Republic of the Philippines City of Olongapo

GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City
Tel. No. (047) 224-2089 loc. 314

BANKING INDUSTRY QUESTIONNAIRES

Written Report
Gordon College
Olongapo City

In Partial Fulfillment of the Course

Requirements in ACC 125 Auditing and Assurance: Specialized Industries

Edquiban, Lenar Dean P.

MARCH 24, 2024

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BANKING

1. For Statement of Financial Position (SFP), Statement of Profit or Loss and Other
Comprehensive Income (SPLOCI), Statement of Changes in Equity (SCE), and
Statements of Cash Flows (SCF):
a. Identify at least three (3) accounts which are not located in typical financial
statements.
b. After identifying the three accounts, kindly explain which transactions could be
included in the specific accounts identified and provide brief description of the
identified accounts.

For SFP:

a.1. Interbank Loans Receivable - allows you to borrow money from a bank with
low-interest rates and obtain funds for debt consolidation or expensive
purchases.
b.1. When Bank C has purchased items using the district’s Pcard but is using
student activity funds to pay for the purchase, a SAF payment request form must
be submitted to reimburse the district for that purchase. This is a deposit substitute
transaction by a bank performing quasi-banking functions.
a.2. Securities Purchased under Reverse Repurchase Agreements (SPURRA) - the
sale of securities with the promise to repurchase them at a better price on a
future date. A reverse repo is the selling side of a repurchase agreement (RP).
These are collateralized loans.
b.2. Imagine Bank LMN has excess cash reserves and wants to put some
of them to work. Meanwhile, Bank OPQ is experiencing a reserve deficiency and
needs a temporary financial infusion. Bank OPQ and Bank LMN may enter into a
reverse repo agreement, in which the former agrees to sell securities for the latter
to store overnight before buying them back at a slightly higher price. The
transaction is classified as a buyback agreement by Bank LMN, which buys the
securities and pledges to sell them back at a premium the next day.
a.3. Deposit Liabilities - when bank customers deposit money into a checking
account, savings account, or a certificate of deposit, the bank views these

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deposits as liabilities. After all, the bank owes these deposits to its customers, and
is obligated to return the funds when the customers wish to withdraw their money.
b.3. The bride-to-be has put down a $1000 deposit, which is recorded as a
liability on the customer deposit account. Once the wedding dress is finished and
delivered to the customer, the liability account is debited by $1000. The sales
revenue account is then credited with $1000 to record this transaction. This
ensures that the accounts are balanced according to the double-entry rule.

For SPLOCI:

a.1. Occupancy – Other expenses - The total amount that a tenant pays for the
use of a specific place, all associated to the property. Base rent and tenant-paid
expenditure reimbursements, such as CAM charges, are included in occupancy
costs; however, company operational costs, such as payroll and sales tax, are
not.

b.1. For example, if a tenant occupies 7,000 square feet and pays P14.00
per square foot in base rent plus P3.00 per square foot in CAM charges, then the
total annual occupancy costs are P119,000 ((7,000sf x P14.00/sf base rent) plus
(7,000sf xP3.00/sf CAM charges)).

a.2. Unrealized mark-to-market gains (losses) on investment securities at FVOCI -

Mark-to-market losses are losses generated through an accounting entry rather
than the actual sale of a security. When owned financial instruments are
evaluated at the current market value, mark-to-market losses may transpire. The
holder would suffer an unrealized loss if a security was bought at one price and
the market price later dropped; the mark-to-market loss would arise from marking
the security down to the new price.

b.2. Suppose a trader takes a long position in an oil futures contract at P60
per barrel. If the price rises to P65, the contract is marked to market, and the
trader's account is credited with the gain. On the other hand, if the price drops
to P55, the trader's account is debited with the loss.

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a.3. Remeasurement gains (losses) on defined benefit plan - The amount of

pension income that an employee will receive upon retirement under a defined
benefit plan is either predetermined or calculated using a regulated formula. The
remeasurement gain represents the difference between the interest calculated
on the plan asset balance and the actual return earned by those assets during
the year. This gain is taken directly to other comprehensive income.

b.3. Consider the following facts: Jose Ltd. initiated a defined benefit
pension plan in 2015. On January 1, 2024, the balance of the DBO as determined
by an actuary was P535,000, and the fair value of the plan assets was P500,000.
With a remeasurement amounting to P3,000, a credit of P6,800 to the net defined
benefit liability that is reported on the company’s balance sheet.

