SELECTED ELEMENTS OF SUPPORT FOR ACCOUNTANCY
In the world of matured economy of financial sector, increased competition and steady changes in respect to financial statement principles and standards, the importance of reliable disclosure on the part of banking organizations and other entities cooperating with banking industry is growing. Special attention in this respect must be directed to those elements that are involved in stabilization of those tools that provide basis for disclosure for decision making processes of banking industry, above all such issues as IAS/IFRS and XBRL. Challenges posed before the disclosure system of financial sector result from two dimensions: external (the obligation for Polish economy to adjust to banking industry conditions and standards of the European Union, accession of member countries to eurozone) and internal (such as the processes involved in accountancy standards improvements and requirements of knowledge-driven economy). One important issue here is the efficiency in utilization of information provided by accountancy for decision-making processes to provide compatibility with managerial needs and clarity for various target groups. How does the modern financial sector cope with the task, especially in relation to companies adopting IAS/IFRS, when foreign investors plan to change the country of financial involvement while simultaneously addressing the problem of impairment of banking assets? How to address the issues of real value of bank balance items in financial statements?
2. Basic elements of information system of an economic entity
One of the accountancy functions is the provision of various information sets that are necessary for proper management of an economic entity. Banks also use accountancy to provide a prospective view on assorted product types offered on the market as part of their economic activities. The prevailing opinion is that information of ‘better quality’ (i.e. more suited for the purpose) should offer two qualities: usefulness and credibility. Usefulness of information for accounting purposes involves its capability to forecast results of past, present and future events with potential correction of any deviations from expected, forecasted or modelled prognoses as well as its influence on operational and strategic decisions (in accordance with IFRS 1). Credibility, on the other hand, is associated with ‘faithful reproduction’ and ‘neutrality’, since reliability of a measurement is invariably related to accurate depiction of the measured value, while at the same time offering the certainty of its representative character. Another important issue is the selection of format (model, scheme) to be used in preparation of individual elements of the financial statement by a self-sustained economic entity of the financial sector. In the competitive market economy, proper presentation and choice of financial information in financial statements following the IFRS principles is of great importance for any potential investor, shareholder or bank customer. In practice, this may result in creative accounting.
Diagram 1. Accountancy-supported information system in a company
INPUT INFORMATION OUTPUT
Data: MODEL INFORMATION IN
non-record (IN-HOUSE FINANCIAL STATEMENTS
in-house PROCEDURES) AND OTHER REPORTS
Source: own research.
Input data comprises of quantified information (quantitative and qualitative) reflecting past events and projecting future events. This information pictures both events and processes within the bank and material/financial standing of bank’s present and potential customers as well as investors. The designed information model of a financial entity will influence the efficiency of future economic decisions (such as long-term credits granted, fixed-term deposit portfolio of fixed or flexible interest, etc.). Data processing results in output information expressed primarily in monetary values, as generated by accounting information system and presented in the form of various financial reports required by obligatory regulations as well as other in-house periodic reports prepared for headquarters or filial units. Data processing procedures typically involve the following activities:
a) data identification (ob the basis of source documents);
b) data classification (by obligatory or facultative algorithms);
c) registration and analysis of classified and processed data;
d) presentation of processed information in codified (unified) form of reports, overviews, etc.
For bank management purposes, data is processed in such a way as to obtain information on: liquidity, solvency, profitability, credit service capability, financial efficiency.
2.1 Impairment of assets and its role in real data presentation for reporting purposes
In line with present regulations, banks listed on Warsaw Stock Exchange (in Poland) since 2005 have been obliged to prepare their financial reports in the IAS/IFRS format [8, 9], while retaining the right to choose the form of financial reporting in respect to in-house reports as well as reports of own capital group subsidiaries. This right applies also to Poland-based subsidiaries of foreign companies, if their stocks are authorised on the EU public market. Adopting the IAS/IFRS format requires the consent from general meeting of the shareholders. All entities that adopt IAS/IFRS standard of financial reporting by law, are obliged to use it exclusively in their reports. In other words, only this format of financial reporting may be subject to scrutiny by chartered auditor, listed in registry and published.
