1. THE FINANCIAL INFORMATION SYSTEM AND ITS BASIC PRINCIPLES: AN APPLIED OVERVIEW

1.6. Comprehensive Income & Equity: an example(Ancient Mariner Bank - business case)

Prof. Alberto Marchesi – Advanced Financial Accounting School of Banking, Finance and Insurance Graduate program in Banking and Finance/Trading and risk management Università Cattolica del Sacro Cuore - Milano - Italy - Year 2013-2014

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1.6 - Comprehensive Income and Equity: an application - Advanced Financial Accounting

Information:● All values are in Currency Units (CU).● The bank is financed only with Share Capital and retained earnings.● Loans & Receivables assets don't change during time.● No tax nor commission on purchases and sales of securities.● No tax on Net Profit nor on Changes in Fair Value.● All operations are regulated in cash or cash equivalents.● Net Profits are charged to reserve from profits.● The Bank has recently bought nr. 10 Overland Bonds at 100 CU each and has classified them in the Available For Sale securities.

AFS securities valuation at T0Overland Bonds nr. 10Purchase price per unit (CU) 100AFS Fair Value at T0 1.000Note: since there are no additonal direct purchase costs, Fair Value at inception equals to purchase cost.

Loans & Receivables 10.000 Share Capital 11.000Available For Sale securities 1.000TOTAL ASSETS 11.000 TOTAL LIABILITIES & EQUITY 11.000

Table 1 - POSITION AT T0

Ancient Mariner Bank - Statement ot Financial Position at T0 (CU)

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1.6 - Comprehensive Income and Equity: an application - Advanced Financial Accounting

Information:● Due to changes in market value, at T1 Fair Value of Overland Bond is 97 CU each.● During the period no sales of bonds occur.

AFS securities valuation at T1Overland Bonds nr. 10Fair Value per unit at T1 (CU) 97AFS Fair Value at T1 970AFS Fair Value at T0 1.000Decrease in Fair Value T0-T1 (30)Note: decrease in Fair Value is due to the decrease in market value of bonds.

Valuation reserveValuation reserve at T0 0Changes in period T0-T1 (30)Valuation reserve at T1 (30)Note: valuation reserve originates from negative OCI and is therefore negative.

Interest income & other revenues 1.000Gains (Losses) on disposal of AFS securities 0Other operating and financial expenses (990)NET PROFIT 10

Net Profit 10Fair Value changes in AFS securities (30)Recycling to profit or loss 0Other Comprehensive Income (30)COMPREHENSIVE INCOME (20)Note: while Net Profit is positive, Comprehensive Income is negative (algebraic sum of Net Profit and negative OCI).

Loans & Receivables 10.000 Share Capital 11.000Available For Sale securities 970 Reserve from profits 0Cash & equivalents 10 Valuation reserve (30)

Net Profit 10TOTAL ASSETS 10.980 TOTAL LIABILITIES & EQUITY 10.980Notes:● Comprehensive Income is charged: to Valuation reserve as for OCI; to Net Profit as for Net Profit;● Cash & equivalents are produced by Net Income, since in this period there are no non-cash operations in the Statement of Income.

Table 2 - PERIOD T0-T1

Ancient Mariner Bank - Statement of Income period T0-T1 (CU)

Ancient Mariner Bank - Statement of Comprehensive Income period T0-T1 (CU)

Ancient Mariner Bank - Statement ot Financial Position at T1 (CU)

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1.6 - Comprehensive Income and Equity: an application - Advanced Financial Accounting

Information● Due to changes in market value, at T2 Fair Value of Overland Bond is 110 CU each.● During the period no sales of bonds occur.

AFS securities valuation at T2Overland Bonds nr. 10Fair Value per unit at T2 (CU) 110AFS Fair Value at T2 1.100AFS Fair Value at T1 970Increase in Fair Value T1-T2 130Note: increase in Fair Value is due to the increase in market value of bonds.

Valuation reserveValuation reserve at T1 (30)Changes in period T1-T2 130Valuation reserve at T2 100Note: positive valuation reserve originates from negative Valuation reserve of former period and from positive period OCI for the period.

