INTRODUCTION AND BACKGROUND

1. High quality financial reporting contributes to promoting private sector

growth and reducing volatility, through: (a) strengthening countries’ financial
architecture and reducing the risk of financial market crises, together with their
associated negative economic impacts; (b) contributing to foreign direct and
portfolio investment; (c) helping to mobilize domestic savings; (d) facilitating the
access of smaller-scale corporate borrowers to credit from the formal financial
sector by lowering the barrier of high information and borrowing costs;2 (e)
allowing investors to evaluate corporate prospects and make informed
investment and voting decisions, resulting in a lower cost of capital and a better
allocation of resources; and (f) facilitating integration into global financial and
capital markets.

2. Financial reporting is also a building block of a market-based monitoring of

companies, which allows shareholders and the public at large to assess
management performance, thus influencing its behavior.

3. High quality financial reporting also contributes to strengthening the

financial discipline of Government Business Enterprises (GBEs).3 The relative
lack of capital-market related pressures on GBEs means that the shareholding
Ministers need to rely on administrative monitoring procedures to hold GBE
boards accountable. The general adoption of International Accounting Standards
(IAS)/International Financial Reporting Standards (IFRS) by GBEs enhances
shareholding Ministers’ and the public’s ability to assess the extent to which a
GBE is creating or eroding value.

4. High quality financial reporting may also contribute to improving the

assessment and collection of taxes on corporate profits. Countries currently have
fundamentally different approaches to the relationship between accounting and
taxation. At one extreme (total independence), income determination for
accounting purposes is completely separate from income determination for tax
purposes. At the other extreme (total dependence), either financial statements
are prepared in accordance with tax rules, or income determination for tax
purposes is determined by the choices made in financial statements. The greater
the level of dependency, the greater the importance of high-quality financial
statements for the assessment and collection of taxes on corporate profits.

5. As an institution committed to the fight against poverty, the World Bank

undertakes a number of activities to support the development and implementation
of international accounting and auditing standards, as it recognizes the
contribution that high-quality financial reporting can make to development. These
activities include financial support to the relevant international standard-setting
organizations; diagnostic work to benchmark countries’ financial reporting
standards and practices against international standards; policy advice and
financial assistance to support the enhancement of these standards and
practices; and participation in international discussions and initiatives aimed at
strengthening the regulatory environment, both nationally and globally, in which
international standards are applied.

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6. This paper provides an overview of the International Accounting Standards
and their implementation in a Public Limited Company. main program of Bank
diagnostic work in the field of private sector financial reporting: the Reports on the
Observance of Standards and Codes (ROSC) accounting and auditing
assessment. It summarizes some of the main findings of the 38 assessments that
have been carried out to date, with specific reference to the challenges to the
successful implementation of international accounting and auditing standards.
Attention is drawn to the need for international consensus on a comprehensive
framework of principles for the regulation of accounting and auditing that also
addresses issues of implementation, which is not covered by existing
international accounting and auditing standards. The paper concludes by raising
a number of other issues to be discussed and resolved going forward, if countries
are to receive the support they need to successfully implement international
standards and reap their full benefits.

INTERNATIONAL ACCOUNTING STANDARDS

Users of Financial Statements

7. Financial statements are used by a variety of groups for a variety of

reasons. The framework surrounding IAS identifies the typical user groups of
accounting statements. The table below identifies the user groups (stakeholders)
and gives likely reasons for the user groups to refer to financial statements:

Main users Reasons for use

Investors • To assess past performance as a basis for future
investment
Employees • To assess performance as a basis of future wage and
salary negotiations.
• To assess performance as a basis for continuity of
employment and job security.
Lenders • To assess performance in relation to the security of their
loan to the company.

Suppliers • To assess performance in relation to them receiving

payment of their liability.

Customers • To assess performance in relation to the likelihood of

continuity of trading
Government • To assess performance in relation to compliance to
regulations and assessment of taxation liabilities.

Public • To assess performance in relation to ethical trading

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Qualitative Characteristics

8. Financial statements are prepared for a variety of reasons. The

information provided by them is useful to users. IAS sets out four qualitative
characteristics of the financial statements:

(a) Understandability – the information is readily understandable by

users.

