Accounts Term Project
Analysis of Financial reports and Accounting Standards of both the Manufacturing Companies and the Banking Sector
Imaad Asad Abeera Burhan Haris Bin Saqib Malik Hassan Khan 12/16/2009
TABLE OF CONTENTS
Executive Summary«««««««««««««««««««««««««3 Introduction to the financial statements«««««««««««««««««..5 General pattern of Balance Sheets of Banks«««««««««««««««..7 General pattern of Balance Sheets of Manufacturing Companies«««««««..8 Unconsolidated Profit and Loss of Banks««««««««««««««««.11 Consolidated Statement of Income of Manufacturing Companies«««««««13 Unconsolidated Cash Flow Statements of Banks«««««««««««««..14 Cash Flow Statements of Manufacturing Companies«««««««««««...16 The similarities««««««««««««««««««««««««««.18 Accounting Standards«««««««««««««««««««««««... 19 Accounting Standards used by Banks««««««««««««««««««23 Accounting Standards used by Manufacturing Companies««««««««...«23 Prudential Regulations««««««««««««««««««««««««24 Conclusion«««««««««««««««««««««««««««.......29
We had been asked to analyze the 3 different financial statements, namely, the balance sheet, the income statement of the profit and loss, and the cash flow statement of the manufacturing companies and the banking sector. Both the sectors are profit oriented. The analysis and the general format of the financial statements were followed by the general similarities and differences between the two. Although the distinctive similarities were only a handful, the differences were innumerable. The differences were easily distinguishable in the general pattern and also in the accounting standards used. Briefly the differences are:
y The financial reports of manufacturing companies are prepared in June while those of the banks are prepared in December. y The banks have minimum fixed assets of which most are highly liquid whereas the ones of manufacturing companies are mainly fixed assets. y The liabilities are different because of the different ways in which both sectors carry out expenditure. y Banks give more value to the shares than the manufacturing companies. y The ways the transactions are recorded are completely different.
It is therefore important to mention the fact that two accounting standards, IAS 21 and IAS 30 were used solely by the banks and two accounting standards, IAS 2 and IAS 39 were used solely by the manufacturing companies. The Banks studied during the compilation of this project are:
y y y y y y y y y
Habib Metropolitan Bank Bank Al Habib Askari Bank Dubai Islamic Bank UBL Bank Alfalah Limited Meezan Bank MCB Standard Chartered Bank (Pakistan) Limited
The Manufacturing companies studied during the compilation of this project are:
y y y
Fauji Cement Unilever Toyota
y y y y y
Pak Arab Fertilizer Company Fauji Fertilizer Company Pakistan Tobacco Company Gul Ahmed Textiles Colony Textile Mills Multan
. All the questions have been met in a concise yet detailed form and all relevant material has been incorporated into this project. the Accounting standards used by both the sectors have been thoroughly analyzed and these two sectors use only around 15 accounting standards in total. Banks such as the Bank Al Habib applied this standard to their financial statements ended 31 December 2008. These prudential regulations have been mentioned in the following report in a concise form. I may stress on the fact again that all accounting standards are used by both the sectors apart from IAS 2 and IAS 39 used solely by the manufacturing companies and IAS 21 and IAS 30 used solely by the banks. Also there is a need to mention the prudential regulations made mandatory upon the Banking sector by the State Bank of Pakistan. One of the most important accounting standards used by the Islamic Banks today is the IFAS-2 (Ijarah).
products held for sale to customers. Examples of which are cash deposited in bank accounts. It comprises of the funds invested in the business by the owner plus any profits retained for use in the business less any share of profits paid out of the business to the owner. (Alternate titles include the statement of operations and the statement of earnings). Cash flow statement: A summary of cash inflows and cash outflows for the period just ended. It shows the standing of the enterprise at a specific date.
Basic format of the balance sheet Debit Side Assets: The actual resources that a business owns. or simple the P&L statement. It depicts the revenues and expenses of the company for a specific period of time. Income statement: A summary of sales revenue and expenses that determines the profit (or loss) for the period just ended. people other than the owner have supplied dome of the assets.
We will observe the general pattern of the financial statements and then compare the two sectors together and analyze them altogether.