Interest income & other revenues 1.001Gains (Losses) on disposal of AFS securities 0Other operating and financial expenses (990)NET PROFIT 11

Net Profit 11Fair Value changes in AFS securities 130Recycling to profit or loss 0Other Comprehensive Income 130COMPREHENSIVE INCOME 141Note: positive Comprehensive Income value is mainly due to positive relevant OCI.

Loans & Receivables 10.000 Share Capital 11.000Available For Sale securities 1.100 Reserve from profits 10Cash & equivalents 21 Valuation reserve 100

Net Profit 11TOTAL ASSETS 11.121 TOTAL LIABILITIES & EQUITY 11.121Notes:● former period Net Profit has been charged to Reserve from profits;● Cash & equivalents increase because of Net Income, since in this period there are no non-cash operations in the Statement of Income.

Table 3 - PERIOD T1-T2

Ancient Mariner Bank - Statement of Income period T1-T2 (CU)

Ancient Mariner Bank - Statement of Comprehensive Income period T1-T2 (CU)

Ancient Mariner Bank - Statement ot Financial Position at T2 (CU)

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1.6 - Comprehensive Income and Equity: an application - Advanced Financial Accounting

Information: ● Due to changes in market value, at T3 Fair Value of Overland Bond is 111 CU each.● During the period the bank has sold nr. 4 bonds at 115 CU each.

Gains (Losses) on disposal of AFSNr. of bonds sold 4Fair Value at inception per unit (CU) 100Total original Fair Value 400Nr. of bonds sold 4Sale price per unit (CU) 115Total value of sale 460Gain on disposal 60Note: gain is calculated comparing Fair Value at inception and cash generated by sale.

AFS securities valuation at T3Overland Bonds nr. 6Fair Value per unit at T3 (CU) 111AFS Fair Value at T3 666Overland Bonds nr. 6Fair Value per unit at T2 (CU) 110Fair Value at T2 (CU) 660Increase in Fair Value T2-T3 6Note: at the end of the period valuation is, of course, only for bonds remaining after the sale.

Valuation reserveValuation reserve at T2 100Changes in period T2-T3 (34)Valuation reserve at T3 66

Cash & equivalentsCash & equivalents at T2 21Cash inflow from sale of bonds 460Cash inflow from other operations 12Cash & equivalents at T3 493Note: Cash & equivalents increase because of cash inflows from: sale of bonds; result from all other operations in the Statement of Income.

Reclassification adjustements (Recycling) to profit or lossValuation reserve at T2 (CU) 100Nr. of bonds relating to Valuation reserve at T2 10Valuation reserve per unit at T2 (CU) 10Nr. of bonds sold during period T2-T3 4Amount of Valuation reserve to recycle period T2-T3 to profit or loss 40Notes: ● Valuation reserve per unit at T2 = Valuation reserve / Nr. of bonds relating; ● Amount of Valuation reserve to recycle during period T2-T3 =

= Valuation reserve per unit at T2 * Nr. of bonds sold during T2-T3

Table 4 - PERIOD T2-T3

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1.6 - Comprehensive Income and Equity: an application - Advanced Financial Accounting

Interest income & other revenues 1.002Gains (Losses) on disposal of AFS securities 60Other operating and financial expenses (990)NET PROFIT 72Note: Net Profit is increased by negotiated Gain on sale of bonds.

Net Profit 72Fair Value changes in AFS securities 6Recycling to profit or loss (40)Other Comprehensive Income (34)COMPREHENSIVE INCOME 38Notes:● Positive Comprehensive Income comes from the sum of positive Net Profit and negative OCI;● Since a part of the bonds have been sold, negative OCI comes from the sum of: increase in Fair Value of remaining bonds; negative reclassification adjustment related to bonds sold.

Loans & Receivables 10.000 Share Capital 11.000Available For Sale securities 666 Reserve from profits 21Cash & equivalents 493 Valuation reserve 66

Net Profit 72TOTAL ASSETS 11.159 TOTAL LIABILITIES & EQUITY 11.159Note: former period Net Profit has been charged to Reserve from profits.

Ancient Mariner Bank - Statement of Income period T2-T3 (CU)

Ancient Mariner Bank - Statement of Comprehensive Income period T2-T3 (CU)

Ancient Mariner Bank - Statement ot Financial Position at T3 (CU)

Table 4 - PERIOD T2-T3 (contd.)

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