Acknowledgements

First of all, I would like to thank God for giving me the life and good health needed to
carry out this dissertation.

Moreover I am very grateful to the staff of the SLCSCCU for assisting in the distribution
of the questionnaires. In particular, I would like to thank the General Manager, Ms. Monrose,
who assisted me from the start to the end of this project. She helped me to understand the
topic better, answered the many queries I had and also administered the distribution of the
questionnaires. I am also grateful to the Head Accountant of the SLCSCCU, Mr. Desouzay who
helped in explaining the breakdown of the financial statements.

Finally, I would like to thank my parents, for providing me with the resources needed to
complete this SBA. My father especially deserves tremendous thanks as his position of
President of the SLCSCCU not only enabled him to advise me on the topic but also to get in
contact with the organization. More importantly, it was he who suggested the research topic to
me, whilst he was also able to access documents that constitute my sources of data.

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 Introduction

The St. Lucia Civil Service Co-Operative Credit Union (SLCSCCU) is a member driven financial
institution in St. Lucia. The vision of the SLCSCCU is ‘To be the financial institution of choice for
our members’ which means that they aim to be at the forefront of meeting member needs.

In order to meet this vision, the SLCSCCU aims to:

 promote thrift among members

 educate members in the Co-Operative principles and financial management
 create from the savings of members and other businesses of the society, a source of
credit available to members
 borrow money and invest in security
 draw, make, accept, endorse, discount, execute and issue financial instruments.
 pursue policies that would encourage growth in membership

The very name Credit Union means that this financial co-operative was formed by members
with a common bond to provide themselves with financial services on more favorable terms
than they would normally obtain from the banking sector.

To become a member of the credit union, one must be an employee, member or pensioner of
the Public Service, Statutory Authorities, Agencies of the Government or an immediate family
member and also must be 16 years or older.

Credit Unions are allowed to raise two types of share capital; permanent and withdrawable
share capital. Permanent shares are paid in capital that cannot be withdrawn. On the other
hand, withdrawable shares are paid in capital that can be redeemed under certain conditions.

Withdrawable share capital is peculiar to co-operatives and is not available for other corporate
forms of business such as private and public limited companies. Unlike permanent share capital
in conventional companies, withdrawable share capital:

 Is issued on the principal of one member on vote

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  Is not as heavily regulated which means that co-operatives enjoy some exemptions from
covering the approval of financial promotions which can reduce the cost of a share
issue. E.g They do not need to draw up a share prospectus
 Cannot be transferred between people. The law allows shareholders to withdraw their
share capital, subject to agreed terms and conditions that protect the society’s financial
security.

Withdrawable Shares have been the capital base for the SLCSCCU since inception in 1961.
However, Permanent Shares were introduced in 2004 and from since then 25% of members’
dividend is transferred to Permanent Shares. New members need one permanent and one
withdrawable share at $5.00 each upon opening of account.

However, in 2005, a revised IAS 32 was released stipulating that withdrawable shares should be
treated as a current liability instead of equity. The fundamental reasoning behind this
reclassification was that these shares could be withdrawn at any time by members once certain
conditions were met, hence it should be treated a liability.

This change in standards however, does not come without several implications for the global
Co-Operative society. The SLCSCCU has not yet become compliant with the revised version of
IAS 32. Hence this dissertation is aimed at studying the possible effects of compliance to this
standard on the St. Lucia Civil Service Co-operative Credit Union.

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Aim: What are the possible effects of the reclassification of withdrawable shares
on the St. Lucia Civil Service Co-operative Credit Union Limited?

Objective:

- How can the reclassification of withdrawable shares impact the financial

statements of the SLCSCCU?

- How can the reclassification of withdrawable shares affect the accounting

ratios of the SLCSCCU?

- How can the reclassification of withdrawable shares affect the SLCSCCU’s

ability to attract new membership?

- How can the reclassification of withdrawable shares affect the SLCSCCU’s

lending capability?

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 Literature Review

The adoption of the amended IAS 32 standard is widely believed by the global co-
operative society to directly threaten the co-operative model since their member shares -
which mainly constitute their capital – can no longer account for equity but classified as
liabilities (ICA, 2008). Consequently, it is hypothesized that co-operative banks’ financial ratios
and financial performance indicators would be dramatically affected. This has sparked
widespread debate amongst the co-operative community who are in disagreement with the
IASB on the change in standards. Hence, the following 9 literature reviews seek to discuss
arguments for and against the change, potential impacts and possible remedies to the issue.

