In accordance with the Federal Law dated July 27, 2010 No. 208-FZ “On Consolidated Financial Statements”, since 2012 the following are required to keep records of their activities in accordance with IFRS:
- credit companies;
- insurance organizations;
- legal entities whose shares, bonds and other securities are traded at organized auctions by being included in the quotation list;
- legal entities whose constituent documentation establishes the mandatory presentation and publication of consolidated financial statements.
In 2014, this list was supplemented by organizations that issue only bonds that are admitted to participation in organized trading through their inclusion in the quotation list.
From January 2015, legal entities that will be required to prepare and submit financial statements in accordance with IFRS will also be companies whose securities are traded in organized trading through their inclusion in the quotation list, and which prepare consolidated financial statements in accordance with US GAAP standards. ).
A complete list of legal entities required to submit financial statements in accordance with IFRS standards since January 2015:
- Management companies of investment funds, mutual funds and non-state pension funds;
- Organizations engaged in clearing and insurance activities;
- Non-state pension funds;
- Federal State Unitary Enterprises (FSUEs), the list of which is approved by the highest collegial executive body Russian authorities;
- Open joint stock companies(OJSC), the securities of which are in federal ownership and the list of which is approved by the Russian Government.
It should be noted that medical insurance companies whose activities are related exclusively to compulsory medical care were excluded from the list of insurance organizations. insurance.
As for the inclusion of non-state pension funds and parent companies in the list, this action by the legislation of the Russian Federation is intended to increase control over their activities and strengthen the degree of protection of incompetent investors.
Rules for reporting under IFRS
Annual consolidated financial statements in accordance with IFRS in 2015 are submitted for consideration to the highest management bodies (shareholders, founders, general directors) or owners of the company's property. In addition, all organizations from the list approved by Law No. 208-FZ (with the exception of FSUEs and OJSCs whose shares are recognized as federal property) must submit annual reports to the Central Bank of Russia.
IFRS reporting is submitted to the Central Bank of Russia in electronic format and must contain an enhanced qualified electronic signature.
Annual consolidated financial statements in accordance with IFRS must be submitted before the general meeting of the highest management bodies of the organization (shareholders, investors, etc.), but no later than 120 days after the end of the calendar period for which these statements were prepared.
Publication and disclosure of financial statements under IFRS 2015
IFRS reporting for 2015 must be posted on public information resources and (or) published in the media accessible to persons interested in its use. In addition, other actions may be taken with respect to the reporting to ensure that its contents are disclosed to all interested parties. The publication of consolidated financial statements must be posted no later than 30 days from the date of submission of the statements to the highest management bodies of the company.
Organization of preparation of financial statements according to IFRS
Today, in December 2014, it seems that there is still a lot of time to prepare financial statements under IFRS. After all, the first reporting of organizations obliged to switch to international standards from January 2015, in accordance with paragraph 7 of Art. 4 Federal Law No. 208-FZ should be submitted in April 2016. But today these persons must determine who will be responsible for preparing the statements, what is the level of professionalism of this specialist, and whether the available information is sufficient to prepare statements in accordance with IFRS and disclose its contents.
When switching to IFRS, specialists responsible for preparing financial statements need to decide in advance:
- Should you use your own resources or those of an outsourced contractor when preparing the first reports?
- Is it rational to form a department to regularly work with IFRS or is it better to turn to third-party contractors as needed?
- How can IFRS reporting indicators affect the company's activities? What key indicators should you pay attention to? Special attention?
- What information is subject to mandatory publication?
- Who will be responsible for auditing IFRS statements?
It should be noted that the choice of the person responsible for preparing financial statements in accordance with IFRS depends on the professionalism of the personnel working in the company and their workload. If there are specialists in the field of IFRS on staff, then, of course, it would be more advisable to involve them.
Employees of the organization have a much better understanding of the specifics and nuances of its activities, the essence of the content of commercial contracts, and also have more time for specialized work. External consultants (auditors), of course, have more practice and experience, but their involvement in the company’s activities will be superficial, and the methods used will be formulaic.
Formation of an IFRS department: training of operating personnel
or selection of ready-made specialists?
The need to report according to international standards forces the management of organizations to form specialized units. Such departments, of course, should be headed by highly qualified specialists with many years of experience working with IFRS. As for ordinary employees, they can be attracted from other departments, accounting or financial departments.
- “Accounting (financial) reporting must give reliable an idea of the financial position of an economic entity as of the reporting date, the financial result of its activities and movements Money for the reporting period, necessary for users of these reports to make economic decisions"
Art. 13.1 of the Law “On Accounting in Russian Federation»
Almost all major market participants reported for 2015 according to international financial reporting standards (IFRS). Significant discrepancies in financial results according to the national methodology and according to IFRS, despite the convergence of the two approaches, forced Banki.ru to delve deeper into this topic. This review examines the results of the 20 largest Russian credit institutions.
The table below shows the financial results of banks (top 20 by asset size, according to the financial rating of Banki.ru) according to RAS and IFRS.
