Harmonisation of accounting standards: disclosure policies and practices of european commercial banks
par Michael Forzeh Fossung
Gothenburg University - Master of Science (MSc) Accounting 2002
In this part of the work, we have presented the requirements of the EC Directives, on the areas of interest to our research; namely, the presentation of financial statements, measurement practice and consolidation practice. These areas are the focus areas of the thesis, where we hope to test homogeneity in reporting practice. We have, therefore, used the Directive to assess compatibility in reporting practices both within banks in the same country and with banks in different countries.
And States6(*) E U SE GE UK
EC and National
SE GE UK
& with other
FSPA SEB DRB DEB HSBC BB
The figure above is a framework of comparisms to be made in the succeeding section.9(*)
This area is dealt with in Article 2.5 of the fourth directive, which requires a fair application ensured by the concept of prudence. According to article 2.3 of the EC directives, the annual accounts shall give a true and fair view of the assets, liabilities, financial position and the profit and loss of the company. Where application of the provision in the directive is not sufficient to give a true and fair view, Article 2.4 requires that additional information must be given.
The fourth directives requires European companies to separate their assets into «current assets» and «fixed assets», but also does not disagree with the use of IAS, which states that companies can present their assets in order of liquidity.10(*)
Assets of some banks are separated into current and fixed assets, and in order of liquidity. This is the case with HSBC Holdings, where assets are separated into fixed and current assets, and also listed in order of liquidity. Barclays does not distinguish between current and fixed assets, rather they present them in order of liquidity. Although the balance sheets of SEB does not separate the assets into current and fixed assets, they are presented in order of liquidity as recommended by the directive, and in accordance with paragraph 53 of the IAS.
Dresdner does not separate assets into current and fixed assets, but presents them in order of liquidity. Deustche bank does not differentiate its assets into current and fixed assets but are presented in order of liquidity. Föreningsparbanken has not separated its assets into current and fixed assets, but has presents them in order of liquidity starting with cash and ending with prepayments and accrued income.
According to the directive, financial statements should be composed of profit and loss accounts, balance sheets and notes to the accounts. The statement of the changes in equity is not a requirement, but also does not go against the directive because the contact committee recognizes the fact that such a statement attaches more meaning to financial statements. Also, although the directive does not expressly mention the inclusion of a cash flow statement as an item in the financial statement, the directive does not exclude their presentation.
HSBC holdings presents the consolidated profit and loss accounts, balance sheets, statements of total consolidated recognized gains and losses, consolidated cash flow statement and notes to the accounts. The profit and loss account and the balance sheet of Barclays PLC are being prepared in compliance with section 226 and schedule 4 of the Company's Act. The consolidated accounts of Barclays include the consolidated profit and loss accounts, statements of total recognized gains and losses, consolidated balance sheets, consolidated statements of changes in reserves, consolidated cash flow statement, the parent company accounts and the notes to the accounts.
SEB has prepared the following in their consolidated financial statements: the profit and loss accounts, the balance sheets, the cash flow statements and the notes to the accounts. Föreningsparbanken, on the other hand, discloses on their financial statements the profit and loss accounts, the balance sheets, statements of cash flows, notes to the accounts, and proposed profit disposition.
Article 43.1(9) of the fourth directive requires European companies to disclose « the average number of persons employed during the financial year, broken down by categories.» SE discloses the average number of employees according to categories. In the annual reports this information has is broken down between the parent and the group and separated and broken down among nations, and between men and women. Further details are given with regards to salaries and remuneration to employees, general administrative and other cost to staffs, loans to employees, pension staffs, and much other information concerning the employees.
Barclays discloses the average number of employees employed during the year by the group. Further explanation is given of the total administrative expenses accrued to them per category. Pension plans; profit sharing facilities and other staff costs have all been explained in the company's annual reports. All further administrative expenses have all been included.
HSBC outlines the average number of person's employed during the financial year and makes a comparison with the previous years. The specific categorization specified here is on the financial sector as a whole, no matter whether it is from either the commercial banking or the investment banking sectors. The bank further gives information on cost accrued to them for example wages, salaries, social security cost, pension and other cost. Benefits accrued to employees upon retirement is also specified.