The version of IAS 32 preceding the 2004 amendment states “A financial instrument
issued by the reporting entity should be treated as equity or debt according to whether it meets
the definition of ‘financial liability’ rather than by reference to its legal form.” Under this version
of IAS 32, withdrawable shares were not classified as liabilities because they did not meet the
definition of a liability. (IAS 32, 1998)

However, the revised IAS 32 states “A financial instrument should be classified as either
a financial liability or an equity instrument according to the substance of the contract, not its
legal form, and the definitions of financial liability and equity instrument.” (IAS 32, 2004). Under
this version of IAS 32, withdrawable shares should not be classified as equity because the
contract gives the shareholder the right to request redemption of their shares under certain
conditions.

The main reason for the IASB’s change in standards is the feature of withdrawable
shares that allows them to be redeemed by members. The IASB views such shares as a current
liability because an organization has a contractual obligation to pay their shareholder for these
shares once redemption is requested and certain conditions are met. According to IFRIC 2,
member shares are only considered equity if (a) the entity has an unconditional right to refuse
redemption or (b) local law, regulation or the entity’s governing charter can impose various
types of prohibition on the redemption of member shares (IFRIC, 2012).

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 However, the co-operative movement disagrees with the fact that they have to comply
with this amendment. They believe that the International Financial Reporting Standards were
created primarily for investor owned business models and that their co-operative model is
different in many ways. Hence, their argument is that co-operatives should not be forced to
adapt to accounting standards which are designed to meet the needs of external equity
investors that are seeking only a return on their invested capital (Tabet, 2008).

Several effects of the amendment to IAS 32 on co-operatives have been identified.

First of all, it will affect the financial ratios of co-operatives. One such ratio is the debt to
equity ratio which will be extremely high for co-operatives until they become better capitalized.
Furthermore, interest expense will increase significantly since liabilities accrue interest
(SLCSCCU, 2013).

Moreover, it will affect co-operatives ability to attract new membership as the equity
side of the balance sheet would give the impression that the co-operatives are not financially
sound. It will also affect co-operatives’ capacity for lending for two reasons. Firstly, lenders
usually require a certain minimum level of equity, hence, complying with the amended IAS 32
standards may result in co-operatives struggling to meet such minimum requirements.
Adherence to IAS 32 will also affect the lending capability of co-operatives because their ratings
will most likely decrease. Since lenders use ratings of firms to determine whether to loan
money to them, co-operatives will be less assured in seeking credit (Barberini, 2008).

Secondly, adherence to IAS 32 may hamper the creation of new co-operatives which
would find themselves in the situation of having no equity at all if their shares are classified as
liabilities (Barberini, 2007).

Nevertheless, the co-operative community has been actively trying to suggest more
favourable approaches for the treatment of co-operative shares to the IASB. One such remedy
is called the loss absorption approach. According to this approach, participation in losses is
thought to be a decisive criterion for distinguishing between liabilities and equity. A financial
instrument can said to be loss absorbing if it can be used by the entity to cover losses that

Page | 6
might be incurred. This approach states that such instruments should be classified as equity.
The problem is that this approach is not developed enough. The ICA views this as quite
unfortunate because they believe that this approach is perfectly adapted for co-operative
member shares which are loss absorbing in most cases, if not all (Tabet, 2008).

However, whilst the current treatment of co-operative shares remains, it is imperative

that strategies to bolster permanent share capital are employed. One of the basic measures
includes amending membership rules to require a minimum amount to be held in permanent
shares. Another strategy involves issuing deferred shares to members. The proposed
regulations allow for deferred shares to be treated as regulatory capital provided that they
have a minimum maturity of 5 years (Hosin, 2011).

Though the IASB may have a plausible reason for the change in IAS 32, the general
consensus, as seen in the literature discussed, is that this amendment could potentially have
disastrous implication for co-operatives around the world. Nevertheless, the co-operative
society is working diligently to devise a new approach for the treatment of co-operative shares
that would allows most of their shares to be classified as equity. However, whilst the
controversial IAS 32 still stands, co-operatives have begun to employ several strategies to
bolster their permanent capital base and ride the tidal wave threatening to crash on them.

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 Methods of Data Collection

1. Documentary Research

Documentary research is the use of outside sources, documents to support the

viewpoint or argument of an academic work. The documents used to collect the data
include:

 Audited Financial Statements

 Comment Letters on Exposure Drafts
 Other documents

The main advantage of documentary research is that it is quicker than data

collection methods which require you to collect your own data.

However, its main drawback is that it is very subjective as different researchers

may express different opinions on the topic. Documents may also lack reliability
sometimes and researchers may forge their results.

