LLP, interest suspense and overstated bank balance sheet
Friday, 8 June 2007
CLASSIFIED loans and advances of scheduled banks are categorised as sub-standard, doubtful and bad/loss as per instructions of the Bangladesh Bank. Loan loss provision (LLP) is created for covering the bank for possible loan losses in the future. Interest accrued on sub-standard and doubtful loans is recorded as 'interest suspense' and not taken to income. The statutory financial statements prepared by Bangladeshi banks show the LLP and interest suspense amount under 'other liabilities' in the balance sheet. These financial statements are annually audited by chartered accounting firms and certified as presenting a 'true and fair view'. This writer asked a banker friend the rationale for showing a liability when it is never payable. After some hesitation he replied that this is the Bangladeshi practice.
The internet is a powerful tool and it did not take the writer much time to see the annual accounts of Citibank, N.A. and subsidiaries. The consolidated balance sheet shows the following:
This writer interpreted the term 'loans, net of unearned income' in the Bangladesh context as 'loans, net of interest suspense'. Thus in the USA the bank balance sheet shows interest suspense and LLP as a deduction on the asset side.
Wondering that we may be following the UK custom, this writer looked up Barclays PLC in the internet and found the year ended 31/12/2005 audited financial statements. The consolidated balance sheet, as on December 31, had an asset item titled 'loans and advances to customers' showing £268,896 million for 2005 and £262,409 million for 2004. Going to Note 17, this writer found the following disclosure:
This writer became curious to know the background to this strange Bangladeshi practice. The banker friend said that the financial statement of banks are prepared in accordance with the Bangladesh Bank instructions, the regulator of the banking industry.
This writer was finding it difficult to accept the notion that all bankers and all chartered accountants are complying with such a wrong practice. Our accountant friends said they know it is not correct as both assets and liabilities are overstated. The correct practice is the international method where the LLP and interest suspense are shown as a deduction from the value of the loan portfolio.
So why have not you talked to the regulator of the accounting profession to discuss the issue with the banking regulator? There was no reply. This writer is now making this public disclosure so that both professions and both regulators see that we need to prepare the bank financial statements in line with international best practice and discontinue the Bangladeshi way.
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The writer is a partner of ACNABIN, Chartered Accountants
The internet is a powerful tool and it did not take the writer much time to see the annual accounts of Citibank, N.A. and subsidiaries. The consolidated balance sheet shows the following:
This writer interpreted the term 'loans, net of unearned income' in the Bangladesh context as 'loans, net of interest suspense'. Thus in the USA the bank balance sheet shows interest suspense and LLP as a deduction on the asset side.
Wondering that we may be following the UK custom, this writer looked up Barclays PLC in the internet and found the year ended 31/12/2005 audited financial statements. The consolidated balance sheet, as on December 31, had an asset item titled 'loans and advances to customers' showing £268,896 million for 2005 and £262,409 million for 2004. Going to Note 17, this writer found the following disclosure:
This writer became curious to know the background to this strange Bangladeshi practice. The banker friend said that the financial statement of banks are prepared in accordance with the Bangladesh Bank instructions, the regulator of the banking industry.
This writer was finding it difficult to accept the notion that all bankers and all chartered accountants are complying with such a wrong practice. Our accountant friends said they know it is not correct as both assets and liabilities are overstated. The correct practice is the international method where the LLP and interest suspense are shown as a deduction from the value of the loan portfolio.
So why have not you talked to the regulator of the accounting profession to discuss the issue with the banking regulator? There was no reply. This writer is now making this public disclosure so that both professions and both regulators see that we need to prepare the bank financial statements in line with international best practice and discontinue the Bangladeshi way.
............................................................
The writer is a partner of ACNABIN, Chartered Accountants