. Owner¶s Equity: Capital is often called the owners equity or net worth. Below are the generalized forms of the Balance sheets. In the British system of accountancy this is called the profit and loss statement. A liability is the amount owing to those people for these assets. however. a summary of the financial situation of the business at the end of the period. Income statements (Profit and Loss accounts) and the Cash Flow statements of the manufacturing companies as well as the banks. buildings and machinery for business use or any material thing owned by the business. Credit Side Liabilities: Usually.INTRODUCTION: FINANCIAL STATEMENTS
Balance Sheet: It is a statement of financial condition.
Basic format of the cash flow statement 1.Expenses (Expenses include a wide variety of costs paid by the business. wages and benefits paid to employees. Cash inflows and outflows from the financing activities for the period. including the cost of products sold to customers.Basic format of the income statement Sales revenue (Revenue generated from the sales of products and services to the customers) . occupancy costs. Cash flow from the profit-making activities. and income tax) = Net Income (The final profit after all expenses have been deducted from the total sales revenue). 3.
. The term operating means the profit making transactions of the business. Cash inflows and outflows from investing activities for the period. administrative costs. for the period. 2. or operating activities.
General pattern of Balance Sheet of Banks Rupees in µ000
Assets Cash and balances with treasury banks Balances with other banks Lendings to financial institutions Investments Advances Operating fixed assets Deferred tax assets Other assets Liabilities Bills payable Borrowings from financial institutions Deposits and other accounts Sub-ordinated loans Liabilities against assets subject to finance lease Deferred tax liabilities Other liabilities Net Assets Represented by: Share capital Reserves Unappropriated profit Surplus/Deficit on revaluation of securities-net of deferred tax -
deposits. furniture and fixtures Land Construction in process Intangible assets: Goodwill Software Investment and other assets: Investments in securities Other investments and other assets Current Assets Cash and deposits Trade noted and accounts receivable Inventories Current tax assets Non-current assets held for sale Marketable securities Deferred tax assets Trade debts Advances.General pattern of Balance Sheet of Manufacturing Companies
Assets Fixed Assets: Property. plant and equipment Buildings and structures Machinery Vehicles Tools. prepayments and
allowance for doubtful accounts Total assets
Liabilities Current liabilities Trade notes and accounts payable Short-term bank loans Commercial paper Current portion of bonds Other payables Accrued expenses Accrued income taxes Deposits received from employees Deferred tax liabilities Other current liabilities Provisions Long-term liabilities Bonds Long-term debt Deferred tax liabilities Allowance for retirement benefits Other long-term liabilities Liability against shipment in transit Long-term deposits and prepayments Total liabilities
.Other receivables Other current assets Less.
Net current assets
Shareholders¶ equity Common stock Share capital Retained earnings Treasury stock at cost Reserves Minority interests Valuation and translation adjustments Net unrealized gains or losses on other securities Deferred gains or losses Foreign currency translation adjustments Subscription rights to share Total capital employed
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commission and brokerage income Dividend income Income from dealing in foreign currencies Gain or loss on sale of securities Unrealized gain or loss on revaluation Other income Total non mark-up/interest income
Non mark-up/interest expense: Administrative expenses Other provisions/write offs Worker welfare fund Other charges Total non mark-up/interest income Profit before taxation Taxation ± current
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.Unconsolidated Profit and Loss Account of Banks
Mark-up/return/interest earned Mark-up/return/interest expensed Net mark-up/interest income
Provision against non-performing loans and advances Bad debts written off directly Net mark-up/interest income after provisions
Non mark-up/interest income: Fee.
Prior periods -deferred Profit after taxation Unappropriated profit brought forward Profit or loss from discontinued operations Profit available for appropriation Basic and diluted earnings per share
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general and administrative expenses Operating income Non -operating income: Interest income Dividends income Other non.operating income Non-operating expenses: Interest expenses Other non-operating expenses Ordinary income Extraordinary gains and losses Income before income taxes Income taxes-current Income taxes-deferred Minority interest in consolidated subsidiaries Net income
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.Consolidated Statements of Income of Manufacturing Companies
Sales Less: Government levies Net Sales Less: Cost of sales Gross Profit Selling.