This method of data collection is the main source for this dissertation due to the
nature of the project. Since the project largely consists of looking at the effects on
financial statements, these documents (financial statements) are be my main source of
data.

2. Questionnaire

This is a document prepared by the investigator containing a set of questions

relating to the problem of enquiry.

The main advantage of a questionnaire is that it is time efficient – a large

number can be distributed in a short time.

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 However it main disadvantages are that response rates may be low and the
researcher cannot explain questions to those who have doubt.

The questionnaire was used to investigate whether behaviours of members or

potential members would change as a result of the re-classification of withdrawable
shares.

3. Interview
This is where the investigator directly contacts informants , solicits their co-
operation and collects the data.

Two key advantages of the direct interview is that it ensures a high respond rate
and that the researcher can explain questions which respondents have doubts about.

Two disadvantages however are that it is quite time-consuming and that

respondents may not always be available for the interview.

Mr. Degazon, President of the SLCSCCU, also my father continually assisted me

throughout the project. Most of the assistance came via informal conversation at home.
Hence some of the key points that he made were converted into an interview.

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 Procedure for Questionnaire

Sampling

 It was decided that a sample of at least 30 respondents would be needed for the survey.
Hence, 40 questionnaires were printed to ensure that at least 30 responses would be
returned.

 To ensure that a sample as random as possible was selected, it was decided that
questionnaires would be given to various employees who came into contact with
customers during their daily operations. These employees would then solicit the co-
operation of these customers.

Procedure

 The GM of the SLCSCCU, Ms. Monrose was contacted to seek permission to carry out
the survey.

 The questionnaires were given to the GM on Friday 7th February 2013.

 The GM split the questionnaires between various employees namely; tellers, loan
officers and member services officers.

 The questionnaires were distributed to customers over the course of a week. They were
returned on Friday 14th February 2013.

 37 out of the 40 questionnaires were returned. This meant that the minimum number of
responses was adequately met.

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 Limitations

1. The sample of 37 respondents may not be an adequate representation of the SLCSCCU

member base. The credit union has approximately 16,000 members so a sample of 37
may not have sufficiently represented the views of the entire membership core.

2. Only current members of the SLCSCCU were given questionnaires to answer, thus, the
views of non members were not represented in the findings. Non member views would
have been important on this issue because they are all potential members and one of
the aims of the research was to find out whether the change in IAS 32 would affect
potential membership.

3. In the balance sheets presented for ‘after reclassification’ the Interest Expense Payable
figure was included in the Liabilities section based on the assumption that members
would have not withdrawn their interest yet. However, in actuality, almost all dividends
are withdrawn as soon as they are declared. Therefore, in the case of Interest paid on
deposits, the situation is likely to be the same. Thus total liabilities in this project are
likely to be overstated, which affects the validity of the findings.

4. The financial statements presented for ‘after re-classification’ were only based on the
assumption that re-classification had taken place already, hence leading to some
possible inaccuracy in findings. However, the change in IAS 32 has only taken effect in
the SLCSCCU for the financial year that has just ended. The statements for that year
have not yet been released. An actual set of financial statements prepared under re-
classification would have been more appropriate to make valid conclusions from.

5. Since the change has only been recently implemented by the SLCSCCU, information on
the topic which was specific to the Credit Union was extremely difficult to obtain.
General information on the topic was also very difficult to obtain from public data
sources such as the internet. Much of the data used to compose the literature review

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was sourced from inside personnel such as the President and General Manager of the
SLCSCCU.

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 Impact on Balance Sheets

The Balance Sheet, also known as the Statement of Financial Position provides a
snapshot of the financial position of a business at a particular point in time (usually at the end
of its financial year). It shows the assets, liabilities and equity of the firm.

A comparison of the Balance Sheets before and after re-classification is shown for the
years 2008-11. The changes due to re-classification are highlighted.

Page | 13
2010 Before Re-Classification After Re-Classification

ASSETS $ $
Cash and Cash Equivalents 10,920,438 10,920,438
Financial Investments 31,433,044 31,433,044
Other Receivables 122,879 122,879
Loans and Advances to Members 92,220,464 92,220,464
Construction Work in Progress 23,082 23,082
Property, Plant & Equipment 4,706,694 4,706,694
139,426,601 139,426,601

LIABILITIES AND MEMBERS’ EQUITY

Liabilities
Other Payables 927,658 927,658
Interest Expense Payable 3,014,892
Deposits From Members 8,426,246 8,426,246
Deferred Income 41,169 41,169
Members’ Withdrawable Shares 100,496,403
9,395,073 112,906,368
Members’ Equity
Share Capital 107,031,641 6,535,238
Statutory Reserve 14,224,621 13,621,642
Education Reserve 500,000 500,000
Development Fund 538,156 538,156
Disaster Fund 240,112 240,112
Funeral & Burial Benefits Scheme 682,500 682,500
Revaluation Reserve 218,578 218,578
Retained Earnings 6,595,920 4,184,007
130,031,528 26,520,233
139,426,601 139,426,601