For SCE:

a.1. Appropriations during the year - It provides the allocation of an organization's

finances among its departments, stockholders, and partners. An appropriation
account for a business indicates how earnings are allocated and held. It displays
the way in which profits are split up among partners in a partnership. It
demonstrates to governments how funding is distributed to specific projects and
ministries.

b.1. In general accounting, appropriation accounts are mainly prepared

by partnerships and limited liability companies. Government appropriation
accounts come into play when they create their budgets. Appropriation credits
are taken out of estimated revenues from taxes and trade and allocated to the
proper agencies.

a.2. Acquisition of NCI - A minority interest, commonly referred to as a non-

controlling interest, is an ownership position in which a shareholder holds less than
50% of the outstanding shares and is not vested with decision-making authority.
Potential voting rights are not taken into consideration when calculating the net
asset value of non-controlling interests.

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b.2. Assume that a parent company buys 80% of XYZ firm and that a non-
controlling interest company buys the remaining 20% of the new subsidiary, XYZ.
The subsidiary’s assets and liabilities on the balance sheet are adjusted to fair
market value, and those values are used on the consolidated financial
statements. If the parent and a non-controlling interest pay more than the fair
value of the net assets, the excess is posted to a goodwill account in the
consolidated financial statements.

a.3. Stock dividend - It is a payout made to shareholders in the form of more

shares as opposed to cash. Per existing share, the payments are paid out in parts.

b.3. For example, if a company issues a stock dividend of 5%, it will pay
0.05 shares for every share owned by a shareholder.

For SCF:

a.1. Provision for credit losses - An estimate of possible losses a business could
sustain because of credit risk is called the provision for credit losses (PCL). The
company's financial statements treat the provision for credit losses as an
expense.

b.1. Company A’s AR has a debit balance of P100,000 on June 30.

Approximately P2,000 is expected to not turn to cash. As a result, a credit
balance of P2,000 is reported as a provision for credit losses. The accounting entry
for adjusting the balance in the allowance account involves the income
statement account uncollectible accounts expense.

a.2. Unrealized foreign exchange losses (gains) - net - When a business purchases
and/or sells goods and services in a foreign currency and that currency swings in
relation to their home currency, they incur a foreign exchange gain or loss. It may
result in variations in the worth of the financial assets and liabilities, which need
to be periodically acknowledged until they are finally resolved. Unrealized gains
or losses are the gains or losses that the seller expects to earn when the invoice is
settled, but the customer has failed to pay the invoice by the close of the
accounting period.

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b.2. For example, if a seller sends an invoice worth €1,000, the invoice will
be valued at $1,100 as at the invoice date. Assume that the customer fails to pay
the invoice as of the last day of the accounting period, and the invoice is valued
at $1,000 at this time.

a.3. Cash for fractional shares related to stock dividends - Less than one full share
of equity is called a fractional share. Such shares may be the result of stock splits,
dividend reinvestment plans (DRIPs), or similar corporate actions. Typically,
fractional shares aren't available from the stock market, and while they have
value to investors, they are also difficult to sell. It comes in a number of ways,
including dividend reinvestment plans, stock splits, mergers, and acquisitions.

b.3. For a stock split, A 3-for-2 would create three shares for every two
shares an investor owns, so an investor with an odd number of shares would end
up with a fractional share after the split. Three shares would become 4½, five
would become 7½, and so on.