Unconsolidated Cash Flow Statement of Bank
Cash Flow from operating activities Profit before taxation Less: Dividend income Adjustments for: Depreciation Amortization Provision against non-performing loans and advances Provision for diminution in the value of available for sale investments (Gain) / Loss on sale / redemption of securities Provision for defined benefit plan Charge for compensated absences Gain on disposal of operating fixed assets Financial charges on leased assets Decrease / (Increase) in operating assets Lendings to financial institutions Advances Other assets (excluding advance taxation) Increase / (Decrease) in operating liabilities Bills payable Borrowings Deposits and other accounts Other liabilities (excluding provision for taxation) Cash inflow before tax Income tax paid Net Cash flow from operating activities
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CASH FLOW FROM INVESTING ACTIVITIES Net investments in available for sale securities Proceeds from investments in held to maturity securities Investments in associate and subsidiary company Dividends received Investments in operating fixed assets Proceeds from sale of operating fixed assets Net Cash flow from investing activities
CASH FLOW FROM FINANCING ACTIVITIES Receipt / (Payments) of sub-ordinated loans ± net Payment of lease obligations Dividends paid Net Cash Flow from financing activities Increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period
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deposits. prepayments and other receivables Increase in trade and other payables Cash generated from operations Compensated absences paid Taxes paid Net cash generated from operating activities
Cash flows from investing activities Additions in property. plant and equipment excluding borrowing cost capitalized
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.Cash Flow Statements of Manufacturing Companies
Cash flows from operating activities Net profit before taxation Adjustments for: Depreciation Provision for compensated absences Reversal of provision for bad debt Finance cost Gain on disposal of property. plant and equipment Interest income including interest on long term deposit Operating cash flows before working capital changes Increase in stores and stocks Increase in long-term deposits and prepayments Decrease in long-term advance Increase in retention money Increase in trade debts Increase in advances.
net of transaction cost Finance cost paid Net cash (used in)/ generated from financing activities (Decrease)/ increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year
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. plant and equipment Interest received on bank deposits Net cash used in investing activities
Cash flows from financing activities Repayment of long term finances Proceeds from long-term loans Dividend paid on ordinary shares Dividend paid on preference shares Import finances and export refinance Payment of guarantee premium and other cost Proceeds from issue of shares .Proceeds from disposal of property.
the dividends received and paid and the net effect on the cash and cash equivalents.THE SIMILARITIES
The similarities between the Balance sheets of both sectors are as follows: Assets: Investments Lendings / Loans Advances Other assets Deposits Other receivables Cash and bank balances Liabilities: Deferred taxation Capital and Reserves: Share Capital Inappropriate profit
The similarities between the Income statements of both sectors are as follows: Other income: Administrative expenses Profit before taxation Profit after taxation Provision for impairment The similarities between the Cash Flow statements of both sectors are as follows: The only similarities here are the adjustments made to the cash flow from the operating activities.
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Recording of favourable and unfavourable cases and distinguishing between adjusting and non-adjusting cases. IAS 2: The objective of IAS 2 is to prescribe the accounting treatment for inventories.
We are going to study the different accounting standards (IASs) used by the manufacturing companies and also those used by the banking sector. IAS 12: The objective of IAS 12 (1996) is to prescribe the accounting treatment for income taxes. including any write-down to net realizable value.
THE ACCOUNTING STANDARDS USED
IAS1: The objective of general purpose financial statements is to provide information about the financial position. International Accounting Standards (IASs). and financing activities. financial performance. which classifies cash flows during the period according to operating. IAS 11: The objective of IAS 11 is to prescribe the accounting treatment of revenue and costs associated with construction contracts. Changes in Accounting Estimates and Errors IAS 10: Concerns events After the Reporting Period. IAS 7: The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows. investing. They comprise:
o o o
International Financial Reporting Standards (IFRSs). and Interpretations developed by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC) and approved by the IASB. It also provides guidance on the cost formulas that are used to assign costs to inventories. IAS 8: Accounting Policies. and cash flows of an entity that is useful to a wide range of users in making economic decisions. The general principle in IAS 12 is that deferred tax liabilities should be recognised for all taxable temporary differences.
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. It provides guidance for determining the cost of inventories and for subsequently recognizing an expense.International Financial Reporting Standards are standards and interpretations adopted by the International Accounting Standards Board (IASB).