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2011 Before Re-Classification After Re-Classification

ASSETS $ $
Cash and Cash Equivalents 12,509,729 12,509,729
Financial Investments 35,287,747 35,287,747
Other Receivables 149,012 149,012
Loans and Advances to Members 97,228,663 97,228,663
Construction Work in Progress 13,500 13,500
Property, Plant & Equipment 4,756,574 4,756,574
149,945,225 149,945,225

LIABILITIES AND MEMBERS’ EQUITY

Liabilities
Other Payables 818,113 818,113
Interest Expense Payable 3,187,129
Deposits From Members 9,826,760 9,826,760
Deferred Income 32,967 32,967
Members’ Withdrawable Shares 104,808,872
10,677,840 118,673,841
Members’ Equity
Share Capital 112,816,036 8,007,164
Statutory Reserve 15,789,719 15,152,293
Education Reserve 500,000 500,000
Development Fund 538,156 538,156
Disaster Fund 240,112 240,112
Funeral & Burial Benefits Scheme 735,500 735,500
Revaluation Reserve 175,318 175,318
Retained Earnings 8,472,544 5,922,841
139,267,385 31,271,384
149,945,225 149,945,225

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2012 Before Re-Classification After Re-Classification

ASSETS $ $
Cash and Cash Equivalents 9,801,448 9,801,448
Financial Investments 36,376,874 36,376,874
Other Receivables 849,876 849,876
Loans and Advances to Members 107,596,500 107,596,500
Property, Plant & Equipment 4,636,642 4,636,642
159,261,342 159,261,342

LIABILITIES AND MEMBERS’ EQUITY

Liabilities
Other Payables 1,026,666 1,026,666
Interest Expense Payable 3,138,359
Deposits From Members 10,555,639 10,555,639
Deferred Income 25,186 25,186
Members’ Withdrawable Shares 111,477,136
11,607,490 126,222,986
Members’ Equity
Share Capital 119,793,324 8,316,188
Statutory Reserve 17,254,881 15,989,782
Education Reserve 500,000 500,000
Development Fund 538,156 538,156
Disaster Fund 240,112 240,112
Funeral & Burial Benefits Scheme 727,325 727,325
Revaluation Reserve 175,319 175,319
Retained Earnings 8,424,727 6,551,474
147,653,844 33,038,356
159,261,342 159,261,342

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 As seen in the Balance Sheets presented, the re-classification of with-drawable shares as
deposits would affect the statement in the following ways:

 Shares would be taken out of the Equity section and placed in the Liabilities section,
thus decreasing Members’ Equity and increasing Liabilities.

 The appropriation to Statutory Reserves and Retained Earnings would fall because of
the decrease in net profits (explained later). This further reduces Members’ Equity.

NB: In the balance sheets presented for ‘after reclassification’ the Interest Expense Payable
figure was included in the Liabilities section based on the assumption that members had
would not have withdrawn their interest yet. However, in actuality, almost all dividends
are withdrawn as soon as they are declared. Therefore, in the case of Interest paid on
deposits, the situation is likely to be the same. Thus in a more realistic situation, there
would be no liability called Interest Expense Payable in the Liabilities section of the
Balance Sheet.

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 Impact on Income Statements

The Income Statement or Statement of Comprehensive Income illustrates the

profitability of a firm over a financial year. Its two basic components are revenues and
expenses, but it also includes gains and losses.

The reclassification of withdrawable shares would only have one main impact on the
Income Statement. The interest to be paid on the newly classified liabilities would increase
total expenses thus reducing net profit.

A comparison of the Income Statements before and after re-classification is shown for the years
2008-11. The changes due to re-classification are highlighted.

