore, are not included in its balance sheet. If the bank is engaged in significant trust activities, disclosure of that fact and an indication of the extent of those activities are made in its financial statements because of the potential liability if it fails in its fiduciary duties. For this purpose, trust activities do not encompass safe custody functions.

Related Party Transactions:

56. BAS 24 Related Party Disclosures deals generally with the disclosures of related party relationships and transactions between a reporting entity and its related parties. In some countries, the law or regulator authorities prevent or restrict banks entering into transactions with related parties whereas in others such transactions are permitted. BAS 24 is of particular relevance in the presentation of the financial statements of’ a bank in a country that permits such transactions.

57. Certain transactions between related parties may be effected on different terms from those with unrelated parties. For example, a bank may advance a larger sum or charge lower interest rates to a related party than it would in otherwise identical circumstances to an unrelated party; advances or deposits may be moved between related parties more quickly and with less formality than is possible when unrelated parties are involved. Even when related party transactions arise in the ordinary course of a bank’s business, information about such transactions is relevant to the needs of users and its disclosure is-required by BAS 24.

58. When a bank, has entered into transactions with related parties, it is appropriate to disclose the nature of the related party relationship as well as information about the transactions and outstanding balances necessary for an understanding of the potential effects of the relationship on the financial statements of the bank. The disclosures are made in accordance with BAS 24 and include disclosures relating to a` bank’s policy for lending to related parties and, in respect of related party transactions, the amount included in:

(a) Each of loans and advances, deposits and acceptances and promissory notes; disclosures may include the aggregate amounts outstanding at the beginning and end of the period, as well as advances, deposits, repayments and other changes during the period;

(b) Each of the principal types of income, interest expense and commissions paid;

(c) the amount of the expense recognized in the period for impairment losses on loans and advances and the amount of any allowance at the balance sheet date; and

(d) Irrevocable commitments and contingencies and commitments arising from off balance sheet items.

Compliance with International Accounting Standards (IAS):

59. Compliance with this BAS ensures compliance in all material respects with International Accounting Standard (IAS) -30.

Effective Date:

60. This Standard becomes operative for the financial statements of banks covering periods beginning on or after January 1, 1999.

Companies at a Glance

At a Glance

AB Bank Limited, the first private sector bank under Joint Venture with Dubai Bank Limited, UAE incorporated in Bangladesh on 31st December 1981 and started its operation with effect from April 12, 1982.

Dubai Bank Limited (name subsequently changed to Union Bank of the Middle east Limited) decided to off-load their investment in AB Bank Limited with a view to concentrate their activities in the UAE in early part of 1987 and in terms of Articles 23A and 23B of the Articles of Association of the Company and with the necessary approval of the relevant authorities, the shares held by them in the Bank were sold and transferred to Group “A” Shareholders, i.e. Bangladeshi Sponsor Shareholders.

As of December 31, 2006; the Authorized Capital and the Equity (Paid up Capital and Reserve) of the Bank are BDT 2000 million and BDT 2582.76 million respectively. The Sponsor-Shareholders hold 50% of the Share Capital; the General Public Shareholders hold 49.43% and the rest 0.57% Shares are held by the Government of the People’s Republic of Bangladesh. However, no individual sponsor share holder of AB Bank holds more than 10% of its total shares.

Since beginning, the bank acquired confidence and trust of the public and business houses by rendering high quality services in different areas of banking operations, professional competence and employment of the state of art technology.

During the last 26 years, AB Bank Limited has opened 70 Branches in different Business Centers of the country, one foreign Branch in Mumbai, India, two Representative Offices in London and Yangon, Myanmar respectively and also established a wholly owned Subsidiary Finance Company in Hong Kong in the name of AB International Finance Limited. To facilitate cross border trade and payment related services, the Bank has correspondent relationship with over 220 international banks of repute across 58 countries of the World.

AB Bank Limited, the premier sector bank of the country is making headway with a mark of sustainable growth. The overall performance indicates mark of improvement with Deposit reaching BDT 42076.99 million, which is precisely 53.78% higher than the preceding year.

On the Advance side, the Bank has been able to achieve 46.32% increase, thereby raising a total portfolio to BDT 31289.25 million, which places the Bank in the top tier of private sector commercial banks of the country.

On account of Foreign Trade, the Bank made a significant headway in respect of import, export and inflow of foreign exchange remittances from abroad.

Total loans and advances of ABBL increased from Tk 116.96 million in 1982 to Tk 12,548.4 million in 2000. Responding to the needs of the market, ABBL introduced three new schemes: Student Loan, Personal Computer Loan for Educational Institutions (for their laboratories), and Monthly Interest Payment Facility to term deposit holders.

The broad economic areas in which the bank lends (and the total outstanding amount of advances to those areas in million Taka) up to 31 March 2000 were: agriculture and fisheries (278), industry (2,811), retail/wholesale trade and hotels and restaurants (3,769), transport/communication and storage (180), insurance, real estate and trade service (1,384), special credit program, including poverty alleviation and income generating activity (520), and others (1,874).

Up to 31 March 2000, ABBL provided financial support in the form of loans and advances to 88 large and medium scale and 145 small and cottage industrial projects amounting to Tk 2,300 million.