However. amortization of discounts or premiums on borrowings. IAS 19: The objective of IAS 19 is to prescribe the accounting and disclosure for employee benefits (that is. rather than when it is paid or payable. "virtually all" business combinations are acquisitions. amortization of ancillary costs incurred in the arrangement of borrowings. the appropriate accounting policies and disclosures to apply in relation to finance and operating leases. IAS 20: The objective of IAS 20 is to prescribe the accounting for. government grants and other forms of government assistance. Borrowing costs include interest on bank overdrafts and borrowings. IAS 23: The objective of IAS 23 is to prescribe the accounting treatment for borrowing costs. IAS 17: The objective of IAS 17 (1997) is to prescribe. patents. It does not cover government grants covered by IAS 41 Agriculture. Under IAS 22. for lessees and lessors.
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. it does not cover government assistance that is provided in the form of benefits in determining taxable income. copyrights. videos. manuscripts. The principle underlying all of the detailed requirements of the Standard is that the cost of providing employee benefits should be recognised in the period in which the benefit is earned by the employee. all forms of consideration given by an entity in exchange for service rendered by employees). finance charges on finance leases and exchange differences on foreign currency borrowings where they are regarded as an adjustment to interest costs. IAS 18: The objective of IAS 18 is to prescribe the accounting treatment for revenue arising from certain types of transactions and events. The Standard covers both an acquisition of one enterprise by another (an acquisition) and also the rare situation where an acquirer cannot be identified (a uniting of interests). natural gas. The principal issues are the recognition of assets. IAS 21: The objective of IAS 21 is to prescribe the accounting treatment for foreign currency transactions and the translation of the financial statements of foreign operations. IAS 20 applies to all government grants and other forms of government assistance. IAS 15: The objective of IAS 15 is to specify disclosures reflecting the effects of changing prices on the measurements used in the determination of an enterprise's results of operations and its financial position. plays. plant. and equipment. and the depreciation charges and impairment losses to be recognised in relation to them. IAS 15 applies to enterprises whose levels of revenue. assets or employment are significant in the economic environment in which they operate. oil. and similar items. profit. and similar regenerative resources and licensing agreements for films. IAS 16: The objective of IAS 16 is to prescribe the accounting treatment for property. IAS 17 applies to all leases other than lease agreements for minerals.IAS 14: The objective of IAS 14 (Revised 1997) is to establish principles for reporting financial information by line of business and by geographical area. and disclosure of. either. the determination of their carrying amounts. It applies to entities whose equity or debt securities are publicly traded and to entities in the process of issuing securities to the public. IAS 22: The objective of IAS 22 (Revised 1993) is to prescribe the accounting treatment for business combinations.
This standard is applied to the primary financial statements including the consolidated financial statements of any enterprise that reports in the currency of a hyperinflationary economics. IAS 30: The objective of IAS 30 is to prescribe appropriate presentation and disclosure standards for banks and similar financial institutions (hereafter called 'banks'). Other enterprises that choose to present EPS information should also comply with the Standard. All plans should include in their reports a statement of changes in net assets available for benefits. a summary of significant accounting policies and a description of the plan and the effect of any changes in the plan during the period. IAS 34: The objective of IAS 34 is to prescribe the minimum content of an interim financial report and to prescribe the principles for recognition and measurement in financial statements presented for an interim period. which supplement the requirements of other Standards. IAS 27: Consolidated financial statements an accounting for investments in subsidiaries.
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. performance and cash flows. The intention is to provide users with appropriate information to assist them in evaluating the financial position and performance of banks and to enable them to obtain a better understanding of the special characteristics of the operations of banks. IAS 33: The objective of IAS 33 is to prescribe principles for the determination and presentation of earnings per share (EPS) amounts in order to improve performance comparisons between different enterprises in the same period and between different accounting periods for the same enterprise. IAS 28: The objective of IAS 28 is to prescribe the accounting treatment to be adopted by an investor for investments in associates IAS 29: IAS 29 financial reporting in hyperinflationary economics. IAS 26: The objective of IAS 26 is to specify measurement and disclosure principles for the reports of retirement benefit plans. IAS 32: The stated objective of IAS 32 is to enhance users' understanding of the significance of on-balance sheet and off-balance sheet financial instruments to an enterprise's financial position.Borrowing cost is interest and other costs incurred by an enterprise in connection with the borrowing of funds. This standard is applied in accounting for investments in subsidiaries in a parent¶s separate financial statements. IAS 33 applies to enterprises whose securities are publicly traded or that are in the process of issuing securities to the public. IAS 31: A bank's income statement should group income and expenses by nature. IAS 24: The objective of IAS 24 is to ensure that an entity's financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances with such parties. This standard is applied in the preparation and presentation of consolidated financial statements for a group of enterprises under the control of a parent.