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2010 Before Re-Classification After Reclassification
Income $ $
Interest Income on Members’ Loans 10,429,563 10,429,563
Less: Interest Expense 214,547 214,547
Net Interest Income 10,215,016 10,215,016
Other Income
Investment Income 1,559,378 1,559,378
Other Operating Income 164,489 164,489
Amortization of Grant Fund 4,131 4,131
1,727,998 1,727,998
General and Administrative Expenses
Staff Related Expenses 1,955,166 1,955,166
Depreciation 127,387 127,387
Other Operating Expenses 1,932,352 1,932,352
Impairment Losses on Loans & Advances 774,355 774,355
Impairment Loss on Investment 1,705,397 1,705,397
Interest on Member Shares 3,014,892
Bank Charges 19,274 19,274
6,513,931 9,528,823
Net Surplus For The Year 5,429,083 2,414,191
Other Comprehensive Income
Fair Value increase/(decrease) in Investment (26,886) (26,886)
Total Comprehensive Income for the Year 5,402,197 2,387,305

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2011 Before Re-Classification After Reclassification
Income $ $
Interest Income on Members’ Loans 10,623,763 10,623,763
Less: Interest Expense 241,383 241,383
Net Interest Income 10,382,380 10,382,380
Other Income
Investment Income 1,971,377 1,971,377
Other Operating Income 171,957 171,957
Amortization of Grant Fund 8,202 8,202
2,151,536 2,151,536
General and Administrative Expenses
Staff Related Expenses 2,133,644 2,133,644
Depreciation 205,813 205,813
Other Operating Expenses 2,134,810 2,134,790
Impairment Losses on Loans & Advances 245,242 245,242
Interest on Member Shares 3,187,129
Bank Charges 16,042 16,042
4,735,551 7,922,680

Net Surplus For The Year 7,798,365 4,611,236

Other Comprehensive Income
Fair Value increase/(decrease) in Investment (43,260)
Total Comprehensive Income for the Year 7,755,105 4,611,236

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2012 Before Re-Classification After Reclassification
Income $ $
Interest Income on Members’ Loans 10,461,196 10,461,196
Less: Interest Expense 228,994 228,994
Net Interest Income 10,232,202 10,232,202
Other Income
Investment Income 1,669,484 1,669,484
Other Operating Income 253,485 253,485
Amortization of Grant Fund 7,779 7,779
1,930,748 1,930,748
General and Administrative Expenses
Staff Related Expenses 1,778,799 1,778,799
Depreciation 184,870 184,870
Other Operating Expenses 2,418,634 2,418,634
Impairment Losses on Loans & Advances 458,333 458,333
Interest on Member Shares 3,138,359
Bank Charges 18,001 18,001
4,858,637 7,996,996
Net Surplus For The Year 7,304,313 3,954,884
Other Comprehensive Income
Fair Value increase/(decrease) in Investment (14,696)
Total Comprehensive Income for the Year 7,304,313 3,940,188

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 Impact on Ratios

The following basic ratios will be affected:

- Debt to Equity Ratio

- Debt to Assets Ratio
- Current Ratio
- Quick Ratio
- Return on Assets
- Return on Capital Employed
- Dividend Pay Out Ratio

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 1. Debt to Equity Ratio

Debt-to-Equity ratio is the ratio of total liabilities of a business to its equity. It

measures the degree to which the assets of the business are financed by the debts and
the members' equity of a business.

Total Liabilities
Debt to Equity Ratio =
Members′ Equity

Lower values of debt-to-equity ratio are favorable indicating less risk. Higher
debt-to-equity ratios are unfavorable because it means that the business relies more on
external lenders thus it is at higher risk, especially at higher interest rates.

Below: Debt to Equity Ratio for the SLCSCCU before and after reclassification of shares

Year Before Re-Classification After Re-Classification

2010 0.07 4.26
2011 0.08 3.79
2012 0.08 3.82

As shown in the table above, the reclassification of shares would exponentially

increase the debt to equity ratio to an unfavorably high amount. This would make the
SLCSCCU less attractive to potential members and lenders.

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 2. Debt to Asset Ratio

This is a ratio which indicates the proportion of a company’s assets that are provided
via debt.

𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

The lower the ratio, the more favorable it is. A higher debt to asset ratios is
unfavorable because greater risk will be associated the company’s operations.

Below: Debt to Asset Ratio for the SLCSCCU before and after reclassification of shares
Year Before Re-Classification After Re-Classification
2010 0.07 0.81
2011 0.07 0.79
2012 0.07 0.79

As shown in the table above, the reclassification of shares would make the debt
to asset ratio unfavorably higher, making the SLCSCCU less attractive to potential
members and lenders.

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3. Current Ratio
This is a ratio of the company’s current assets to current liabilities. It gives an
idea of a company’s ability to pay back its short term debts.

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

A low current ratio is unfavourable as it indicates that a company has a low

capability of repaying its short term debts. However, while a low ratio may signal
danger, a high ratio may indicate that firm has resources that are not being used
efficiently. An ideal current ratio lies between 1.5:1 and 2:1.