(b) Relevance – The information may be used to influence economic

decisions of users.

(c) Reliability – the information is free from material error and bias.

(d) Comparability – the information enables comparisons over time to

identify and evaluate trends.

IAS 1 (Revised 6 September 2007)

9. IAS 1 changes the titles of financial statements as they will be used in

IFRSs:
• 'balance sheet' will become 'statement of financial position'
• 'income statement' will become 'statement of comprehensive income'
10. The revised IAS 1 is effective for annual periods beginning on or after 1
January 2009. Early adoption is permitted. Entities (businesses) are not required
to use the new titles in their financial statements but all existing Standards and
Interpretations are being amended to reflect the new terminology so could be a
source of confusion for teachers using recent textbooks or doing research on line.

Presentation Of Financial Statements

(a) The purpose of Financial Statements:- ‘To provide information
about the financial position, financial performance and cash flows of an
entity that is useful to a wide range of users in making economic
decisions.’
(b) The components of the Financial Statements:- A complete set of
financial statements as set out in the Standard, comprises the following:

(i) Balance sheet (from 1/1/2009 – ‘a statement of financial

information as at the end of ….)
(ii) Income statement (from 1/1/2009 – ‘a statement of
comprehensive income for the period)
(iii) A statement of changes in equity
(iv) A statement of cash flow - cash flow statement (also has to its own
specific IAS)
(v) Accounting policies and explanatory notes (also has its own
specific IAS).

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 (c) Accounting Concepts:- The statement requires compliance with
a series of accounting concepts:
(i) Going concern – the presumption is that the entity will not
cease trading in the immediate future. (This is generally taken to
mean within the next 12 months.)
(ii) Accrual basis of accounting – with the exception of the cash
flow statement the information is prepared under the accruals
concept, income and expenditure is matched to the same
accounting period.
(iii) Consistency – the presentation and classification of items in
the financial statements is to be consistent from one period to the
next. Thus the entity uses straight line depreciation one year it must
do so for future years.
(iv) Materiality and aggregation – classes of similar items are to
be presented separately in the financial statements. This would
apply to a grouping such as current assets.
(v) Offsetting – this is generally not permitted for both assets
and liabilities and income and expenditure. For example it is not
permitted to offset a bank overdraft with another bank account not
in overdraft.
(vi) Comparative information – there is a requirement to show
the figures from the previous periods for all the amounts shown in
the financial statements. This is designed to help users of them to
make relevant comparisons.
Structure and Content of Financial Statements

11. IAS 1 identifies in detail how the financial statements should be presented.
It also sets out some general principles that must be adopted in those
statements:
(a) A clear identification of the financial statements (Income Statement,
Balance Sheet, etc). (alternative titles suggested from 1/1/2009)
(b) The name of the entity (XYZ Limited).
(c) The period covered by the financial statements (for the year ended,
etc). Note that statements are usually prepared on an annual basis. If this
is not the case the reason for the change, say to a short accounting
period, must be disclosed, as must the fact that the figures may not be
comparable with previous data.
(d) The currency used (£s, $s, etc).
(e) The rounding used (if the statements are presented in thousands,
millions, etc).

Income Statement
(XYZ Plc – Statement of comprehensive income for the year
ended ..................)

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12. There is certain data which the statement requires to be identified and
detailed on the face of the income statement. However, the detail included in the
statement can be summarized, rather than detailing every single item.

(a) Revenue
(b) Finance costs
(c) The charge for taxation
(d) The after–tax profit or loss for the period from discontinued
operations.

13. The statement ends by showing the profit or loss for the period attributable
to the equity holders. Expenses may be analyzed:

(a) By nature, for example raw materials, employee costs, depreciation

and so on. This may be more applicable for a manufacturing company; or

(b) By function, cost of sales, administration expenses distribution

expenses, etc.

14. Whichever is used will depend on which provides the more reliable and
relevant information.

Balance Sheet

15. IAS 1 specifies the minimum information which must be shown on the face
of the balance sheet. It does not specify the order in which information is to be
presented.
The statement requires entities to separate out:

(a) Non–current assets, the usual sort of fixed assets such as property,
plant, equipment, plant and machinery, motor vehicles, intangible
assets, goodwill, etc.