Bank's name | License number | Profit/loss for 2015 according to RAS (thousand rubles) | Profit/loss for 2015 according to IFRS (thousand rubles) |
|
Sberbank of Russia | ||||
Gazprombank | ||||
FC Otkritie | ||||
Rosselkhozbank | ||||
Alfa Bank | ||||
Bank of Moscow | ||||
UniCredit Bank | ||||
Credit Bank of Moscow | ||||
Promsvyazbank | ||||
Raiffeisenbank | ||||
Bank "Saint-Petersburg" | ||||
Russian standard | ||||
Sovcombank |
N/A - no data. Bank Rossiya commented that it does not disclose IFRS statements for 2015 due to the international sanctions in force against it.
As you can see, the financial results using the two methods in almost all cases differ significantly from each other, and sometimes are completely different: for example, some banks show a profit under RAS and at the same time record a loss under IFRS, and vice versa.
This discrepancy is explained by significant differences in the principles of accounting and reporting under IFRS and according to the Russian methodology. Let's look at the main ones.
Form vs content
One of the fundamental differences between IFRS and RAS is the difference in determining the main priority when preparing financial statements. The conceptual framework establishes a general requirement: transactions must be recorded in accordance with their content, and not on the basis of the legal form alone.
This principle is clearly visible in many IFRS: according to international standards, it is not so important what legal form a particular fact is presented in economic activity, - much more important is what it represents from an economic point of view.
In Russian accounting, the situation is different: the emphasis is invariably placed on the form, rather than on the economic meaning of the transaction, which can lead, for example, to an incomplete reflection of the potential liabilities of the enterprise and, as a result, to incorrectly assessed risks and benefits.
Reflection of transactions according to the “Priority of economic content over legal form” approach allows you to objectively assess the state of affairs in order to make correct and effective investment decisions.
Fair value vs historical cost
IFRS follows the concept of fair value, the main purpose of which is to provide information about financial condition and the results of the organization’s activities, based on the real price. This approach estimates the value of assets and liabilities at the reporting date and provides a realistic view of the value of the business - vital information for any investor.
The concept of fair value is found in RAS, but there is no single concept, as well as the procedure for its application. In reality, the Russian methodology operates only with historical cost.
Professional judgment vs primary document
In IFRS, the decisive factor in the formation of accounting entries is the opinion of a specialist. In RAS, professional judgment of management is reduced to a minimum, and the basis for recording in accounting is the primary document. The fact that most financial specialists view Russian reporting solely as tax reporting cannot but have a corresponding impact on the reliability of the latter.
Discounting vs nominal payments
When accounting according to IFRS, value discounting is used, that is, amounts are recalculated taking into account the time value of money. This allows you to adhere to the vector mentioned above - generating reports for investors and creditors.
RAS does not oblige organizations to reflect any reporting items on a discounted basis (with the exception of long-term estimated liabilities).
Thus, in IFRS, discounting can be used when accounting for deferred payment for property, plant and equipment, intangible assets or inventories. According to RAS, such income/expenses are calculated based on the nominal amount of payments. The result may be a gap in the value of assets between RAS and IFRS.
Shareholder Help: Equity vs Profit and Loss
According to IFRS, contributions to capital made by owners/participants are recognized directly in equity, as are dividends distributed to owners/participants.
RAS does not provide for a separate procedure for accounting for income and expenses when carrying out transactions with owners, therefore, in practice, contributions to capital are reflected in the income statement.
Impaired long-lived assets vs overvalued book value
IFRS principles govern asset impairment. According to international standards, the economic “exhaust” from an asset is always greater than its book value: otherwise, its acquisition is simply impractical.
In the RAS methodology, the provision that intangible assets can be tested for impairment exists only in the form of a recommendation, that is, it is not mandatory. There are no rules at all regarding fixed assets, as a result of which the book value is often overstated.
Consolidation vs financial investments
IFRS provides the opportunity to generate consolidated reporting - unified reporting of the group (parent company and its subsidiaries). Consolidation is formed to provide information not only about those assets and liabilities that are legally owned by the parent company itself, but also about those that it controls. Thus, it is important to understand that the consolidated financial statements under IFRS, in addition to the parent organization, also include the results of subsidiaries, which also contributes to the emergence of discrepancies in financial results.
RAS does not contain the concept of consolidation (when preparing consolidated statements, Russian companies always rely on IFRS). All investments of the company in the authorized capital of other organizations are reflected as part of financial investments. At initial recognition they are measured at the cost of their acquisition. If shares are traded on an organized securities market, then at each reporting date they are reflected in the statements at market value.
Conclusion: same goals, different results
Currently, the declared goals of reporting in accordance with IFRS and reporting according to Russian standards are the same - to provide a reliable picture of the activities of the enterprise/organization. Moreover, IFRS is now “developing” almost according to the Russian version, namely: it provides more and more detail - the number of pages in the collection of IFRS standards has increased more than tenfold over the past ten years.
However, many of the banks examined show a completely different picture when analyzing their statements under RAS and IFRS. The discrepancies are due to the fact that in the domestic approach the emphasis is on the compliance of financial statements with the provisions of legislative acts, while in IFRS attention is paid to the usefulness of information in making economic decisions for a wide range of users. That is, the economic essence of financial information.
It turns out that the declared goals are the same, but the results are different.