Below: Current Ratio for the SLCSCCU before and after reclassfication

Year Before Re-Classification After Re-Classification

2010 4.52 0.38
2011 4.49 0.40
2012 4.05 0.37

The table above shows that the reclassification will cause a drastic drop in the
current to unfavourable levels.

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4. Liquidity/Quick/Acid Ratio
The quick ratio measures the ability of a company to meet its short term
obligations with its most liquid assets. Liquid assets include cash, marketable securities,
accounts receivable and current notes receivable.
𝑄𝑢𝑖𝑐𝑘 𝐴𝑠𝑠𝑒𝑡𝑠
𝐿𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

This ratio is a more conservative version of the current ratio as it provides a

more rigorous assessment of a company’s ability to meet its short term debts. It does
this by eliminating those assets which are least liquid, such as inventory and prepaid
expenses.

Like the current ratio, low quick ratios (usually below 1:1) are unfavourable.

Since the SLCSCCU is not a merchandising firm, it has no stock. Also for the years
observed, the credit union did not possess any prepaid expenses. Hence, the current
and quick ratios for the SLCSCCU are the same for all the years investigated.

Below: Liquidity Ratio for the SLCSCCU before and after reclassfication
Year Before Re-Classification After Re-Classification
2010 4.52 0.38
2011 4.49 0.40
2012 4.05 0.37

Just like the current ratio, the reclassification will cause the liquidity ratio to fall
to unfavourably low levels.

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5. Return on Assets (ROA)
This ratio is a measure of operating performance that indicates how effectively
the assets have been employed during the year. In the denominator we use the average
total assets; which is calculated by averaging the assets figures of the previous year and
current year.

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐴 = × 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

The higher the ROA ratio the better, as it means that the company is earning
more on less investment.

Below: ROA for the SLCSCCU before and after reclassfication

Year Before Re-Classification After Re-Classification
2010 4.0% 1.8%
2011 5.4% 3.2%
2012 4.7% 2.7%

As shown in the table above, reclassification would lower the ROA figure slightly.

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6. Return on Capital Employed (ROCE)
This ratio is a measure of the returns that a business achieves from its capital
employed. The term capital employed refers to the total sum of common stock, reserves
and long term liabilities. The formula is shown below:

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐶𝐸 =
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑

The higher this ratio is the better as it indicates that the firm is using its
resources more efficiently.

Below: ROCE for the SLCSCCU before and after reclassfication

Year Before Re-Classification After Re-Classification
2010 4.2% 9.1%
2011 5.6% 14.7%
2012 4.9% 12.6%

As seen in the table above reclassification of shares would actually increase the
ROCE ratio, making it more attractive to investors and members. This is increase is due
to the capital employed figure (denominator) falling because withdrawable shares
would no longer be considered as capital.

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7. Dividend Pay-Out Ratio
This ratio shows the percentage of earnings that are paid out to shareholders as
dividends.

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑦 𝑂𝑢𝑡 𝑅𝑎𝑡𝑖𝑜 = × 100
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

Higher dividend pay-out ratios are more attractive to potential investors as they
receive a higher proportion of net surplus as dividends.

Below: Dividend Pay-Out Ratio for the SLCSCCU before and after re-classfication
Year Before Re-Classification After Re-Classification
2010 73.6% 165.4%
2011 43.6% 73.8%
2012 54.0% 32.9%

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 Persons Who Used the Financial Statements of
the SLCSCCU as a Major Factor In Joining

32%

68% Yes
No

The above pie chart shows that the majority of respondents (68%) did not consider the
financial statements of the SLCSCCU as a major factor in their decision to join the organization.
Only 32% considered the financial statements as having played a major role in their decision to
join the SLCSCCU.

Furthermore, out of the 12 respondents who answered ‘Yes’ to Question 1, the most
common aspect of the financial statements and ratios that played a major role in their decision
were related to dividends and profits. 8 respondents gave an answer related to dividends with
some answers including “Dividend Payout Ratio” and “Net Profit Ratio.” The results of this
question are shown below:

Below: Table showing specific aspects of financial statements and ratios that
influenced members to join the SLCSCCU

Answer No. of Respondents

Profits, Dividends 8
Other 3

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 Members Who Would Still Join the SLCSCCU Now
That Their Statements Reflect Higher Debt and
Lower Equity Levels

17%

Yes
No

83%

The above graph illustrates that the majority of the sample (30) would still join the
SLCSCCU now that their financial statements and ratios are much less attractive due to the
change in IAS 32. Only 6 answered that they will not join the SLCSCCU. 1 respondent did not
answer this question.