(b) Current assets; inventories, trade receivables, cash and cash

equivalents.

(c) Current liabilities; trade payables, bank overdrafts and taxation.

(d) Non–current liabilities; bank loans and long term provisions.

(e) Equity; Share capital, share premium reserves and retained

earnings.

Note - IAS 1 does not prescribe the format of the balance sheet. Assets can be
presented current then non-current, or vice versa, and liabilities and equity can
be presented current then non-current then equity, or vice versa. A net asset
presentation (assets minus liabilities) is allowed. The long-term financing
approach used in UK and elsewhere (fixed assets + current assets - short term
payables = long-term debt plus equity) is also acceptable. Two acceptable forms
of balance sheet for a limited company are shown in Appendix 2.

5
IAS 2 - INVENTORIES
16. The term inventory refers to the stock of goods which the business holds
in a variety of forms:
(a) Raw materials for use in a subsequent manufacturing
process.
(b) Work in progress, partly manufactured goods.
(c) Finished goods, completed goods ready for sale to customers.
(d)Finished goods which the business has bought for resale to
customers.

17. The principle inventory valuation set out in IAS 2 is: “ Inventories should
be valued at the lower of cost and net realisable value. “

18. Notice the exact wording. It is the lower of cost and net realizable value,
not the lower of cost or net realizable value.

19. The term net realizable value can be compared to selling price. Thus if the
expected selling price is lower than the cost price, then inventory should be
valued at their selling price.

20. Note that stock is never valued at selling price when the selling price is
greater than the cost.

Example
The ABC Stationery Company bought 20 boxes of photocopier paper at $5 per
box. Following a flood in their stockroom 5 of the boxes were damaged. They
were offered for sale at $3 per box. All were unsold at the end of the company’s
financial year.
At what price will they be valued in the annual accounts?
15 boxes will be valued at their cost of $5 per box, a total of $75.
5 boxes will be valued at $3 per box, a total of $15.
The total stock value will be $90.

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Example

The Good Look Clothing Company carries a variety of stocks. At their year
end they produce the following data in respect of it:

Item Cost Price Net Realisable Selling

$ Value$ Price (when
new)$
1000 1500 2000
New dresses

Children’s
2000 3000 2000
clothes

Bargain
1200 900 3000
Fashions*

What will be the total stock value for the accounts?

$
New dresses 1 000
Children’s clothes 2 000
Bargain fashions 900
Total Stock Value 3 900

*Notice the valuation of the Bargain Fashions. This is the lowest of the three
choices. This means that inventory valuation follows the PRUDENCE concept.

IAS 8 - ACCOUNTING POLICIES

21. This statement is designed to formalize accounting policies within an

organization. There are a series of definitions and general comments which must
be known.

Accounting Policies
22. These are defined as:
‘the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial
statements’.
23. Such policies are the specific accounting bases (see below) selected by
the directors of the entity. In selecting and applying policies, the statement
requires that:
(a) where an accounting policy is given in an accounting standard then
that policy must apply.
(b) where there is no accounting policy provided to give guidance then
the directors of the entity must use their judgement to give information that

7
 is relevant and reliable. They must refer to any other standards or
interpretations or to other standard setting bodies to assist them. However,
they must ensure that their subsequent interpretation or recommended
method of treatment for the transaction does not result in conflict with
international standards or interpretations.

Accounting Principles
24. These are covered in the statement, although no formal definition is given
of them they are regarded as:
the broad concepts that apply to almost all financial statements.
These would include such things as going concern, materiality,
prudence and consistency.

Accounting Bases

25. Again, no formal definition is given, but these can be regarded as:
The methods developed for applying the accounting principles to
financial statements. They are intended to reduce subjectivity by
identifying and applying acceptable methods.

26. Once an entity adopts an accounting policy then it must be applied

consistently for similar transactions. Changes in accounting policies can only
occur:
(a) if the change is required by a standard or interpretation.
(b) if the change results in the financial statements providing more
reliable and relevant information.