From theory to practice
Declining profitability and losses
It is important to separately indicate that the main reason for the reduction in profitability and losses is Russian banks in 2015, there was a decrease in the solvency and level of real income of borrowers, which led to an increase in overdue debt and, as a consequence, the need to create reserves for possible losses. Thus, according to the Central Bank of the Russian Federation, overdue loans (including interbank loans) as of January 1, 2016 amounted to more than 3 trillion rubles, which is 54% higher than the previous year. At the same time, reserves for possible losses at the end of 2015 increased by more than 1 trillion rubles, amounting to 4.53 trillion rubles as of January 1, 2016, which significantly worsened the profitability indicators of banks.
Another, no less important reason is the decrease in net interest income due to the significantly increased cost of funding and raising resources for banks (as a result of a sharp increase in the key rate by the Bank of Russia in December 2014). According to the 102nd form of banks as of January 1, 2016, net interest income of the banking sector for 2015 decreased by about 430 billion rubles (-17.1%), amounting to 2.09 trillion rubles.
Discrepancies in the amount of reserves
The amount of accrued reserves under IFRS in most cases turns out to be higher than the reserves accrued under RAS. The key point that determines the difference is the fact that, according to IFRS, the property pledged as collateral is not taken into account in calculating the reserve: the emphasis is on the assessment of the borrower himself (or his business) and his ability to generate cash flows. (Property can be taken into account only if it has a reliable valuation and high liquidity.) According to Russian standards, if a number of requirements are met, the pledge of property can significantly reduce the amount of the actually created reserve. Thus, there are often cases when the amounts of the calculated and actually created reserves differ radically due to the accounting of property, which leads to a distortion of the real economic meaning.
In this regard, a number of problems arise in Russian practice: difficulties in the professional assessment of property and the fairness of its collateral value, its liquidity, quality of monitoring, etc. The most striking confirmation of the current situation is the creation today of separate banking departments for working with non-core assets that are desperately trying to sell those same “highly liquid” pledges and return at least part of the funds to the bank.
Separately, we note that according to IFRS, in the bank’s balance sheet, the amount of loans provided to customers is adjusted by the amount of reserves created for possible losses and is reflected at the “net” or “cleared” value in the line “Loans and receivables”.
Below is a table reflecting the amount of formed reserves for 2015 (banks from the top 20 in terms of assets, according to the financial rating of Banki.ru) according to RAS and IFRS.
Position by net asset size | Bank's name | License number | Volume of formed reserves for the reporting period (RAS), (thousand rubles) | Volume of formed reserves for the reporting period (IFRS), (thousand rubles) |
Sberbank of Russia | ||||
Gazprombank | ||||
FC Otkritie | ||||
Rosselkhozbank | ||||
Alfa Bank | ||||
National Clearing Center | ||||
Bank of Moscow | ||||
UniCredit Bank | ||||
Credit Bank of Moscow | ||||
Promsvyazbank | ||||
Raiffeisenbank | ||||
Bank "Saint-Petersburg" | ||||
Khanty-Mansiysk Bank Opening | ||||
Russian standard | ||||
Sovcombank |
VTB (IFRS-profit 1.7 billion rubles; RAS-profit 49.1 billion rubles)
Let us remind you that according to RAS, VTB does not provide consolidated statements, but only the results of the parent bank. It is the consolidation of reporting under IFRS that largely explains such a significant discrepancy financial results. The VTB Group includes about 20 organizations operating in different segments of the financial sector, including outside Russia. The financial results of the subsidiaries determined such significant discrepancies in the indicators. There was also a significant difference in the volume of reserves formed for possible losses: according to RAS, the figure was 54.9 billion rubles, and according to IFRS - 167.5 billion rubles.
Rosselkhozbank (IFRS-loss of 94.2 billion rubles, RAS-loss of 75.2 billion rubles)
Note that interest income and expenses of Rosselkhozbank according to RAS for 2015 were significantly higher than according to IFRS. This fact is explained by the fact that in IFRS reporting, interest income and expenses for all debt instruments are reflected using the effective method. interest rate(which includes all commissions and fees, as well as transaction costs, discounts, etc.). If the bank has doubts about the timely repayment of issued loans and other debt instruments, they are written off to their recoverable amount, with subsequent recognition of interest income based on the effective interest rate.
Representatives of Rosselkhozbank did not provide comments on this issue.
BM Bank (formerly Bank of Moscow) (IFRS-profit 1.2 billion rubles, RAS-loss of 63.7 billion rubles)
An interesting fact is that according to IFRS the group showed positive net interest income after deducting reserves, but according to RAS they were negative. It is also worth noting that according to RAS the bank shows a positive revaluation of foreign currency (about 16.3 billion rubles), while according to IFRS the group suffered significant losses on this item. This is explained by the fact that when calculating the revaluation of foreign currency assets, as well as RAS standards, the bank used preferential rates established by the Central Bank of the Russian Federation in order to reduce regulatory risks that arose as a result of the sharply increased volatility of the ruble in the period of late 2014 - early 2015. Please note that from April 1, 2016, preferential rates were abolished.
Representatives of the bank explained the above discrepancies as follows: “The difference in the financial result is caused by approaches to risk assessment: according to IFRS, the assessment is more conservative; the creation of reserves for loan losses was carried out in the previous period (in 2014). Also, according to IFRS, the necessary reserves for assets included in the Volga Federal District were created at the beginning of the process of financial rehabilitation of the bank, and according to RAS they are created evenly in accordance with the agreed schedule.”
