CORPORATE ANNUAL REPORTING OF A BANK

The lecture notes will focus on the relevant provisions in the Banking Act 2004, Act 673. It will also discuss the provisions in IAS 30 and finally prepare the financial statements of a bank.

Some relevant provisions of the Banking Act

Functions of the Bank of Ghana2. (1) The Bank of Ghana shall have an overall supervisory and regulatory authority

in all matters relating to banking business and shall be responsible for(a) Promoting an effective banking system;(b) Dealing with any unlawful or improper practices of banks, and(c) Considering and proposing reforms of the laws relating to banking business.(2) The Bank of Ghana shall establish within its organisation, a Banking Supervision

Department.(3) The Bank of Ghana may authorise the Head of the Banking Supervision

Department or any other official or person to exercise a power and do an act that itconsiders appropriate in order to discharge its responsibilities under this Act.

(4) The Bank of Ghana may, in relation to the operation of a bank; authorise anyother person either generally or in respect of a particular matter, to perform a functionthat otherwise would be performed by the Bank.

Banking licence mandatory4. (1) No person shall carry on the business of banking except by or under the

authority of a licence issued in accordance with this Act.(2) A person who carries on banking business without a licence commits an

offence and is liable on summary conviction(a) in the case of a body corporate or other body of persons to a fine not

exceeding three thousand penalty units, and(b) in the case of an individual to a fine not exceeding three thousand penalty

units or to a term of imprisonment not exceeding ten years

Permissible activities of banks11. (1) A bank shall not carry on any business other than any of the following:(a) acceptance of deposits and other repayable funds from the public:(b) Lending;(c) Financial leasing;(d) Investment in financial securities:

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(e) Money transmission services;(f) Issuing and administering means of payment including credit cards,

travellers cheques and bankers’ drafts;

(g) Guarantees and commitments;

(h) Trading for own account or for account of customers in,

(i) Money market instruments,

(ii) foreign exchange, or

(iii) transferable securities;

(i) participation in securities issues and provision of services related to those

issues;

(i) advice to undertakings on capital structure, acquisition and merger of

undertaking;

(k) portfolio management and advice;

(l) the keeping and administration of securities;

(m) credit reference services;

(n) safe custody of valuables;

(o) electronic banking; and

(p) any other services as the Bank of Ghana may determine.

(2) The Bank of Ghana may by notification, restrict the permissible activities of

banks in general or a class of banks or an individual bank or remove the restriction so

imposed as it considers appropriate

Restrictions on commercial, agricultural or industrial activities and immovable

property

SECTION 12. (1) Subject to subsections (2), (3) and ( 4 ), a bank shall not directly engage in

any commercial, agricultural or industrial undertaking unless it establishes for that

purpose a subsidiary company of the bank registered in Ghana.

(2) The equity capital invested in a subsidiary company by the bank shall not

exceed fifteen per cent of the net worth of the bank and where the bank has more than

one subsidiary company the equity capital invested in those subsidiary companies by

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the bank shall not exceed in the aggregate twenty-five per cent of the net worth of the

bank.

(3) The aggregate amount of any loan, advance, credit or other facility and equity

capital which a bank may grant and invest under subsection (2) shall not at any one time

exceed

(a) twenty-five per cent of the net worth of the bank, in the case where the bank owns one

subsidiary company; or (b) thirty-five per cent of the net worth of the bank, in the case

where the

bank owns more than one subsidiary company.

(4) A bank shall not build, purchase or take a lease of immovable property except

(a) for the provision of premises or housing the business or staff of the bank; or

(b) for the provision of amenities for its staff.

(5) Notwithstanding anything in this section, a bank may accept immovable

property as security for any debt or other liability and may acquire an interest which a

bank may lawfully acquire in the satisfaction of a debt due to it:

(6) An interest acquired under subsection (5) shall be disposed of by the bank

within one year after the acquisition or within a longer period that may be determined by

the Bank of Ghana on application made by the bank

(7) This section does not prevent a bank from letting or subletting a part of

immovable property which is ordinarily used for housing its business where the property

is in excess of the immediate requirements of the bank

(8) A bank which contravenes a provision of this section commits an offence and

is liable on summary conviction to a fine not exceeding 1,500 penalty Units.

Opening of representative office

SECTION 21. (1) A foreign bank incorporated abroad shall not set up a representative office

in the country, unless it has obtained the prior approval in writing of the Bank.

(2) A foreign bank setting up a representative office shall apply to the Bank of

Ghana with the information and documents that the Bank of Ghana may require,

including permission from the supervisors in the country where that bank is incorporated.

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(3) A representative office permitted to be set up shall not transact any form of

banking business in the country.

(4) A foreign bank which does not comply with this section commits an offence

and is liable on summary conviction to a fine not exceeding 2,000 penalty units.

Capital adequacySECTION 23. (1) A bank shall at all times while in operation maintain a minimum capital

adequacy ratio of ten per cent.

(2) The Bank of Ghana may by directives prescribe a higher capital adequacy

ratio with respect to a particular bank or all banks for the period that the Bank may

prescribe

(3) The capital adequacy ratio shall be measured as a percentage of the adjusted

capital base of the bank to its adjusted asset base in accordance with Regulations made by

the Bank of Ghana.