In the case of banks, important elements of reclassification to IAS/IFRS standards are individual items or groups of financial assets that have become impaired, resulting in loss. In such cases, one needs to reliably establish whether the impairment may be attributed to objective occurrence due to events effected after the initial entry of the applicable assets in bank registers as well as assess the impact of impairment on future level of financial flows related to impaired assets.
Identification of sources (reasons) for asset impairment is done by the bank on the basis of objective qualitative and quantitative premises, taking into account the assessment of customer’s financial standing, history of transactions, as well as the overall business and legal situation. By analysing the level of banking risk elements, loss-incurring events (in terms of real premises for impairment) involve the following:
a) significant financial problems of the issuer or debtor;
b) breach of agreement on the part of transaction party, such as delayed settling or failure to settle capital dues or interests;
c) high probability of financial reorganization or insolvency of creditor;
d) granting the debtor (e.g. creditor) economically or legally substantiated credit facilities (or other forms of settlement to the advantage of the creditor) in response to financial problems, that would otherwise be deemed unacceptable by the bank;
e) financial problems of the stock market or general lack of active market in regard to the given element of financial assets;
f) forecasted decrease of future financial flows in respect to the analysed group of financial assets, including assessed prognoses on:
– disadvantageous changes of settlement status of the debtors;
– economic changes on national or local scale that may directly or indirectly correlate with bank asset impairment risk.
In such cases, banks distribute the dues to individual risk categories [4, p.12] as:
1) normal dues:
a) appraised individually and deemed with no objective evidence of impairment (in line with
§59 IAS 39), but subject to portfolio appraisal (to reclaim losses incurred but not
b) appraised by group (in line with portfolio assessment) if not deemed impaired dues (no loss
2) dues under scrutiny include those items that are not deemed as impaired by individual
appraisal, despite occurrence of objective evidence of impairment.
3) dues at risk involve dues appraised individually and by group, for which objective evidence
of impairment (in accordance with §59 IAS 39) was found.
Each individual credit and leasing exposure is then subject to asset impairment test. In case an impairment loss is recognized (through objective evidence), the loss is recorded to update the real value of the dues. If no objective evidence of impairment loss is found, then the applicable credit or loan exposure is incorporated in the group portfolio and appraised collectively with other exposures bearing similar credit risk. The consequence of assessing the financial assets in group portfolio (categorized as loans and receivables, financial leasing dues or investments held to maturity), is the calculation of allowance as difference between balance value of the asset element and the current value of assessed future cash flows (excluding future credit losses that have not been incurred), discounted using the original effective interest rate calculated at the initial assessment of the given financial asset element.
EXAMPLE 1 Asset impairment loss
Assumptions: Bank H purchased for 88 million PLN, effective from 1.01.2001, a company „Z” comprising of three business lines, being separate economic entities. The economic value of I business line, on the basis of DCF, is estimated at 24.6 million PLN.
Variant A – Settlement with option to allocate company value to business lines of the acquired „Z” company.
Impairment calculation for I business line:
Balance sheet value: 25.2 PLN, economic value 24.6 PLN – permanent asset loss of 0.6 PLN, hence overall loss of value for the company ascribed to I business line.
Variant B – Settlement with no possibility of allocating company value to individual business lines of the acquired „Z” company by Bank H.
Economic value of the acquired „Z” company is 96.0 million PLN, while economic value of I business line, based on DCF, is estimated at 24.6 million PLN.
Variant B requires comparison of company „Z” economic value with its balance sheet value.
Conclusion: The solution in Variant A brings a value decrease for business line I. Consequently, Bank H balance sheet notes will show values different than those present in final business line I value in case of liquidation/resale/transfer in the form of non-cash contribution. On the other hand, Variant B represents a more ‘gentle’ form of account for value loss results in a given asset item, since a managerial decision to devalue (by quantity or by value of the business line of acquired „Z” company) will bear different financial consequences. One should choose a variant best suited from the bank development perspective, accounting for any and all aspects of the chosen variant.
Consequences for the financial reporting:
a) presentation of initial and ‘reversed’ value for each asset class, isolating capital-bearing
items (and profit and loss account, if needed);
b) detailed description of: dates, activities, circumstances of accepting (or reversing) the value
c) setting basis for economic value assessment for each asset class.