A financial asset is cash.
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. IAS 40: Property (land or buildings) held (whether by the owner or under a finance lease) to earn rentals or for capital appreciation or both. The same definition is used in IAS 32. a contractual right to receive cash or another financial asset. IAS 41: The objective of IAS 41 is to establish standards of accounting for agricultural activity -. and only if. The Standard also specifies how to measure the carrying amount of intangible assets and requires certain disclosures regarding intangible assets. A financial liability is an obligation to deliver cash or another financial asset or an obligation to exchange financial instruments with another enterprise on terms that are potentially unfavorable. IAS 39: A financial instrument is a contract that results in a financial asset of one enterprise and a financial liability or equity instrument of another enterprise.the management of the biological transformation of biological assets (living plants and animals) into agricultural produce. The Standard requires an enterprise to recognize an intangible asset if. certain criteria are met. a contractual right to exchange financial instruments with another enterprise on terms that are potentially favorable.IAS 38: The objective of IAS 38 is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another IAS. or an equity instrument of another enterprise.
The same definition is used in IAS 32. A financial asset is cash. and to enable them to obtain a better understanding of the special characteristics of the operations of banks. IAS 39: A financial instrument is a contract that results in a financial asset of one enterprise and a financial liability or equity instrument of another enterprise. A financial liability is an obligation to deliver cash or another financial asset or an obligation to exchange financial instruments with another enterprise on terms that are potentially unfavorable. or an equity instrument of another enterprise. a contractual right to exchange financial instruments with another enterprise on terms that are potentially favorable. It provides guidance for determining the cost of inventories and for subsequently recognizing an expense. which supplement the requirements of other Standards.
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. It also provides guidance on the cost formulas that are used to assign costs to inventories. a contractual right to receive cash or another financial asset. including any write-down to net realizable value. IAS 30: The objective of IAS 30 is to prescribe appropriate presentation and disclosure standards for banks and similar financial institutions (hereafter called 'banks').
ACCOUNTING STANDARDS USED ONLY BY THE MANUFACTURING COMPANIES
IAS 2: The objective of IAS 2 is to prescribe the accounting treatment for inventories.ACCOUNTING STANDARDS USED ONLY BY THE BANKS
IAS 21: The objective of IAS 21 is to prescribe the accounting treatment for foreign currency transactions and the translation of the financial statements of foreign operations. The intention is to provide users with appropriate information to assist them in evaluating the financial position and performance of banks.
REGULATION R-4 LIMIT ON EXPOSURE AGAINST UNSECURED FINANCING FACILITIES Banks / DFIs shall not provide unsecured / clean financing facility in any form of a sum exceeding Rs 500. The Prudential Regulations for Corporate / Commercial Banking cover four categories viz. Corporate Governance (G). Anti Money Laundering (M) and Operations (O)]. enhancement and Rescheduling / restructuring) exceeding such limit as may be prescribed by State Bank of Pakistan from time to time (presently at Rs 500. REGULATION R-5 LINKAGE BETWEEN FINANCIAL INDICATORS OF THE BORROWER AND TOTAL EXPOSURE FROM FINANCIAL INSTITUTIONS While taking any exposure. banks / DFIs should give due weightage to the credit report relating to the borrower and his group obtained from Credit Information Bureau (CIB) of State Bank of Pakistan. whereas. for the remaining three categories [i.e. the Prudential Regulations for SMEs and Consumer Financing cover only the Risk Management (R) category. the Banks in Pakistan use the prudential regulations. REGULATION R-1 LIMIT ON EXPOSURE TO A SINGLE PERSON/GROUP The total outstanding exposure (fund based and non-fund based) by a bank / DFI to any single person shall not at any point in time exceed 30% of the bank¶s / DFI¶s equity as disclosed in the latest audited financial statements. REGULATION R-3 MINIMUM CONDITIONS FOR TAKING EXPOSURE While considering proposals for any exposure (including renewal.PRUDENTIAL REGULATIONS:
In addition to the accounting standards. Risk Management (R). banks / DFIs shall ensure that the total exposure (fund-based and / or non-fund based) availed by any borrower from financial institutions does not exceed 10 times of borrower¶s equity as disclosed in its financial statements subject to the condition that the fund based exposure does not exceed 4 times of its equity as disclosed in its financial statements.