"Russian Standard" (IFRS-loss of 14.097 billion rubles, RAS-profit 14.364 billion rubles)
The key factor that contributed to such a large discrepancy in the results obtained was the financial assistance provided to the bank by its shareholder. The bank’s press service explained to us that “financial assistance to the bank from a shareholder in RAS is reflected through the “Profits and Losses” section; in IFRS it is reflected directly in the bank’s capital.”
The amount of contributions to reserves for possible loan losses also had a significant impact on the bank’s financial results. Thus, according to RAS, the volume of reserves (24.623 billion rubles) turned out to be noticeably less than the deductions generated under IFRS (48.559 billion rubles).
It should be noted that in order to reduce operating costs, the bank seriously reduced the number of employees over the year (from 18,924 to 8,492 people), the number of divisions (from 312 to 161) and stopped implementing individual investment projects, switching to the development of new products in the hope of increasing profitability in the future .
Sovcombank (IFRS-profit 19.295 billion rubles; RAS-profit 10.240 billion rubles)
In the case of Sovcombank, it is important first of all to note that the IFRS indicators are the consolidated results of the Sovcombank group, which, in addition to the credit institution, also presents data from subsidiaries, affiliates and joint ventures and enterprises of the group. A significant portion of Sovcom's profits in 2015 came from transactions with securities - the group's portfolio showed significant growth over the year. The volume of accrued reserves under IFRS (9.021 billion rubles) was less than those reserves that the bank accrued under RAS (13.463 billion rubles), and the bank's net interest income was slightly higher than the results obtained under RAS. These factors combined contributed to the difference in profits received.
Let's consider the main features of the use of IFRS by banks, as well as those IFRS standards that are a priority for any financial director, accountant or financial specialist working in banks and financial institutions.
If you work in a bank or any other financial institution, you are well aware that IFRS is a little different. More precisely, the standards are still the same, they are just applied a little differently.
What is this connected with?
Unlike companies whose activities are related to products and services, banks work primarily with money.
For other types of companies, money is basically just liaison for their operations, and most goods or services are not related to money (financial activities).
In other words, money-related transactions, such as servicing a bank account, are “ancillary” transactions to the main business activity.
But the main product or service of any bank or financial institution (we will call them by the general word “banks”) is operations with money in various forms:
- Credit money,
- Deposit money
- Growing your money (and also shrinking your money)
- Services related to money
- Possibility of using money ( credit cards, bank accounts, etc.).
As a result, the financial reporting of banks is significantly different from what you would expect to see in the reporting of a “regular” company.
Let's look at the 3 most pressing topics related to IFRS for banks and financial institutions.
1. Financial instruments (IFRS 9, IAS 32).
If you work in a bank, standards for financial instruments are MANDATORY for you. After all, money is a financial instrument in itself!
In short: IFRS 9 introduced a new expected credit loss (ECL) model for recognizing impairment of financial assets. And the banks were hit hard.
Why?
Most other types of entities may use the simplified approach permitted by IFRS 9 for impairment of financial assets and calculate loss provisions solely to the extent of expected credit losses over the life of the financial instrument.
However banks cannot use the simplified approach for the largest group of their financial assets - loans.
Banks need to apply a three-step general model for recognizing losses.
This means that banks must:
- Decide whether individual financial assets will be monitored jointly (many similar loans with lower volumes) or individually (large loans).
- Carefully analyze financial assets and assess which of the 3 stages each financial asset is in.
- Based on the stage of the financial asset, the bank must assess how to calculate the amount of the provision equal to:
- 12-month expected credit losses; or
- Expected credit losses over the life of a financial asset.
- To make the above calculation, the bank must collect a large amount of data for assessment:
- Probability of default within 12 months;
- Probability of default after 12 months;
- Credit losses in the event of default.
- Banks may have to allocate their loans across different portfolios and monitor relevant information for each portfolio separately based on certain common characteristics.
All of the above carries important tasks for the IT department, client managers, bank statisticians and analysts and many other specialists involved in the update internal systems to ensure that all information is provided in a timely manner and in acceptable quality.
This is no easy task!
1.2. Classification and valuation of financial instruments.
Financial assets make up the majority of banks' assets.
Currently, IFRS 9 classifies financial assets based on two tests:
- Contractual Cash Flow Test (SPPI Test) and
Based on the assessment of these tests, the financial asset may be classified for measurement by:
- By fair value through profit or loss (FVTPL); or
- By fair value through other comprehensive income (FVOCI). In this case, further accounting depends on the type of asset.
Banks and other financial institutions, mainly securities trading companies, investment funds and similar organizations, it is necessary to analyze its own business model for individual portfolios of financial assets (trading securities, debt collection, etc.), and then decide on their classification and valuation.
In relation to the 2 tests above, it should be emphasized that each financial asset and liability should be initially recognized at fair value (sometimes including transaction costs).
Here you also need to refer to IFRS 13 Fair Value Measurement. This standard sets out the principles for determining fair value and is therefore very important for any bank's financial reporting.
1.3. Distinguishing between equity and debt financial instruments.
Banks carry out various operations related to money and financial instruments - we have already talked about this.
Due to the variety and complexity of transactions, banks need to correctly classify whether a banking financial instrument is equity or debt, or even a mixture of both.