3. Role of bank disclosure in setting goals for strategic management
Current analysis of financial sector legislature clearly shows the growing importance of information disclosed by banks to central management bodies and financial supervision authorities. Since
April 1, 2007, has introduced a
statutory instrument obliging banks to disclose qualitative and quantitative
data, with range of such disclosure dependant on banking classification [8, §
3], as follows: Poland
a) banks that are neither dominant nor subsidiary, disclose information on individual basis;
b) banks that are dominant entities in EU legislature disclose information based on
c) banks that are subsidiaries of EU dominant entities in financial holding disclose
information based on consolidated data of the dominant entity;
d) banks that are significant subsidiaries of EU dominant entity or EU entity dominant in a
financial holding disclose information based on the highest available level of national
consolidation or (in lack thereof) on the basis of individual data.
To provide greater stability of banking operation, the accountancy system should not be limited to provision and transmission of data, but should also offer conceptual analysis of data. Favourable conditions for this approach are found in optimization of managerial and accounting staff towards supporting the decision-making processes and long-term planning via creative accountancy models involved in the management strategies of the financial sector. One important issue addressed herein is the problem of appropriate presentation of potential and real asset impairments in financial reports as well as current appraisal of this group of report items, especially in the context of bank transition to new accountancy principles and policies. This is apparently stipulated by present legislature processes that stress the connection between accountancy and reliability of information, in the wider view that incorporates elements of asset impairment. Any negligence in this respect would lead to considerable loss of the financial sector on micro- and macroeconomic level in future reporting periods. Thus, improving in-house procedures of the bank information system in this area is an especially important issue that can be facilitated with proper accountancy involvement. It must be also noted that there are certain facultative prospects for preliminary solutions to managerial decision-making (such as individual appraisal of credit risk categories not included in asset impairment loss adjustments – in line with IAS 39 principles addressing identification of gain-producing assets and asset impairment assessment). Hence, competences and knowledge of banking management as well as quality of forecast procedures used will ex ante influence future financial results of the sector and, consequently, the interest of foreign investors seeking to employ their resources in Poland, with its banking industry in over 80% owned by foreign capital (as of 2007).
 Gos W.: Części składowe sprawozdania finansowego według Międzynarodowych Standardów Rachunkowości, e-Biuletyn Rachunkowości No. 3/2007,
 Helin A: Sprawozdanie finansowe według MSSF, Wydawnictwo C.H. Beck, Warszawa 2006.
 Illustrative consolidated financial statements for banks 2006, PWC 2007, www.pwc.com/ifrs
 Instrukcja wypełniania formularzy sprawozdawczych na potrzeby statystyki monetarnej i nadzorczej dla banków stosujących MSR, NBP Warszawa 2006
 Kwasiborski A.: Stosowanie MSRF do badania sprawozdań finansowych, „Rachunkowość”, 2006, No. 2 (27).
 Ministry of Finance statutory instrument of
Dec. 10 2003 r. on principles of
reserve funds to cover banking operation risks (Official Gazette 2003 No. 218,
pos. 2147, with amendments).
 Decision of
Mar. 13 2007 on detailed principles
and forms of banking disclosure of qualitative and quantitative information
addressing capital adequacy, with setting the range of information
subject to disclosure (Official Bulletin of NBP, 2007, No. 3, pos. 8).
 Act of
Sept. 29 1994 r. on accountancy
(Official Gazette 2002, No. 76, pos. 694, with amendments)
 Act of
Dec. 10 2001 r. on banking
accountancy (Official Gazette 2004, No. 7, pos. 57, with amendments).
It must be noted that some smaller banks, not listed on the Warsaw Stock Exchange, have been obliged to adopt IFRS standards as late as for the 2006 financial year.
 If, according to criteria set in the statutory instrument, the receivable is deemed questionable or lost, while the IAS criteria allow to deem it normal, the IAS ruling is decisive, with the provision that the receivable be marked under scrutiny [4, p. 12].
 Assignment of receivables to individual categories of risk should be done in accordance with .
a) in relation to individual credit exposures of significant reporting value (e.g. upwards of 2 million PLN),
b) in relation to portfolio of individually insignificant credit exposures.