It has also extended project financing in syndication with other banks. The ratio of advances and deposits during the year 1999 and 2000 were 80.66% and 77.38% respectively.

In 2000, the bank’s total classified loans were 23.45% of its total loans and advances. It maintained a provision of Tk 1,435.4 million for them, which affected the bank’s performance and degraded the quality of its lending assets. The quantum of investment of the bank rose to Tk 2,429.66 million in 2000 from Tk 23 million in 1982. Of the total investment in 2000, 93% was in government treasury bills.

The rest was invested in other sectors including debentures of ICB, ordinary shares of companies and prize bonds. In that year, the bank earned an income of Tk 170.21 million from its investments.

In the financial year ending on 30 June 2000, total foreign exchange business of the bank was Tk 11,600 million, which included imports (34.48%), exports (58.19%) and remittances (7.33%). ABBL has foreign correspondent relationships with 221 banks/bank offices and other financial institutions at different international financial centers. The overseas operations of the bank are conducted through its Mumbai branch in India and its subsidiary company, the AB International Finance Limited in Hong Kong. The bank has two foreign representative offices – one in London and the other in Yangon.

Total assets of the bank including the off-balance-sheet items were valued at Tk 31,111.6 million in 2000, when its liquid assets were Tk 9,838.1 million. The bank earned a net profit of Tk 366.5 million that year. Its interest income increased from Tk 608.3 million in 1999 to Tk 1,288.9 million in 2000.

On the other hand, interest expenses had also increased from Tk 995.0 million in 1999 to Tk 1,370.5 million in 2000. There have been wide fluctuations in both the total incomes and total operating expenses of the bank over the last few years of its operation.

Auditor’s Report of the Company:

We have audited the accompanying Balance Sheet of AB Bank Limited as at December 31, 2007 and the related Profit and Loss Account, Cash Flow Statements, Statement of Changes in Shareholders’ Equity together with the notes for the year then ended. The preparation of these financial statements is the responsibility of the management of bank. Our responsibilities are to express an independent opinion on these financial statements based on our audit.

We conducted our audit in accordance with Bangladesh Standards on Auditing (BSA). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant accounting estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above which have been prepared in the format prescribed by Bangladesh Bank vide circular number 14 dated 25 June, 2003 give a true and fair view of the state of affairs of the bank as of 31 December, 2007 and of the result of its operation and its cash flows for the year then ended and comply with the Company’s Act 1994, the Bank Company Act 1991, the rules and regulations issued by Bangladesh Bank, The Securities and Exchange rules 1987 and other applicable laws and regulation.

We further report that:

a) We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit and made due verifications thereof;

b) In our opinion, proper books of account as required by law were kept by the banks so far as it appeared from our examination of those books and proper returns adequate for the purposes of our audit have been received from branches not visited by us;

c) The company’s balance sheet, profit and loss account dealt with by the report is in agreement with the books of accounts and returns;

d) The expenditure incurred was for the purpose of the bank’s operations;

e) The financial position of the bank as of the 31 December, 2007 and profit for the year then ended have been properly reflected in the financial statements, which have been prepared in accordance with the General Accepted Accounting Principles.

f) The financial statements have been drawn up in conformity with the Bank Company Act, 1991 and in accordance with the accounting rules and regulations issued by Bangladesh Bank.

g) Adequate provision has been made for advance and other assets which are, in our opinion, doubtful of recovery.

h) The records and statements submitted by the branches have been properly maintained and consolidated in the financial statements;

i) The financial statement conform to the prescribed standards set in accounting regulations issued by Bangladesh Bank after consultation with the professional accounting bodies of Bangladesh.

j) The information and explanation required by us have been received and found satisfactory.

k) Cash Reserve Requirement (CRR) and Statutory Liquidity Reserve (SLR) with Bangladesh bank have been maintained as per rule.

l) As far as it was revealed from our test checks, exists rules and regulation for loan sanctioning and disbursements have been followed properly.

m) It appeared from our test checks that the internal control system was satisfactory and adequate to prevent probable frauds and forgeries.

n) Adequate capital of the bank, as required by law, has been maintained during the year under audit.

o) We were note aware of any other matters, which are required to be brought to the notice of the shareholders of the bank, and

p) 80 % of the risk weighted assets of the bank have been audited.

Dhaka ACNABIN

March 10, 2008 Chartered Accountants

5.2.1

BRAC Bank Limited

Bank Description:

BRAC Bank (BRAC) is a commercial bank that was founded in 2001 by BRAC NGO, one of the largest development finance institutions in the world. The bank’s objectives include providing comprehensive commercial banking services, building a profitable and modern, full-service financial institution, and pursuing profitable market niches in the Small and Medium Enterprise (SME) business sector not traditionally met by conventional banks.

The bank’s main portfolio products include loans for small and medium sized entrepreneurs; personal loans, credit cards and multiple deposit accounts for retail customers; and specialized retail products tailored to religious restrictions. The bank also provides corporate deposit and loan products as well as non-resident Bangladeshi remittance services. BRAC’ s distribution network of 22 branches, 350 small and medium enterprise unit offices, and 19 ATM sites span across Bangladesh and reach more than 40,000 borrowers.

Capacity Building

Main Shore Cap Exchange Capacity Building Support Areas:

• Small business lending
• Risk management
• Internal audit operations