IAS 32 Financial Instruments: Presentation provides more precise rules on how to properly distinguish between the two types of instruments.
Why is this issue so relevant for banks?
Because incorrect identification of equity funds / debt funds / composite financial instruments may lead to incorrect reporting of the bank’s financial results, including various financial indicators that assess the capital and financial position of the bank.
2. Presentation of financial statements (IAS 1, IAS 7, IFRS 7)
Banks present their financial position and financial performance very differently from other companies. Let's look at 3 main financial statements.
2.1. Statement of financial position of the bank (IAS 1).
2.2. Statement of profit or loss and other comprehensive income of the bank (IAS 1).
Similar to the statement of financial position, IAS 1 does not prescribe the precise format of the statement of total comprehensive income.
The company must choose the format in which it will present its financial results that is suitable for its business.
It's no surprise that a bank's statement of profit or loss and other comprehensive income usually begins with interest income and interest expense!
Typically, you'd expect to see interest information reported somewhere toward the end of the statement, in financial transactions, and sometimes not reported at all.
However, interest income and expenses are the most important items for a bank, since that's what banks usually do - they deposit your money and give you interest for it. (= bank interest expenses), and they lend you money and charge interest for it ( = bank interest income).
Because banks typically charge you some fees for servicing your bank account, there is a fee income line item on the report.
To illustrate, here is a comparison of the income statement and other comprehensive income of a regular company and a bank.
Comparison of the statement of profit or loss and other comprehensive income of a bank and a regular company.
|
Regular company |
|
|---|---|
|
Profit and loss |
Profit and loss |
|
Cost of goods and services sold Other income Business expenses Administrative expenses other expenses Operating profit Financial expenses Share in profits of associated companies |
Interest income Interest expenses Net interest income Provision for credit losses on debt financial assets Net interest income after provision for credit losses Commission income Commission expenses Net commission income Net income from transactions with financial instruments Net income from investments in associates Personnel costs Management and other expenses |
|
Profit before tax |
Profit before tax |
|
Income tax |
Income tax |
|
Total profit for the period |
Total profit for the period |
|
Other comprehensive income: |
Other comprehensive income: |
|
Income from property revaluation Income from hedging |
Items not to be reclassified to profit or loss in the future Actuarial earnings and expenses for defined benefit plans Income from property revaluation Income tax as part of comprehensive income Items to be reclassified to profit or loss in the future Income from hedging Exchange differences when recalculating statements of foreign divisions Other comprehensive income for the period, net of taxes |
|
Other comprehensive income for the period |
2.3. Cash flow statement (cash flow).
Banks' approach to money and therefore cash flow statements also looks different.
When you prepare a cash flow statement, you typically group individual cash flows into 3 sections:
- Operating activities,
- Investment activities and
- Financial activities.
2.4. Information disclosure.
In addition to the disclosures made by other non-financial companies, banks must make a number of other disclosures related to their own activities.
Most Important Disclosures:
1. Capital disclosure in accordance with IAS 1:
Here the bank reveals how it manages capital, with a focus on:
- Descriptive information about money management strategies,
- Some numerical data on money management,
- Are there any external capital requirements for the bank and
- Does the bank meet the requirements for credit institutions, and if not, what are the consequences?
2. The full range of information disclosure in accordance with IFRS 7 “Financial instruments: information disclosure”.
These disclosures relate primarily to financial instruments and should, in any case, be taken into account by banks. Focuses on:
- The meaning of financial instruments, including their breakdown by category, their fair value and how it is determined, accounting policies for financial instruments;
- The risks associated with financial instruments and their nature and extent, including credit risks, market risks and liquidity risks;
- Transfer of financial assets;
- And other questions.
3. Consolidation and special purpose entities (IFRS 10, IFRS 12).
Banks love to use special purpose companies (SPE, from the English "special purpose entity" or SPV, from the English "special purpose vehicle").
This used to be a "great and creative" way to hide some unwanted or dangerous assets from the public eye, since special purpose vehicles were typically not included in the consolidated accounts (so no one noticed them).
Even today, many banks use literally hundreds of SPEs for various purposes, mainly to securitize its accounts receivable, carrying out some tax transactions, to finance assets, etc.
A bank needs to assess very carefully whether it controls the SPE, using the same methodology as for any other voting controlled entity.
As a result, you may see many companies in a bank's consolidated financial statements.
Other issues of bank reporting.
Other critical areas for banks and financial institutions to pay attention to are basically the same as for any other company, but they can be more significant and significant:
- Leases - Some arrangements are not called "lease", but their contents are often finance leases. As a result, some contracts may be moved from off-balance sheet to on-balance sheet.
[cm. See also full text of IFRS 16] - Employee benefits - banks often provide a number of specific employee benefits, such as:
- Free bank accounts or other banking services for employees.
- Contributions to pension funds.
- Health care schemes for both serving employees and retirees.
- And many others.
As a result, banks are actively using all the tricks associated with the IAS 19 Employee Benefits standard.
- Hedge accounting - Banks often use hedging.
Of course, this list of standards is not exhaustive, however, the listed standards can be considered a starting point into the complex topic of IFRS accounting in banks.
The clarity and efficiency of banking accounting make it possible to monitor the safety of funds, cash flow and the state of settlement and credit relations.