27. Once any changes are adopted then they must be applied retrospectively
to financial statements. Thus, the previous figure for equity and other figures in
the income statement and balance sheet must be altered, subject to the
practicalities of calculating the relevant amounts.

IAS 16 - PROPERTY, PLANT AND EQUIPMENT

28. This statement deals with the accounting treatment of the non – current
assets of property, plant and equipment. The issues covered by the statement
are:

(a) The recognition of the assets

(b) The determination of their carrying amounts
(c) Their depreciation charges
(d) Their impairment losses

29. As with the other standards, there are a series of definitions:

8
 (a) Property, plant and equipment :-Tangible assets held for use in
the production or supply of goods and services, for rental to others and
for administrative purposes, which are expected to be used for more
than a period of more than one year.

(b) Depreciation:-The systematic allocation of the depreciable amount

of an asset over its useful life.

(c) Depreciable amount :- The cost or valuation of the asset, less any
residual amount.

(d) Useful life :-The length of time, or number of units of production,

for which an asset is expected to be used.

(e) Residual value :-The net amount the entity expects to obtain for an
asset at the end of its useful life, after deducting the expected costs of
disposal.

(f) Fair value:- The amount for which an asset could be exchanged
between knowledgeable, willing parties in an arm’s length transaction.

(g) Carrying amount:-The amount at which an asset is recognized in

the balance sheet, after deducting any accumulated depreciation and
impairment loss.

Recognition of the asset in the financial statements

30. At what point does an entity recognise the asset? The statement provides
that an item of property, plant and equipment is to be brought into the financial
statements when:

(a) it is probable that future economic benefits will flow to the

entity; and

(b) the cost of the asset can be reliably measured.

Additional costs associated with the asset

31. The statement recognises that in addition to the initial purchase price of
the asset, other amounts will also be spent on it. The statement provides the
following guidelines to assist with the treatment of such expenditure:
(a) Day to day costs of servicing or repairing the asset should be
charged as expenditure in the income statement.

(b) Where parts require replacement at regular intervals, say the seats
in an aeroplane then these costs can be recognised as part of the
carrying amount of the asset – subject to the rules of recognition
above.

9
 (c) Where the asset requires regular inspections in order for the asset
to continue operating then the costs of such inspections can also be
recognised in the carrying amount, again subject to the rules of recognition
above.

The costs which can be included in the balance sheet when the asset is
purchased

32. The statement provides that the following can be included as part of the
cost in the balance sheet.

(a) The initial purchase price

(b) Any import duties, taxes directly attributable to bring the asset to its
present location and condition

(c) The costs of site preparation

(d) Initial delivery and handling costs

(e) Installation and assembly costs

(f) Cost of testing the asset

(g) Professional fees; say architects or legal fees

33. The statement also provides guidance on which costs must be excluded
as part of the cost in the balance sheet:
- Any general overhead costs
- The start up costs of a new business or section of the business
- The costs of introducing a new product or service, such as
advertising.

Valuation of the asset

34. Once the asset is acquired the entity must adopt one of two models for its
valuation:

(a) Cost model – cost less accumulated depreciation

(b) Revaluation model – the asset is included (carried) at a revalued
amount. This is taken as its fair value less any subsequent depreciation
and impairment losses. Revaluations are to be made regularly to ensure
that the carrying amount does not differ significantly from the fair value of
the asset at the balance sheet date.

35. The statement provides further guidance on the use of fair values in the
revaluation model:

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 (a) Land and buildings: usually determined from a valuation by
professional valuers
(b) Plant and equipment – market value

36. Guidance is also given as to the frequency of the revaluations:

(a) if the changes are frequent then annual revaluations must
be made
(b) where changes are insignificant then revaluations can be
made every three to five years.

37. If an asset is revalued then every asset in that class must be revalued.
Thus, if one parcel of land and buildings is revalued then all land and buildings
must be revalued. Any surplus on revaluation is transferred to the equity section
of the balance sheet. Any loss on revaluation is recognised as an expense in the
income statement.

Depreciation

38. The expected life and residual value of the asset are to be reviewed at
least annually. If there is a difference from previous estimates this must be
recognised as a change in an estimate under IAS 8 (Accounting policies,
changes in accounting estimates and errors).

