THE INSTITUTE OF CHARTERED ACCOUNTANTS OF BANGLADESH

1. THEINSTITUTE OF CHARTERED ACCOUNTANTS OF BANGLADESH ICAB CPE on Presentation of Financial Statements of banks: Disclosure under IFRS 7 Presented by: Md Shahadat Hossain, FCA July 09 , 2008

2. Objectives of IFRS 7 • The main objectives are: • Providing disclosures that enable users to evaluate the significance of financial instruments relating to an entity's financial position and performance. • Disclosing the nature and extent of risks appearing from the financial instruments to which an entity is exposed, and how those risks have been managed or to be managed.

3. Basis of preparation of guideline The standard in overall sense applies to all risks arising from all financial instruments, including those instruments that are not recognized on-balance sheet. For example, loan commitments are not within the scope of Financial Instruments: but their Recognition and Measurement (IAS 39) are within the scope of IFRS 7. Contracts to buy or sell a non-financial item that are within the scope of IAS 39 (as derivative financial instruments) are also within the scope of IFRS 7. Scope of IFRS 7

4. Balance Sheet Financial assets at fair value through profit or loss. Held-to maturity investments. Loans and receivables. Available-for-sale financial assets. Financial liabilities at fair value through profit or loss Financial liabilities measured at amortized cost

5. These include financial assets that the bank either holds for trading purposes or has otherwise elected to classify into this category. A financial asset is held for trading if the bank acquired it for the purpose of selling it in the near future, or it is part of a portfolio of financial assets subject to trading. Financial assets at fair value through profit or loss

6. These include investments in debt instruments that the company will not sell before their maturity date, irrespective of changes in market prices or the company's financial position or performance of the Company. Held-to maturity investments

7. Loans and receivables These include financial assets with fixed or determinable payments that do not have a quoted price in an active market. A bank can classify accounts receivables and loans to customers under this category.

8. Available-for-sale financial assets This category includes financial assets that do not fall into any of the other categories, or those assets that the bank has elected to classify into this category. For example- a company could classify some of its investments in debt and equity instruments as available-for-sale financial assets

9. Financial liabilities at fair value through profit or loss include financial liabilities that the bank either has incurred for trading purposes or has otherwise elected to classify into this category. For example- An issued debt instrument that the bank intends to repurchase soon - to make a gain from short-term movements in interest rates Financial liabilities at fair value through profit or loss

10. Financial liabilities measured at amortized cost is the default category for financial liabilities that do not meet the definition of financial liabilities at fair value through profit or loss. For example- accounts payables, loan notes payable, issued debt instruments, and deposits from customers, etc. Financial liabilities measured at amortized cost

11. Reclassification Derecognition Collateral given Collateral received Allowances for credit losses Compound financial instruments Defaults and breaches Other Sundry Balance Sheet Disclosures

12. When a held-to-maturity investment is classified as available-for-sale, it should be remeasured at fair value at the date of reclassification The difference between its previous carrying amount and fair value should be recognized in equity. Reclassification

13. Fair value of Tk 1 million bond (10% of Tk 10,749,395) 1,074,940 Carrying value of Tk 1 million bond (10% of Tk 10,407,192) 1,040,719 ------------------- Profit on disposal recognized in profit or loss 34,221 Fair value of Tk 9 million bond (90% of Tk 10,749,395) 9,674,395 Carrying value of Tk 9 million bonds(90% of Tk 10,407,192) 9,366,473 Gain on reclassification recognized in equity 307,982 Reclassification-Example

14. Net gains and net losses on : Financial assets or financial liabilities at fair value through profit or loss Available-for-sale financial assets Held-to-maturity investments Loans and receivable, and Financial liabilities measured at amortized cost Income Statement

15. The standard emphasized disclosures Relating to the methods and significant Assumption used to determine fair value for the different classes of financial instruments. The required disclosures include: Whether the fair value is based on quoted prices or valuation techniques Fair Value

16. Whether the fair value is based on a valuation technique that includes assumptions not supported by market prices or rates, and, if so, the amount of the change in fair value recognized in profit or loss that arises from the use of the valuation technique The effect of reasonably possible alternative assumptions used in a valuation technique Fair Value, Contd….

17. The qualitative disclosures should include a narrative description of the risks the bank is exposed to and how they arise. The policies and processes for managing the risks would typically include: The structure and organization of the risk management function The scope and nature of the risk reporting and measurement systems Qualitative Risk Disclosures

18. The policies and procedures for hedging or mitigating risks, including the taking of collateral Processes for monitoring the continuing effectiveness of hedges and other risk mitigating devices Policies and procedures for avoiding excessive concentrations of risk. Qualitative Risk Disclosures (Contd)……

19. Credit Risk Credit Concentrations Maximum Credit Exposures Financial Assets that are neither past due nor impaired Financial Assets that either past due or impaired Liquidity Risk Market Risk Quantitative Risk Disclosures

20. Factors mentioned in the Implementation Guidance that the entity might consider in describing how manages its liquidity risks include whether the bank (entity): expects some liabilities may be paid later than the earliest contractual due date has undrawn loan commitments that are not expected to be drawn holds financial assets for which there is a liquid market and are, therefore, readily saleable to meet liquidity needs has committed borrowing facilities which it could use to help provide liquidity Liquidity Risk

21. Market risk is defined as “the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices” and includes interest rate risk, foreign currency risk and other price risks, such as equity and commodity risk. A separate sensitivity analysis for each type of market risk to which the bank is exposed at the reporting date, based on changes in the risk variable that are considered reasonably possible at that date Market Risk

22. One of the fundamental objectives of Basel II is to minimize risk in operation, and with that end in view different types of risk are considered to determine the minimum capital requirements. Objective of IFRS 7 is also to provide those disclosures in the financial statements that may enable users to evaluate the nature and extent of risks instruments to which an entity is exposed, and how those are planned to be managed. Relation between Basel II and IFRS 7

23. From this it appears that there is a close relation between Basel II and IFRS 7. So implementation of IFRS 7 in all banks could be considered as one step advancement of implementation of Basel II. Relation between Basel II and IFRS 7 (Contd…..)

24. Accounts of a bank are prepared as per contents of Bank Companies Act (Act of parliament). Despite that implementation of IFRS 7 will not be any hindrance because IFRS 7 is mostly addition to IAS-30. However, as a regulatory body Bangladesh Bank (Central Bank of Bangladesh) should issue circular for mandatory implementation of IFRS 7. Conclusion

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