Main tasks of accounting in banks
Banking accounting in credit institutions is characterized by efficiency and unity of form of construction. This is manifested in the fact that all settlement, credit and other transactions carried out in the bank during operating hours are reflected on the same day in the personal accounts of analytical accounting and are controlled by drawing up the daily balance sheet of the bank. A uniform accounting system for all banks is a necessary condition for analyzing banking activities.
Accounting in banks is closely related to accounting in other sectors of the economy. This connection is determined by the activities of banks in settlement, cash and credit services to enterprises, organizations and institutions. Operations carried out by banks on lending, settlements, etc. are reflected in the accounting records of business entities. Banking transactions reflected in the assets of the bank's balance sheet correspond to liabilities in the balance sheets of enterprises and organizations and show the amount of bank loans received. At the same time, the funds of enterprises and organizations on settlement, current and other accounts are reflected in their balance sheets as an asset, and in the bank’s balance sheet as a liability.
To prepare financial statements in accordance with IFRS based on Russian financial statements The transformation method is recommended to credit institutions, the essence of which is to regroup the items of the balance sheet and profit and loss statement. At the same time, banks themselves make the necessary adjustments and apply professional judgments (professional opinions of responsible persons of a credit institution, formed on the basis of an objective interpretation of available information about specific operations and transactions of a credit institution in accordance with IFRS requirements). As a result, the credit organization’s accounting system generates information for external and internal users. Such users may include actual and potential investors, employees, creditors, clients and authorities, as well as the public at large. They may have different interests: investors and their representatives are interested in information about the riskiness and profitability of their actual and planned investments; Lenders are interested in information to determine whether the loans they make will be repaid on time and interest paid. Since the interests of users vary significantly, accounting cannot satisfy all the information needs of these users in full, so the collected accounting information is focused on meeting the most common needs.
With regard to information for internal users, international standards see the purpose of accounting as generating information useful to management for making management decisions. It is assumed that information for external users is also formed on the basis of information intended for internal users, which relates to the financial position of the credit institution, results of operations and changes in financial position.
In accordance with Methodological recommendations“On the procedure for the preparation and presentation of financial statements by credit institutions” (Letter of the Central Bank of the Russian Federation dated December 23, 2003 No. 181-T), the management body of the credit institution approves the accounting policy for the preparation of financial statements in accordance with IFRS, as well as the structure and content of the forms of the specified financial reporting.
The preparation of financial statements in accordance with IFRS must be properly regulated. Such regulations must contain the procedure for preparing and approving financial statements in accordance with IFRS, including statements of regrouping and adjustments of balance sheet and profit and loss account items, documented professional judgments, as well as the procedure for storing said documentation for the periods established for Russian reporting by Russian legislation. Federation and regulations of the Central Bank of the Russian Federation.
In addition to such purely formal procedures as the signing of the bank’s financial statements by the head and chief accountant (these persons, according to the legislation of the Russian Federation, are responsible for the reliability of the financial statements), the regulations establish the procedure for execution, endorsement, approval, signing, storage of documentation, including regrouping statements, professional judgments and adjustments to the Russian financial statements based on these professional judgments, as well as other adjustments included in the financial statements of the credit institution in accordance with IFRS.
International standards place great emphasis on professional judgment. Therefore, it is recommended to identify the circle of responsible persons in a credit institution, to whom the head of the credit institution grants the right to form professional judgments in each of the areas of the organization’s activities and to make adjustments to Russian financial statements based on these professional judgments. This circle should include officials from among the managers of the credit institution, who are required to verify the objectivity of the professional judgments formed and the adjustments made to the Russian financial statements based on these judgments.
And most importantly, within the credit organization there must exist (or be created) a unit responsible for summarizing all adjustments to Russian financial statements received from the relevant divisions of the credit organization, as well as officials of the credit organization who check the correctness of summarizing all adjustments to Russian financial statements for the purpose of preparing financial statements in accordance with IFRS.
Accounting is maintained by the bank continuously from the moment of its registration as legal entity until its reorganization or liquidation. In accordance with IFRS, financial statements are considered prepared if all standards in force at the beginning of the reporting period for which the financial statements are prepared are used.
General characteristics of financial reporting elements
In order to understand the specifics of preparing financial statements in credit institutions in accordance with international standards, let’s consider its elements. The elements of financial statements are economic categories that are concerned with providing information about the financial condition of a bank and the results of its operations. They represent financial operations, grouped into classes according to their economic characteristics. These elements are necessary to assess the financial position and performance of the bank.
The elements of financial statements prepared under IFRS that are directly related to the measurement of a bank's financial position are assets, liabilities and equity, which are determined accordingly.
The definitions of assets and liabilities show their basic characteristics, but do not attempt to reveal the criteria they must satisfy before they are recognized on the balance sheet. Thus, the definitions include items that are not recognized as assets or liabilities on the balance sheet until they satisfy the recognition criteria.
When deciding which definition (asset, liability or capital) the item in question meets, special attention should be paid to its underlying essence and economic reality, and not just to its legal form. Thus, for example, in the case of a finance lease, the essence and economic reality is that the lessee receives the benefit of using the leased asset for the majority of its useful life in exchange for an obligation to pay for this right an amount approximately equal to the fair value of the asset , and related finance charges.