Deutsche bank discloses the average number of employees employed during the year and further divides it into gender. Also, specification is made as to the number who work part time and full time, and also the number that work abroad. Further explanation is given about their provisions for pension obligations and staff cost.
Föreningsparbanken discloses the average number of employees it employs per year, and specifies according to gender and age categoies. Their academic levels and positions are also specified in their annual reports.
In dealing with depreciation, the fourth directive states that the purchase price or production cost should be the basis for depreciation. As stated above, Article 35.1(c) (bb) of the directive requires fixed assets to be valued at a lower figure on the balance sheet dates, if it is expected that the reduction in their values is permanent.
Article 35.1 (b) is a requirement that fixed assets with a finite life are depreciated over that life. SEB reports its fixed assets using the purchase or acquisition cost and depreciates them according to straight-line basis. Equipment's leased to clients is reported at acquisition value and is depreciated on an annuity basis. As with SEB, the other banks report fixed assets using historic cost, and depreciate them on a straight-line basis. The only exception is for leased equipments, where only Föreningsparbanken follows the SEB policy of using the annuity method, instead of the straight line method as used by the other banks.
Article 37.1 of the fourth directive addresses the treatment of research and development costs. Each member country has the power to decide on this issue. However, it is possible to capitalize both the research and development costs, against the provision of International Accounting Standards, which makes it a must for development costs to be capitalized and rejects the capitalization of research costs.
Accounting for consolidation is addressed in the seventh directive. The directive requires consolidated accounts to be prepared in situations where an entity holds the majority of the voting rights in another enterprise.1(*)1 In this case, the parent company has the right to appoint the majority of the members of the administrative, management or supervisory body of the subsidiary. The main idea is to make sure a true and fair picture of the consolidated entity is presented. Thus, any undertaking whose inclusion would impair the true and fair view of the financial position of the group should be excluded from the consolidated account.
In Sweden, SEB prepares its consolidated accounts with companies where they own 50 % of the voting rights of the company. The bank does not consolidate companies it has taken over with loan foreclosures, provided they are engaging in deviating activities or are planned to be sold in the short term. Föreningsparbanken, on the other hand, consolidates only those companies in which the bank directly or indirectly owns more than 50 % the voting rights of the shares. The consolidated accounts also include associated companies; that is those which the bank directly or indirectly owns more than 20% of the voting rights of the shares. Companies in which the bank owns more than 50 percent are consolidated according to the purchase method while those where the bank owns more that 20 % that is associated companies are consolidated using the equity method.
In Germany, Dresdner Bank consolidates subsidiaries in which the bank directly or indirectly has more than 50 % of the voting rights or otherwise has control over its operations. Such subsidiaries are consolidated from the day on which the group has control over its operations. On the other hand, Deustche Bank consolidates companies according to the number of shareholdings in them. Some were not consolidated as the idea of voting rights is restricted or the shares are held for reasons of subsequent disposal. This is in accordance with IAS 27. consolidation has been carried out by Deustche Bank using the book value.
In the United Kingdom, The consolidated accounts of Barclays Bank include the accounts of Barclays PLC and its subsidiary undertakings as of the 31st of December. The companies included are those in which the group exerts significant influence over the entities operating and financial policies. For HSBC, the consolidated financial statements include the financial statements of HSBC holdings and its subsidiary undertakings. The consolidated financial statements include the attributable share of the results and reserves of joint ventures and associates.
* 6 An institutional framework.
* 7 Harmonization framework
* 8 Application framework.
* 9 EU has been used for European Union, SE; for Sweden, GE; for Germany, UK for the United Kingdom, FSPA for FöreninsSparbanken, SEB; for Scandinaviska Eskilda Banken, DRB; for Dresdner Bank, DB; for Deutsche Bank, and BB; for Barclays Bank. These abbreviations may not be the official ones in some cases They have been used inorder to make them fit into the diagram.
* 10 See last sentence of paragraph 53 of the IAS.
* 11 The voting rights does not necessarily mean majority of share capital. A majority in this case is taken to mean a simple majority,
9Impact, le film from Onalukusu Luambo on Vimeo.