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.000). Corporate Governance (G). Financing facilities granted without securities including those granted against personal guarantees shall be deemed as µclean¶ for the purpose of this regulation.(Rupees five hundred thousand only) to any one person. set by the State Bank of Pakistan which has been made mandatory upon them (the Banks). KYC and Anti Money Laundering (M) and Operations (O).\ the relevant sections contained in the accompanying Prudential Regulations for Corporate / Commercial Banking shall be applicable.000/. subject to the condition that the maximum outstanding against fund based exposure does not exceed 20% of the bank¶s / DFI¶s equity.
REGULATION R-2 LIMIT ON EXPOSURE AGAINST CONTINGENT LIABILITIES Contingent liabilities of a bank / DFI shall not exceed at any point in time 10 times of its equity. Thus.
underwrite TFCs. at their discretion. submission of returns. time of creating provisions. REGULATION R-10 FACILITIES TO PRIVATE LIMITED COMPANY Banks / DFIs shall formulate a policy.
REGULATION R-12 MONITORING While extending fund based facilities to borrowers against hypothecation of stock and / or receivables on pari-passu basis. about obtaining personal guarantees of directors of private limited companies.REGULATION R-6 EXPOSURE AGAINST SHARES / TFCs AND ACQUISITION OF SHARES This regulation contains certain guidelines that the banks / DFIs must follow and refrain from doing regarding the exposure against shares and acquisition of shares. contains instructions regarding loans and advances. provided the banks¶ / DFIs¶ such exposure remains within the per party exposure limit as prescribed in Regulation R-1. This regulation is to detailed to explain in a concise form so we shall not go into its detail. provided that banks / DFIs hold at least 20% of the guaranteed amount in the form of liquid assets as security. or borrowings of any non-banking finance company. Banks/DFIs may. reversal of provisions and verification by the auditors. duly approved by their Board of Directors. except in the cases mentioned at Annexure-III where it may be waived up to 50% by the banks / DFIs at their own discretion. REGULATION R-9 ASSUMING OBLIGATIONS ON BEHALF OF NBFCs Banks / DFIs shall not issue any guarantee or letter of comfort nor assume any obligation whatsoever in respect of deposits. banks / DFIs shall obtain monthly statements from borrowers
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. however. investments and other assets. their past experience with it or its financial strength and operating performance. sale of investment certificates. and issue guarantees in favor of multilateral agencies for providing credit to NBFCs. issue of commercial papers. REGULATION R-7 GUARANTEES All guarantees issued by the banks / DFIs shall be fully secured. Banks / DFIs may. and (c) All the requirements laid down in Banking Companies Ordinance. commercial papers and other debt instruments issued by NBFCs. 1962 relating to payment of dividend are fully complied. (b) All their classified assets have been fully and duly provided for in accordance with the Prudential Regulations and to the satisfaction of the State Bank of Pakistan. REGULATION R-8 CLASSIFICATION AND PROVISIONING FOR ASSETS This regulation summarized. link this requirement to the credit rating of the borrower. REGULATION R-11 PAYMENT OF DIVIDEND Banks / DFIs shall not pay any dividend on their shares unless and until: (a) They meet the minimum capital requirements as laid down by the State Bank of Pakistan from time to time.