(a) Depreciation must continue to be charged even if the fair value of an

asset exceeds its carrying amount.

(b) Depreciation need not be charged when the residual value is greater
than the carrying amount.

(c) Depreciation is to be included as an expense in the income statement.

39. When considering the useful life of an asset the following should be
considered:
- expected usage of the asset, its capacity or output
- expected physical wear and tear
- Technical or commercial obsolescence
- Legal or other limits imposed on the use of the asset
40. Freehold land is not to be depreciated, other than in the case of a mine or
quarry. It is carried in the balance sheet at cost.

41. Land and buildings are to be separated out. The element of land is not
depreciated but the buildings are.

42. Allowable methods of depreciation are:

- straight line
- diminishing or reducing balance

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 - units of output
43. The entity must choose a method of depreciation which reflects the pattern
of its usage over its useful economic life. Ideally, once it has decided on the
method this should not be changed. It is possible though to review the method
and if a change in the pattern of usage of the asset has occurred then the method
of depreciation should be changed to reflect this. Such a change would come
under IAS 8.

Derecognition

44. This occurs when the asset is sold or no further future economic benefits
are expected from its use. Any profit or loss on disposal is shown in the income
statement.

IAS 18 - REVENUE

45. This standard sets out the accounting treatment to ensure that the revenue
shown in the Income Statement is correctly shown. Again, it is a statement which
contains definitions of items rather than any numerical data. The definitions are
shown below.

Revenue

46. ‘The gross inflow of economic benefits arising from the ordinary activities
of an entity.’ This means sales, either of goods or services. It also includes
income from interest, say bank interest, dividends received and royalties
received. The definition can also be widened to include revenue and gains from
non – revenue activities, such as the disposal of non – current assets or the
revaluation of assets.

Fair Value

47. ‘The amount for which an asset could be exchanged, or a liability settled
between knowledgeable, willing parties in an arm’s length transaction.’ Revenue
is to be measured at the fair value of the consideration received or receivable.
48. The standard then goes on to set out the rules for the recognition of three
types of income:

(a) Sale of goods :-This is to be recognised when all of the following

criteria have been met:

(i) the seller of the goods has transferred to the buyer the significant
rewards of ownership.

(ii) the seller retains no continual managerial involvement in and

no effective control over the goods.

(iii) the amount of revenue can be reliably measured.

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 (iv) it is probable that the economic benefits will now flow to the
seller.

(v) the costs incurred, or to be incurred in respect of the

transaction can be reliably measured.

(b) Rendering of services :-The sale or rendering of services is to be

recognized in the seller’s books by reference to the stage of completion of
the transaction at the balance sheet date. This is usually regarded as a
percentage of completion. Again, in order for recognition to take place, the
following criteria have to be met:

(i) The amount of revenue can be reliably measured.

(ii) It is probable that the economic benefits will now flow to the
seller.

(iii) At the balance sheet date the stage of completion can be

reliably measured.

(iv) the costs incurred in and the costs to complete the transaction
can be reliably measured.

Interest, dividends and royalties

49. In each case it is necessary to consider whether it is probable that the

economic benefits will flow to the entity and that the amount of revenue can be
reliably measured. Provided these two conditions are met, then the amount is to
be recognised as follows:

(a) for interest – using a time basis to calculate the interest.

(b) for dividends – when the shareholder’s right to receive payment is

established.

(c) for royalties - on an accruals basis in line with the royalty

agreement.

CASE STUDY
For case study Bank Alfallah was chosen.

The Bank Al-Falah limited

Historical Background

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1. Bank Al-Falah Limited was incorporated on June 21st, 1997 as a public
limited company under the Companies Ordinance 1984. Its banking operations
commenced from November 1st, 1997. The bank is engaged
in commercial banking and related services as defined in the Banking companies
ordinance, 1962. The Bank is currently operating through 104 branches in 36
cities, with the registered office at B.A.Building, I.I.Chundrigar, Karachi.

2. Since its inception, as the new identity of H.C.E.B after the privatization in
1997, the management of the bank
has implemented strategies and policies to carve a distinct position for the bank
in the market place.