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 Major Reasons for Joining the SLCSCCU
35

30
29
25 27 27

20 22

18
15

13
10
10

0
Easy to obtain Lower interest Tax benefit for Financial Patronage Financial Dividends
loans rates for loans purchase of Counseling Refund Statements
shares

The above graph shows the major reasons for or major factors responsible for the
sample of members joining the SLCSCCU. The most common reason was dividends with 78% of
respondents selecting this option. The second most selected reasons for joining the SLCSCCU
were the ease of obtaining loans and the tax benefit for purchasing shares with 73%. Another
common factor selected was the lower interest rates on loans compared to banks with 59% of
respondents selecting this factor.

Interestingly, 4 out of the 10 respondents who cited financial statements as a major

factor in their decision to join the SLCSCCU had answered no to the question “Did the financial
statements and ratios of the Credit Union play a major role in you joining the organization?”
Thus these 4 respondents contradicted their answer to Question 1 by selecting financial
statements as a major reason responsible for them joining the SLCSCCU.

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 A closer look at these respondents’ questionnaires shows that the least number of
options shaded was 5 out of 7. Out of these 4 respondents, 2 of these respondents shaded all of
the options. This suggests that these respondents may have been in a rus h so just shaded all or
most of the options. This may not be true however; it may have been that the respondents
changed their minds or that they were not sure or even a misinterpretation of the question.

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 Members Who Would Be More Inclined to Increase
Withdrawals

24%

Yes
No

76%

The above graph shows the percentages of respondents who would be more inclined to
increase their withdrawals now that their withdrawable shares have been re-classified as
deposits or liabilities instead of equity. The majority of respondents (28) said that they will not
be inclined to withdraw more. Only 9 respondents said that they will be inclined to withdraw
more.

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 Evaluation

The Impact of the Re-Classification on the Balance Sheet

The effects of the re-classification on the Financial Statements are clearly negative. First
of all, in the balance sheet, it would significantly increase liabilities and reduce members’ equity
giving off the impression that the SLCSCCU is not financially sound.

In the three Balance Sheets presented, after re-classification, Liabilities would increase
by an average of 1066%! In Lehmann’s terms, Liabilities would increase more than ten-fold!
This is primarily due to the large amount of withdrawable shares that would have been
transferred to the Liabilities section. This massive increase can be explained by the fact that
these with-drawable shares are the main capital base for the SLCSCCU.

Moreover, Members’ Equity would decrease by an average of 78.5%. Again this is

primarily due to the with-drawable shares being taken out of the Members’ Equity Section. Also
playing a very small role in this fall in Members’ Equity figure is the fall in amounts for Statutory
Reserves and Retained Earnings. As explained earlier, these figures would drop slightly due to
the fall in net income, which would lead to a smaller amount being appropriated to them.

The Impact of Re-Classification on the Income Statement

Just like the Balance Sheet, the impact on the Income Statement would be negative.
Interest expense rather than dividends would have to be paid on the newly classified deposits
since they would be no longer considered equity. This would have the effect of increasing the
expense figure in the Income Statement and thus reducing Net Income. In the three Income
Statements presented, the re-classification would have reduced net income by an average of
48%

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The Impact of Re-Classification on the Financial Ratios
As shown earlier the majority of ratios would be affected adversely by the re-
classification which would make the SLCSCCU less attractive to stakeholders. These ratios
include:
 Debt to Equity Ratio
 Debt to Assets Ratio
 Current Ratio
 Quick Ratio
 Return on Assets

However, a couple of ratios would actually be impacted on favourably. These two ratios are
the:
 Return on Capital Employed
 Dividend Pay Out Ratio

The Impact of Re-Classification on Attracting Membership

Overall, the re-classification of withdrawable shares as deposits would have a negative
effect on the financial statements and ratios of the SLCSCCU. But would this severely affect the
cooperative’s ability to attract new members? The results of the questionnaire sugges t
otherwise.

The majority of respondents claimed that the financial statements and ratios of the
SLCSCCU did not play a major role in their decision to join the co-operative. Furthermore, 83%
of respondents said that if they were not yet a member, they would still join the SLCSCCU even
though their financial statements are much less attractive.

When asked what were there major reasons for or major factors for joining the
SLCSCCU, ‘Financial Statements’ was the least selected option with only 27% of res pondents

Page | 36
selecting it. Instead, the reasons most commonly selected were “Dividends”, “Ease of Obtaining
Loans” and “Tax Benefit for Purchasing Shares”.

This goes to show that the members of the SLCSCCU did not join because of the financial
position of the firm as reflected in its statements but instead, because of the services that it
provides and the benefits that they can receive as members. Hence, it can be concluded that
though the re-classification would make the financial statements and ratios les s attractive, this
would barely deter potential members from joining the co-operative.