REGULATION G-4 CREDIT RATING With a view to safeguard the interest of prospective investors. This restriction does not apply in case of purchase of vehicles by the paid directors. They will also follow µCode of Corporate Governance¶ issued by the Securities & Exchange Commission of Pakistan (SECP) so long as any provision thereof does not conflict with any provision of the Banking Companies Ordinance. educational or public welfare purposes. SOCIAL.that contain a bank-wise break-up of outstanding amounts with the total value of stocks and receivables there-against. Briefly. social. employees or such persons who either individually or in concert with family members beneficially owns 5% or more of the equity of the bank / DFI. responsibilities of the board of directors. Banks / DFIs are advised not to open import letter of credit for these items in any case till such time the lifting of ban on any such item is notified by the State Bank of Pakistan. However. compliance officer and fitness and propriety of key executives. REGULATION G-1 CORPORATE GOVERNANCE / BOARD OF DIRECTORS AND MANAGEMENT The following guidelines are required to be followed by banks / DFIs incorporated in Pakistan. REGULATION G-3 CONTRIBUTIONS AND DONATIONS FOR CHARITABLE. it shall be mandatory for all banks / DFIs to have themselves credit rated by a credit rating agency on the approved panel of the State Bank of Pakistan. Prudential Regulations and the instructions / guidelines issued by the State Bank of Pakistan. renting and sale / purchase of any kind with their directors. REGULATION R-13 MARGIN REQUIREMENTS Banks / DFIs are free to determine the margin requirements on facilities provided by them to their clients taking into account the risk profile of the borrower(s) in order to secure their interests. EDUCATIONAL AND PUBLIC WELFARE PURPOSES This includes strict rules that the Banks / DFIs shall observe in the matter of making any donation / contribution for charitable. it includes fit and proper test. depositors and creditors. provided such sale is covered under the employees service rules duly approved by the Board of Directors of the banks / DFIs and is effected by the banks / DFIs at least at book value at the date of such transaction. officers or employees of the banks / DFIs which remained in their own use. REGULATION G-2 DEALING WITH DIRECTORS.
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. officers. MAJOR SHARE-HOLDERS AND EMPLOYEES OF THE BANKS / DFIs Banks / DFIs shall not enter into leasing. this relaxation shall not apply in case of items. management. import of which is banned by the Government. 1962.
banks / DFIs may have been taking on their own in this regard. transfer of illegal/ill-gotten monies. it includes the minimum guidelines required to be followed by banks / DFIs. as also to ensure transparency/prudence in banking transactions while starting relationship with a new customer and maintaining and continuing relationship with existing customers. These will add to or reinforce the precautions. The prudence demands that such records may be maintained in systematic manner with exactness of period of preservation to avoid any set back on legal and reputational fronts.. Banks / DFIs shall therefore. adequate and suitable security measures should be put in place for cash feeding and safety of the machines. terrorist financing. and all unusual patterns of transactions. and as conduit for white collar crime etc. except through the installation of Automated Teller Machine (ATM). the importance of µKnow Your Customer (KYC) / customer due diligence¶ has increased. both domestic and \ international.REGULATION M-1 KNOW YOUR CUSTOMER (KYC) In view of recent heightened global efforts to prevent the possible use of the banking sector for money laundering. REGULATION M-5 SUSPICIOUS TRANSACTIONS The banks / DFIs should pay special attention to all complex. REGULATION M-3 RECORD RETENTION The records of transactions and identification data etc. maintain. other than the authorized place of business. for a minimum period of five years. they have not been explained. REGULATION M-2 ANTI-MONEY LAUNDERING MEASURES Banks / DFIs are advised to follow guidelines to safeguard themselves against their involvement in money-laundering activities. unusually large transactions. REGULATION O-1 UNDERTAKING OF CASH PAYMENTS OUTSIDE THE BANK¶S AUTHORIZED PLACE OF BUSINESS Banks shall not undertake any business of cash payments. which have no apparent economic or visible lawful purpose.For this purpose.
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. Banks desirous of providing the facility of withdrawal through Authorized Merchant Establishments at various Points of Sale (POS) may do so up to a maximum cash limit of Rs 10. maintained by banks / DFIs occupy critical importance as for as legal proceedings are concerned.000/. all necessary records on transactions. REGULATION M-4 CORRESPONDENT BANKING The banks / DFIs shall gather sufficient information about their correspondent banks to understand fully the nature of their business. and other unlawful trades. Due to the length of the guidelines. In line with the international best practices.