2. Perform the following to at least three (3) accounts on any Financial Statements
(FSs) and provide at least three (3) sentences for the narrative on each account.
(AMOUNTS IN THOUSANDS)
a. Horizontal Analysis
i. Net Income = [(CY-BY)/BY] x 100
[(12,673,222 – 12,577,733)]/ 12,577,733] x 100
= 0.76%
▪ The Bank had increased net profit by merely 0.76%. It means it relatively
remained stagnant. The bank should procure more solutions with regard to
earning more revenues for future periods.
ii. Other Expenses = [(31,527,360 – 24,319,554)]/ 24,319,554] x 100
= 29.64%
▪ The total costs have increased by 29.64%. This is relatively not much which
is good for achieving an an optimized operation. The bank should observe
at least a closer amount to this for future periods.
iii. Cash and CE = [(9,891,536 – 8,904,903)]/ 8,904,903] x 100
= 11.08%

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▪ The cash and cash equivalents have increased by 11.08%. This is relatively
not much but it is still considered a growth for the operation. The bank
should find more solutions to increase its cash sales or funding for future
periods.
b. Vertical Analysis
i. Cash and CE = Asset/Total Asset x 100
= (9,891,536 / 1,092,737,865) x 100
= 0.91%
▪ The cash and cash equivalents make up only 0.91% of the total resources.
This indicates the account holds one of the weakest positions.
ii. Loans and other receivables = (479,657,898/1,092,737,865) x 100
= 43.9%
▪ The loans and other receivables make up 43.9% of the total resources. This
indicates the account holds the strongest position.
iii. Deposit liabilities = (711,303,942 / 944,595,542) x 100
= 75.3%
▪ The deposit liabilities make up 75.3% of the total liabilities. This indicates the
account holds the strongest position among the rest.
c. Financial Ratios
i. Current ratio = CA/CL
= 399,268,076/804,473,876
= 0.5
▪ The result is less than 1.0 which is not good. This indicates the company does
not have the financial resources to remain solvent in the short term.
ii. Debt to Assets Ratio = Debts/Assets
= 944,595,542/1,092,737,865
= 0.86
▪ The result is less than 1.0 which is good. This indicates the company is not
significantly funded by debt. Thus, they can meet their obligations as they
are mostly funded by assets.
iii. Debt to Equity Ratio
= 944,595,542/148,142,323

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= 6.37
▪ The result dictates that the company has more debts and that equity may
not cover it all when needed to liquidate.
3. Based on the analysis of Notes to the Financial Statements (FSs), provide narrative
with at least five (5) sentences on each of at least five (5) accounts on the whole
set of FSs which are crucial to the entity as part of the banking industry.
i. Interbank Loans Receivable and Securities Purchased under Repurchase
Agreement - The length of interbank loans receivable, which ranges from 1 to
68 days in 2022 and from 3 to 63 days in 2021, includes loans made to other
banks denominated in foreign currencies. In situations when the underlying
securities cannot be sold or re-pledged to parties other than the contracting
party, SPURRA represents short-term placements with the BSP and private
organizations. In detail, the interest income on interbank loans amounted to
P=260,343, P=23,256, and P=95,857 in 2022, 2021, and 2020, respectively, for the
Group, and P=259,183, P=22,170, and P=95,451 in 2022, 2021, and 2020, for the
Parent Bank. Interest income on SPURRA amounted to P=566,019, P=300,764,
and P=444,275 in 2022, 2021, and 2020, respectively, for the Group, and
P=393,663, P=204,381, and P=273,324 in 2022, 2021, and 2020, for the Parent
Bank.
ii. Bank Premises, Furniture, Fixtures, and Equipment - The Group owns leases for
computer equipment, signs, parking spaces, branch offices, and event stalls.
Every lease is shown as an ROU asset and a lease liability in the consolidated
statement of financial position, except for short-term leases and leases involving
low-value underlying assets.
iii. Deposit Liabilities - Deposit liabilities bear annual interest rates ranging from
0.00% to 7.00% in 2022, from 0.00% to 8.00% in 2021, and from 0.00% to 9.5% in
2020 for the Group and from 0.00% to 5.75% in 2022, from 0.00% to 5.75% in 2021,
and from 0.39% to 1.65% in 2020 for the Parent Bank. Demand and savings
deposits usually have either fixed or variable interest rates while time deposits
have fixed interest rates. The Parent Bank may issue a Long-term Negotiable
Certificate of Deposits (LTNCD) up to P=20,000,000, with approval from the BSP's
MB on December 12, 2017. P=3,000,000 of the authorized sum was issued on