Balance sheets prepared in accordance with international standards may include items that do not meet the definitions of an asset or liability and are not shown as part of equity.
In addition, the financial statements must reflect the income and expenses of the credit institution.
Recognition of elements of financial statements
Recognition is the process of including in the balance sheet or income statement an item that meets the definition of an accounting element and satisfies the recognition criterion. The recognition criterion has the following components:
- it is probable that the bank may or may not realize future economic benefits attributable to the item;
- the article can be reliably assessed.
Certain transactions that have the essential characteristics of an element but do not qualify for recognition may nonetheless merit disclosure in notes, explanatory material or supplementary tables accompanying the financial statements. This is necessary when information about the transaction is considered relevant for assessing the financial position of the credit institution and the results of its operations.
Requirements for the structure and content of financial statements
In accordance with the requirements of IFRS, financial statements must provide information about the financial position, results of operations of a credit institution and its cash flows. This information should be useful to a wide range of users when making economic decisions.
Financial statements must be clear and understandable. It is based on accounting policies, which may differ from the accounting policies of other credit institutions. Therefore, for a correct understanding of financial statements, it is necessary to consider the most important principles of accounting policies on the basis of which these statements are prepared. In accordance with international standards, analysis of accounting policies is an integral part of financial statements.
- balance sheet as of the reporting date;
- profit and loss statement for the reporting period;
- cash flow statement for the reporting period;
- report on changes in equity (capital) for the reporting period (that is, a report showing all changes in capital, or not related to the authorized capital);
- Notes to the financial statements (including the accounting policies applied in preparing the financial statements).
- financial review, which includes current results, financial positions, and emerging uncertainties;
- environmental report;
- value added reports, etc.
The financial statements also need to reflect the methods of control and management of liquidity and solvency, as well as the methods of control and management of risks associated with banking operations.
Particular attention should be paid to disclosing credit risk management methods. Such methods include:
- analysis of the loan application and feasibility study of the loan project;
- analysis of the borrower's credit history;
- analysis of the borrower's financial statements in order to determine its creditworthiness;
- choosing a form of loan security;
- setting interest rates;
- creation of loan reserves.
- the agreed exchange rate is a condition included in the loan agreement, according to which the payment amount changes depending on the change in the exchange rate of the payment currency;
- hedging is a method of insuring risk by entering into an alternative transaction for the same amount and the same period.
The identifying data of the financial statements are:
- name of the credit institution;
- type of reporting: consolidated/unconsolidated;
- reporting date, reporting period;
- reporting currency;
- units of measurement (for example, thousand, million).
The Central Bank of the Russian Federation has proposed approximate forms included in financial statements in accordance with IFRS. These forms can be changed by a credit institution in order to ensure the best reflection in financial statements prepared in accordance with international standards of the structure and specifics of the credit institution’s operations, the volume of transactions performed, etc. This can be done, for example, by excluding or combining individual items of the bank’s financial statements due to the absence or insignificance of the volumes of individual transactions, as well as introducing additional items of financial statements for transactions, the size and nature of which, based on the principle of materiality, is such that their separate presentation in the financial statements reporting will enhance the transparency and quality of the information presented in these financial statements. This is done to ensure that financial statements are adequately understood by users.
Main contents of financial statements
Balance sheet. The financial position of a credit institution varies depending on the funds it has, the ratio of short-term and long-term assets and liabilities, as well as the ability to restructure its activities in relation to market conditions. Information on the financial position is reflected in the balance sheet, intended to provide information on the financial position of the credit institution as of the reporting date.
There are two methods of presenting assets and liabilities on the balance sheet:
- by classification: current (current) and long-term;
- in descending order of liquidity.
In accordance with IFRS, the balance sheet includes:
- fixed assets;
- intangible assets;
- financial investments;
- accounts receivable;
- capital and reserves;
- stocks;
- provisions for impairment of assets;
- tax liabilities and assets;
- accounts payable.
Other requirements for subclassification are contained in individual standards.
In relation to the authorized capital, the following information must be disclosed in the balance sheet:
- number of authorized shares;
- number of issued and fully placed shares;
- number of shares issued but not fully placed;
- par value of the share;
- reconciliation of changes in the number of shares;
- rights, priorities and restrictions on shares;
- treasury shares;
- shares under options or for sale (conditions and amounts).
Gains and losses report. Grade current situation affairs in a credit institution can be based on an analysis of the current and previous financial situation. Information about the results of operations is contained in the income statement. The profit and loss statement is intended to present information about the bank's performance for the reporting period. It also contains information about profit-generating activities and funds earned or spent during a certain period. It reflects not only the final financial results of activities obtained during the reporting period, but also the absolute and relative levels of profitability achieved during the time that has passed since the date of the previous report.
IFRS impose certain minimum requirements for the content of the income statement, according to which this report must contain the following information:
- revenue;
- operating results;
- share of profits and losses of associates and joint ventures accounted for using the equity method;
- tax expenses;
- income and expenses from ordinary activities;
- performance results in emergency situations;
- net profit or loss for the period.
Classifying expenses by origin means that items such as wage, depreciation, etc., reflected in the income statement, are simple amounts of homogeneous costs. Classification of expenses by function implies their analysis in terms of three main items that should be indicated:
- depreciation charges for tangible assets;
- depreciation charges for intangible assets;
- staff costs.