REGULATION O-5 FOREIGN CURRENCY DEPOSITS UNDER FE 25-1998 Banks shall not invest FE 25 deposits in foreign currency / local currency denominated instruments below investment grade. REGULATION O-3 RECONCILIATION OF INTER-BRANCH ACCOUNTS AND SETTLEMENT OF SUSPENSE ACCOUNT ENTRIES All entries outstanding in the Inter-Branch Accounts (by whatever name called) and / or Suspense Account must be reconciled / cleared and taken to the proper head of account within a maximum period of 30 days from the date the entry is made in the above-named accounts. Particular care shall be taken in showing their deposits. shall they invest / place such deposits in fund management schemes of other banks / DFIs / NBFCs whether in Pakistan or abroad.REGULATION O-2 WINDOW DRESSING Banks / DFIs shall refrain from adopting any measures or practices whereby they would either artificially or temporarily show an ostensibly different position of bank¶s / DFI¶s accounts as given in their financial statements. 1963). provisioning. inter-branch and inter-bank accounts. MCR. Accordingly. etc. Neither. profit. exceed 20% of its time and demand liabilities specified in the said Form X. non-performing loans/assets. at any point in time. REGULATION O-4 MAINTENANCE OF ASSETS IN PAKISTAN Every bank / DFI shall maintain in Pakistan not less than 80% of the assets created by it against such time and demand liabilities as specified in Part-A of Form X (prescribed under Rule 17 of the Banking Companies Rules.
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. All other assets financed from sources other than time and demand liabilities specified in the said Form X shall be held within Pakistan. assets held abroad by any bank / DFI shall not.
The differences were easily distinguishable in the general pattern and also in the accounting standards used. The similarities include only a few account titles mentioned in the report. half of them o credit therefore they have a large amount of liabilities at one time. The balance sheet for the owner¶s equity of companies is very concise. µcommon stock¶. The banks have usually classified the owner¶s equity in two sub headings: ³equity attributable to equity holders of the parent company´ and ³Minority interest´. the differences were innumerable. µsurplus reserve¶. These accounts include.CONCLUSION
After the analysis of the 3 different financial statements. The liabilities are different because of the different ways in which both sectors carry out expenditure. To save the blushes. µsurplus¶. the financial reports of manufacturing companies are prepared in June while those of the banks are prepared in December. the banks need cash at hand at all times. and the cash flow statement of the manufacturing companies and the banking sector. First and foremost. Also the banks have leases and the manufacturing companies don¶t. It does not have a lot of the titles that the bank¶s balance sheet has. the balance sheet. The analysis and the general format of the financial statements were followed by the general similarities and differences between the two. The manufacturing companies on the other hand need to worry about the value of their stocks only because these stockholders are a form of income to the banks to finance heavy projects. µre-evaluation increment of land¶. This is because since the banks are highly interested in investments. Most banks have a ³capital reserve´ title while no such reserves exist for the companies
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. µequity adjustment from translation¶ etc. both the sectors have totally different forms of recording nd updating their financial statements. The banks are more interested in investments and loaning therefore they have more debtors while the manufacturing companies make purchases. namely. µpreferred stock¶. Banks give more value to the shares than the manufacturing companies. it is concluded that although both sectors are profit oriented and a have similar goals. The ways the transactions are recorded are also completely different. This is because the banks need an amount of cash in hand just in case any customer wants to withdraw a large amount of money from his bank account. the income statement of the profit and loss. Although the distinctive similarities were only a handful. The banks have minimum fixed assets of which most are highly liquid whereas the ones of manufacturing companies are mainly fixed assets. the most profitable investment opportunities arise in the stock market. while the companies don¶t use that format.
the Accounting standards used by both the sectors have been thoroughly analyzed and these two sectors use only around 15 accounting standards in total. It is also important to mention the fact that two accounting standards. Furthermore. Banks such as the Bank Al Habib applied this standard to their financial statements ended 31 December 2008. I may stress on the fact again that all accounting standards are used by both the sectors apart from IAS 2 and IAS 39 used solely by the manufacturing companies and IAS 21 and IAS 30 used solely by the banks. Also there is a need to mention the prudential regulations made mandatory upon the Banking sector by the State Bank of Pakistan. The bank do not have expenses such as ³distribution and finance costs´ although provision for bad debts.In comparison of the income statements we find that the companies have mentioned the Administrative expense first while it is last in line for the banking sector. IAS 2 and IAS 39 were used solely by the manufacturing companies. IAS 21 and IAS 30 were used solely by the banks and two accounting standards. The income decrease due to the taxation is also variable in both sectors. bad debts written off and provision for diminution in the value of investments form a major part of their expenses.
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. These prudential regulations have been aforementioned in a concise form. One of the most important accounting standards used by the Islamic Banks today is the IFAS-2 (Ijarah).