Guidelines on accounting standards and disclosures in balance sheet and profit and loss account70. (1) The Bank of Ghana may lay down the guidelines to be followed by banks in

respect of accounting policies, practices, presentation of annual accounts and disclosure

of information in the annual accounts.

(2) A bank which does not comply with subsection (1) shall pay to the Bank of

Ghana a fine not exceeding 1000 penalty units.

Accounting records71. (1) A bank shall keep accounting records in a manner that gives an accurate and

reliable account of its transactions and the accounts prepared from the records shall give a

true and fair view of the state of affairs of the bank and its results for the accounting

period.

(2) The accounting records of the bank shall be kept at the bank’s head office in

Ghana.

(3) A bank which contravenes a provision of this section commits an offence and

is liable on summary conviction to a fine not exceeding one thousand penalty units.

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Financial statements72. (1) A bank shall prepare, at the expiration of each calendar year in respect of the

business transacted by it with reference to that year, financial statements comprising

balance sheet, profit and loss account and cash flow statement.

(2) The financial statements referred to in subsection (1) shall be approved by

the board of directors of the Bank and signed by at least two directors of the bank.

(3) A bank which fails to prepare a financial statement in accordance with this

section is liable to pay to the Bank of Ghana, a fine not exceeding 1000 penalty units.

Audit of bank’s accounting records73. The balance sheet and profit and loss account referred to in section 73 and the

accounting records of the bank for the period shall be audited by qualified auditors duly

appointed in accordance with this Act.

Appointment of auditors

74. (1) An auditor of a bank shall, except as provided in subsection (2) of this section

and subsection (2) of section 75 be appointed at an annual general meeting of the bank.

(2) The directors of a bank may appoint the first auditor of the bank; or

(b) an auditor to act in place of the auditor who is for any reason unable or

unwilling to act until a new auditor is appointed at an annual general

meeting or until the Bank of Ghana appoints an auditor under section

75(2).

(3) A person shall not be appointed an auditor of a bank unless that person

(a) is a member of the Institute of Chartered Accountants under the Chartered

Accountants Act, I963 (Act 170); or

(b) is not disqualified by a law in force in this country or in any other country

from being appointed as an auditor of a body corporate.

The Bank of Ghana’s powers to appoint auditors

75. (1) A bank which for a continuous period of three months is without an auditor

shall notify the Bank of Ghana.

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(2) The Bank of Ghana shall upon being notified under subsection (1) appoint an

auditor for that bank to hold office until the next annual general meeting of that bank.

(3) A bank which fails to notify the Bank of Ghana as required under sub- section

(1) shall pay to the Bank of Ghana a fine not exceeding 1000 penalty units.

QUESTION 1

The trial balance below was extracted from the records of Excellent Commercial Bank

year ended 31 Dec 2015

Dr Cr

GH000 GH000

Interest income 4,950

Interest on customers’ deposits 850

Net commission and fees income 900

Gains on foreign currency transactions 40

Dividend income 30

Operating expenses 2,400

Directors emolument 20

Auditors fees 40

Dividend paid (note vi) 20

Loan impairment provision (1st Jan 2015. Note iv) 410

Rental income from investment property (note iii) 90

Corporate current income tax 100

Income surplus (1 Jan 2015) 1,700

Capital surplus (1 Jan 2015) 20

Statutory reserve (1 Jan 2015) 640

Stated capital (50,000 equity shares) 1 jan 2015 100

Cash on hand 340

Balance with central bank 3,050

Investment in government securities 10,900

Investment in listed financial institutions 160

Receivables from other banks 1,610

Payables to other banks 50

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Overdraft, loans and advances 15,700

Sundry receivables and prepayments 500

Property plant and equipment 1,240

Accumulated depreciation of PPE (1 Jan 2015)note 1 410

Investment property (note iii) 240

Customers’ deposits 24,530

Expense trade payables and accruals 3,300

37,170 37,170

The following additional notes are relevant:

1. Property, plant and equipment is analysed as follows:

Cost Acc dep rate of depreciation

GH000 GH000

Land and building 450 90 20% p.a straight line

Computers and equipment 750 300 25% p.a straight line

Motor vehicles 40 20 25% p.a straight line

The land and buildings were acquired on commencement of business in Jan 2005, have neither

been further acquisition nor disposal since then. The directors caused the property (land) to be

revalued in Jan 2015. The valuers assigned value of GH₡400,000 but advised that the estimated

remaining useful life should be maintained. The directors wish to incorporate this valuation in

2015 financial statement.

ii) There was neither current tax liability nor current tax asset as at 1 Jan 2015.