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February 21, 2018, with quarterly payments due and maturing on August 21,
2023, at a fixed coupon rate of 4.375% annually. The Parent Bank used the net
proceeds to support its goals for commercial expansion as well as to further
enhance its maturity profile.
iv. Service Charges, Fees, and Commissions – This account consists of other various
commission income from securities and management fees. It also includes a
commission from bancassurance, which is a related party transaction.
v. Salaries and Employee Benefits - All regular full-time workers of the Group are
covered by funded, tax-qualified, noncontributory pension plans that are
managed by designated trustee banks, including the Parent Bank's TISG, for the
Parent Bank, UIC, CSB, FUIFAI, Bangko Kabayan, PBI, and PETNET. All eligible
employees under these pension systems are eligible to receive cash benefits
upon meeting specific age and service requirements. The Group maintains
various retirement plans. Two of these are being maintained for UnionBank and
former iBank employees, hence, the Parent Bank presents pension information
in its financial statements separately for the three plans. The other pension plans
are for UIC, CSB, FUIFAI, Bangko Kabayan, PBI, PETNET, CFSI, and former
Citigroup Inc. consumer banking business employees.
4. Identify at least five (5) Bangko Sentral ng Pilipinas (BSP) Regulations which are
complied with by the entity based on your analyses of the Notes to the FSs. Give
narrative of at least five (5) sentences on each regulation like date of issuance,
overview, affected operations, how to compute specific thresholds, and the like.
i. BSP CIRCULAR NO. 156 (Minimum Capital Requirement) - the required minimum
capitalization of a universal bank is P=20.0 billion both as of December 31, 2022
and 2021. As of those dates, the Bank is following these regulations. Hence, the
company was cleared regarding the aforementioned requirement.
ii. BSP Circulars 1041, 1056, and 1063 - Non-FCDU deposit liabilities of the Bank are
subject to a unified reserve requirement equivalent to 14.0% as of December 31,
2019. In 2020, BSP Circulars 1082 and 1092 were issued reducing the reserve
requirement to 12.0%, 3.0%, and 2.0% for universal and commercial banks, thrift
banks, and rural banks, respectively. BSP Circulars 1083, 1087, and 1100 were
issued in 2020 to provide guidelines allowing the use of eligible loans to MSMEs

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and large enterprises for alternative compliance to required reserves for deposit
liabilities.
iii. BSP Circular Nos. 881 and 990 – It covers the implementing guidelines on the BLR
framework designed to act as a supplementary measure to the risk-based
capital requirements and shall not be less than 5.00%. Effective July 1, 2018, the
monitoring of the leverage ratio was implemented as a Pillar I minimum
requirement. Under the framework, BLR is defined as the capital measure divided
by the exposure measure. The exposure measure is the sum of on-balance sheet
exposures, derivative exposures, security financing exposures, and off-balance
sheet items.
iv. BSP Circular No. 639 – It articulates the need for banks to adopt and document
an Internal Capital Adequacy Assessment Process (ICAAP). All universal and
commercial banks are expected to perform a thorough assessment of all their
material risks, as well as maintain capital adequate to support these risks. This is
intended to complement the current regulatory capital requirement of at least
10% of risk assets, which only covers credit, market, and operational risks. On
December 29, 2009, the BSP issued Circular No. 677 which effectively extended
the implementation of the ICAAP from January 2010 to January 2011.
v. BSP Circular No. 989 - which mandates the conduct of stress testing exercises of
banks. The Group’s ICAAP Document considered the impact of severe but
plausible scenarios on the Group’s capital position. The results are thoroughly
discussed during RMC meetings and reported to the Board. In the course of its
discussions, the BOD and senior management may request additional stress
testing scenarios or revisions to the test assumptions to better align these to
current trends and forecasts. The Group has a cross-functional ICAAP technical
team, comprised of representatives from the core risk management units - credit,
market, operational, information technology, and emerging risks; corporate
planning; financial controllership; treasury; internal audit; and compliance. This
ensures a well-coordinated approach to the development, documentation,
implementation, review, improvement, and maintenance of the various sub-
processes included in the ICAAP.

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