The main idea of the income statement is to adjust the revenue received in the reporting period by adding the amount of income received and subtracting the amount of expenses incurred, which ultimately gives the amount of net profit for the reporting period.
Statement of changes in capital. The credit institution must submit a statement of changes in capital showing the increase or decrease net assets between two reporting dates.
This report is an integral part of the financial statements. The form for its provision contains separate information for each element of share capital. In accordance with IFRS, the statement of changes in equity must contain minimum required information on the following results of the bank’s activities:
- net profit (loss) for the period;
- items of income (expenses) included in capital, as well as the amount of these items;
- changes in accounting policies and their consequences;
- results of corrections of fundamental errors.
- transactions with owners in relation to capital and transactions for the distribution of capital with owners and shareholders;
- reconciliation of the balance of profit or loss at the beginning and end of the period;
- reconciliation of the carrying amount of share capital, share premium and each reserve at the beginning and end of the period.
Cash flow statement. The bank's cash flow statement is important for assessing its activities for the reporting period. When preparing a cash flow statement, changes in cash balances can be identified according to their impact on the bank's operations. This report provides a basis for assessing a bank's ability to generate cash and cash equivalents and its need to utilize those cash.
To prepare a cash flow statement, IFRS 7 has been developed, which bears the same name. The purpose of this standard is to reflect in financial statements information about changes in cash and cash equivalents.
Notes to the financial statements
The notes to the financial statements include material, complete and most helpful information for users of financial statements of a credit institution. Typically, notes to financial statements consist of the following main blocks.
1. General information about the credit institution and the nature of its activities, including:
- location and legal form of the credit institution;
- description of the nature of the operations and main activities of the credit institution;
- the name of the parent company of the credit institution and the main parent company of the group (the parent company is considered to be an economic entity that has a significant stake in the authorized capital, or, in accordance with the concluded agreement or otherwise, has the opportunity to exercise a decisive influence on the decisions made by the credit institution);
- average annual number of personnel for the reporting period or number of personnel as of the reporting date;
- other information of a general nature, at the discretion of the credit institution (for example, information about available licenses, the number and location of branches, etc.).
2. Statement of reporting compliance with IFRS requirements, which records the compliance of the prepared financial statements with the requirements of IFRS, information on the basis for the preparation of financial statements (for example, the presented financial statements are unconsolidated or consolidated).
3. Supporting transcripts to information for articles presented in the main reports.
4. Auxiliary (additional) information that is not presented in the financial statements themselves, but is necessary for the perception of financial statements by users (for example, a description of the economic situation in the country (countries) or region (regions) in which the credit institution operates.
5. Information on the principles of accounting policies adopted by the credit institution for the purposes of preparing financial statements. Information about accounting policies is necessary for a correct understanding of financial statements. In this case, the accounting policy pursued must be based on relevant international standards or their interpretations. Accounting policy should reflect the following main aspects of the credit institution’s activities:
- revenue recognition;
- principles of consolidation;
- acquisitions and mergers (business combination);
- joint ventures;
- recognition and amortization of tangible and intangible assets;
- capitalization of interest or other expenses;
- construction contracts;
- investment property;
- financial instruments and investments;
- leasing and rental;
- R&D;
- stocks;
- taxes, including deferred taxes;
- reserves;
- employee benefits;
- foreign exchange transactions and hedging transactions;
- principles of segment reporting;
- identification of highly liquid assets;
- accounting for inflation;
- additional funding from the state.
6. Additional analytical information on all significant items of the balance sheet, profit and loss statement, cash flow statement and statement of changes in equity (capital) in accordance with IFRS requirements.
7. Characteristics of the credit institution’s activities by segments in accordance with the requirements of IFRS 14 “Segment Reporting”.
8. Description of the activities of the credit institution in managing financial risks, including credit, market, country, currency, liquidity and interest rate.
9. Description contingent liabilities credit institution and transactions with derivative financial instruments. This block reveals information about current and possible legal proceedings; tax and credit obligations, as well as those related to the financing of capital investments and operating leases; transactions with derivative financial instruments; transactions with assets held in custody, pledged, etc.
10. Information on the fair value of financial instruments, determined in accordance with the requirements of IFRS 39 “Financial instruments: recognition and measurement”.
11. Information on transactions with related parties in accordance with the requirements of IFRS 24 “Disclosure of information about related parties”.
12. Information on significant events that occurred after the reporting date, but before the date of signing of the financial statements by the management of the credit institution and the conclusion of the audit organization.
13. Other significant information about the activities of the credit institution in the reporting period. Such information may be necessary for users financial report for a comprehensive and objective assessment of the performance of a credit institution in the past, as well as for a reliable forecast of the effectiveness of its activities in the future.
The notes to the financial statements should be presented in an orderly manner. For each line item in the credit institution's balance sheet, income statement, cash flow statement, and statement of changes in equity, reference should be made to any relevant information in the notes.
It should be noted that, in accordance with IFRS, the management of a credit institution is encouraged to, in addition to reporting, provide an analysis of the financial performance and position of the organization, as well as describe the main difficulties that management has to deal with. This analysis may include issues such as the main factors influencing the institution's performance, changes in the environment in which it must operate, dividend policies, and financing and risk management policies.
A.V. Suvorov, MSUTU, Ph.D.