Impact on Lending Capability

According to Mr. Degazon, the re-classification would adversely affect the SLCSCCU’s
ability to receive long term loans as the cooperative’s financial statements would not be as
attractive as before.

However, this effect will not have any impact on the SLCSCCU in the present day or near
future, since the cooperative does not usually borrow large sums of money. This is seen in the
three Balance Sheets presented; there are no long term loans in the Liabilities section of the
Balance Sheet.

Other Possible Effects

The first of these effects concerns the tax deduction granted to those who purchase
shares of the SLCSCCU. Now that they will be classified as deposits, would they still be
considered a tax deductible expense? If they no longer qualify for tax-deductions, it would
reduce the incentive for members to purchase with-drawable shares in the SLCSCCU.

The Inland Revenue Departments’ ruling on this matter is pending, but according to Mr.
Degazon, it is likely that the department will retain the tax deductible status of these with-
drawable shares which bodes well for the SLCSCCU.

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 The second possible effect concerns the mandatory interest expense. According to Mrs
Monrose, in the event of a loss, if the shares were still classified as equity, the cooperative
would have the option to withhold dividends from members in order to reduce the impact of
the loss. However, now that these shares are classified as deposits, it would still be obligated to
pay interest whether or not a loss occurs.

It should be noted however, that the SLCSCCU does not frequently make losses. As
shown in the three Income Statements presented, the cooperative made a healthy profit for all
three years.

Finally, the SLCSCCU has to re-think of a strategy to boost its permanent share capital.
This is because, a few years ago, it was decided at an AGM that 25% of dividends declared
would be transferred to members’ permanent capital. This was implemented to boost the
capital base of the cooperative. However, with the re-classification of the withdrawable shares
as deposits, they will yield interest, not dividends. The SLCSCCU now has to find a more
innovative way to boost the permanent share capital of the organization.

Page | 38
 Recommendations
1. The WOCCU should gather more support for and assist in the development of the loss
absorption approach. This criteria for determining equity is better suited to cooperatives
whose majority of with-drawable shares are loss absorbing.

2. The SLCSCCU should amend membership rules to require a minimum amount to be held
in permanent shares. This would help build up the number of permanent shares and
thus bolster the equity section of the Balance Sheet.

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 Conclusion
The re-classification of withdrawable shares to deposits will have a drastic effect on the
financial statements and ratios of the SLCSCCU thus making the cooperative seems much less
financially sound.
This drastic effect however, is not likely to be echoed in the cooperatives ability to
attract members since people join the SLCSCCU based on the services it provides and not its
financial standing as reflected by its statements.
Though the re-classification will reduce the SLCSCCU’S attractiveness to lenders, this will
not have any major effect on the cooperatives operations since it is not in the habit of
borrowing large sums of money. And even if the situation does arise in the future where the
SLCSCCU has to borrow long-term, it will most likely have a much stronger permanent share
base by then.
In order to cushion the possible effects of the change in IAS 32, it is recommended that
the WOCCU assists in helping develop the loss absorption approach and also that the SLCSCCU
require members to hold a minimum amount in permanent shares.
In conclusion, though the effects of re-classification will severely affect the financial
statements and ratios of the SLCSCCU, in actuality, it would not impact much on the
organization.

Page | 40
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International Accounting Standards Board. (25 th November 2004) IFRIC Issues Guidance On
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Barberini, Ivano. (2007). Comment Letter on the Exposure Draft of a Proposed IFRS for SMEs.
Geneva, Switzerland: International Co-operative Alliance

Barberini, Ivano. (2008). Comment Letter on the Discussion Paper “Distinguishing Between
Liabilities and Equity.” Geneva, Switzerland: International Co-operative Alliance

Barberini, Ivano. (5th September 2008). Comment Letter on the Discussion Paper “Financial
Instruments With Characteristics of Equity.” Geneva, Switzerland: International Co-operative
Alliance

Macdonald, Iain. (15th June 2009). Comment Letter on the Discussion Paper “Financial
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Alliance

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Grace, David and Tangwall, Lilliana. (March 2009). Alternative Sources of Capital for Credit
Unions -International Examples. Wisconsin, USA: World Council of Credit Unions.

Page | 41
Hosin, Gayon. (2011). Challenges For The Cooperative Model - Governance And Access To
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IFRIC (2012). HK (IFRIC) Interpretation 2 - Members’ Shares in Co-operative Entities and Similar
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Tabet, Imad. (2008). The Impacts of the International Accounting Standards on Co-operative
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