During 2015 the acompany paid GH₡100,000 for corporate tax on interim assessment. The bank

is subject to 20% corporate tax. The company adopts nil provision for deferred tax.

iii) The investment property was acquired in Jan 2015. The rental income from the investment

property GH90,000 relates to the three-year period ending 31 Dec 2017. The bank adopts fair

value model in subsequent measurement of the investment property and fair value assessment at

31 December 2015 puts the valuation at GH250,000.

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iv) Loan impairment provision at the end of the year ie as at 31 December 2015 is to be

increased to GH 510,000

v) In compliance with the Banking Act 12.5% of profit after tax is to be transferred to statutory

reserve.

vi) On 15th November 2015, the directors paid an interim dividend of GH0.40 per share. No

further dividend is recommended for the year.

vii) In order to satisfy the central Bank minimum stated capital requirement, the shareholders, at

an emergency meeting on 24 December 2015, approved a bonus issue of one share for each one

held (out of income surplus) to be credited at the current market price of GH5 per share. This

decision is to be reflected in the 2015 financial statements.

Required:

(a) Prepare the income statement and statement of changes in equity for the ended

31 December 2015 as well as statement of financial position as at 31 December

2015 in a format that accords with relevant legislations and international

financial reporting standards

(b) Draft any four accounting policies that have been applied in preparing the

financial statements.

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Answer to Question 1

EXCELLENT COMMERCIAL BANK

INCOME STATEMENT FOR THE YEAR ENDED 31st DECEMBER 2015

Notes GH₵’000 GH₵’000

Interest Income 4,950

Interest Expense (850)

Net Interest income 4,100

Commission and fees income 900

Other operating income (gains on foreign currency transaction

and dividend income) (40+30) 70

Operating income 5070

Operating expenses (w1) (2,667.5)

Loan impairment provision (w2) (100)

Net operating income 2,302.5

Other income (w3) 40

Net profit before tax 2,342.5

Corporate income tax (w4) 468.5

Net profit after tax 1,874

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DEC 2015

Stated capital Statutory income

Capital surplus reserves surplus

GH000 GH000 GH000 GH000

Balance as at 31 December 2014 100 20 640 1700

Surplus on revaluation of PPE (w 40

Bonus share (w5) 250 (250)

Net profit for the period 1,874

Transfer to statutory reserve fund (w6) 234 (234)

Dividends (w7) (20)

Balance as per 31 December 2015 350 60 874 3,070

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STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2015

GH₡000

Assets

Cash and short term funds (including balances with BoG) (w8) 3,390

Government securities 10,900

Due from other banks and financial institutions 1,610

Loans and advances (net of impairment) (w9) 15,190

Investments 160

Other assets (receivables and prepayment) 500

Property plant and equipment (w10) 662.50

Investment property 250

32,662.5

Financed by:

Shareholders fund and liabilities:

Stated capital 350

Capital surplus 60

Statutory reserves 874

Income surplus 3,070

Shareholders funds 4,354

Liabilities:

Customers deposit 24,530

Due to other banks and financial institutions 50

Sundry trade payables/other liabilities (w12) (3,300+60) 3,360

Taxation 368.5

32,662.5

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Workings:

1) Operating expenses: GH₡’000

Operating expenses per trial balance 2,400

Director’s emolument 20

Auditor’s fees 40

Depreciation:

Land & building (450-400) × 20%)) 10

Computers and equipment (750 × 25%) 187.5

Motor vehicle (40 × 25%) 10

2,667.5

2) Loan impairment provision:

Loan impairment provision per trial balance 410

Increase in impairment provision 100

Balance c/f of impairment provision 510

3) Other income:

Rental income from

investment property per trial balance for 3 years = 90

Therefore for one year will be equal to 90/3year = 30

Revaluation surplus (240-250) = 10

Total income = 40

4) Corporate income Tax:

Current tax on profit to be

debited to income statement (20% of 2,342.5)

Tax to be debited to income statement 468

Amount paid = (100)

Current tax liability = 368

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5) Bonus shares

1 bonus share for 1 share already held.

The total number of shares held is 50,000 shares

The number of bonus shares to issue per the ratio above will be 50,000 shares at GH5

each. Giving a total value of GH₡250,000. The company suppose to finance this through

it profit. Hence the reduction of GH₡250,000 from the profit.

6) Transfer to statutory reserve fund

Transfer to general reserve is adjustment (v) which states that 12.5% of profit after tax is

to be provider under statutory reserve: therefore (12.5% × 1,874) = GH₡234

7) Dividends paid are supposed to be treated in the statement of changes in equity

8) Cash and short term funds (including balances with BoG)

Cash on hand GH₡ 340

Balance with central bank 3,050

3,390

9) Loans and advances (net of impairment) (w9)

Loans and advances 15,700

Less impairment 510

15,190

10) Property plant & equipment

Cost depreciation net book value

Land and building (400+50) 450 (90+10) = 100 350

Revaluation surplus (400-(450-90) 40

Computers and equipment 750 (300+187.5)= 487.5 262.5

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Motor vehicle 40 (20 + 10) = 30 10

662.5

11) Revaluation gain/surplus

Revaluation is normally done at the end of the accounting year. The land and building net

book value before revaluation is GH₡360 (450 – 90).

Carrying value GH₡360

Revalued amount 400

Revaluation surplus 40

12 Sundry trade payables/other liabilities (w12)

The 60 relates to the rental income prepaid (90/3 × 2 = 60)(3,300+60) = 3,360

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