3. Strengthened with the banking of the Abu Dhabi Group and driven by
the strategic goals set out by its board of management, the Bank has
invested in revolutionary technology to have an extensive range of products
and services. This facilitates our commitment to a culture of innovation and
seeks out synergies with clients and service providers to ensure uninterrupted
services to its customers. We perceive the requirements of our customers
and match them with quality products and service solutions. During the past five
years, we have emerged as one of the foremost financial institution in the region
endeavoring to meet the needs of tomorrow today.

4. Bank Al-Falah limited was incorporated on June 21, 1992 as a public

limited Companies Ordinance 1984 and commenced banking operation from Nov
1, 1992. The bank is growing rapidly in its equity & asset base due to strategic
managerial policies and assistance of Abu Dhabi Group.

5. The strength and standing of Abu Dhabi Group, principal owners of BAL
have helped Bank Al-Falah Limited launch high quality consumer and corporate
banking operation in Pakistan. Bank Al-Falah Ltd has embarked upon a rapid
expansion program to make sure that our services reach more and more
peoples. We are headed towards an optimum sized network reaching major
urban centers in Pakistan and soon to go International.

6. ATM machines locations have been increased inmost of the branches but
still need to expand their network in every branch and collaboration with other
commercial banks in ATM services. It is also introducing a new; more advanced
and latest funds settlement computerized SWIFT program in late 2002. Which is
a strong point of BAL that makes it a sophisticated and highly technological
oriented bank?

7. Regarding the investment and deposits portfolios BAL is playing dynamic

strategies to diversity their funds in more productive assets like; investment in T.
Bills and export related concerns, which are producing healthy profits. But all this
goes to the staff of Bank Al-Falah Ltd bank that is more proficient and good risk
managers.

8. BAL has numerous opportunities in future to increase the volume of

business because it has options to tap the market of its own peer units (Al-Falah
Car Financing, Al-Falah Visa, & also Al-Falah Home Finance etc) beside BAL has
strong assets base, it can diversify its funds in more lending & investment

14
opportunities live; Petroleum concerns, financial derivatives business through
treasury.

9. In nutshell, BAL has been performing very well since its birth. All financial
institutions of Pakistan regarding commercial banking concerns give Bank Al-
Falah Ltd as a leading bank in domestic sector title. Through SWOT analysis we
have found that BAL has competitive edge over other peer banks and it wants to
tap the prospects of foreign banks to achieve long-term objectives of the bank it
ought to have astute, well-designed, comprehensive and dynamic frame of
undertaking which might be established after diagnosing the conditions of country
and drawbacks due to which it lags behind.

Board of Directors

10. The board of directors has the authority in guiding Bank affairs and in
making general policies. Some directors are the personnel of the Bank Al-Falah
Limited follows.

H.E. Sheikh Hamdan Bin Mubarak Al Nahayan Chairman

Mr. Abdulla Nasser Hawalileel Al-Mansoori Director
Mr. Abdull Khalil Al Mutawa Director
Mr.Khalid Mana Saeed Al Otaiba Director
Mr. Ikram Ul-Majeed Sehgal Director
Mr. Nadeem Iqbal Sheikh Director
Mr. Sirajuddin Aziz Director & CEO

Management

11. Bank Alfalah has a top quality management which is listed as follows.

Mr. Sirajuddin Aziz Chief Executive Officer

Mr. Parvez A. Shahid Co-Chairman Central Management Committee
Mr. Shakil Sadiq Chief Operating Officer
Mr. Arfa Waheed Malik Group Head Corporate & Investment Banking
Mr. Ijaz Farooq Group Head Islamic Banking
Mr. Adil Rashid Group Head Consumer Finance
Mr. Nadeem Ul Haq Group Head Operations
Mr. Mohammad Yousuf Group Head Credit & Collections
Mr. Bakhtiar Khawaja Group Head Training & Development
Mr. A. Wahid Dada Group Head Commercial Banking
Mr. Hamid Ashraf GM Legal Affairs & Company Secretary
Mr. Zahid Ali H. Jamall Chief Financial Officer
Mr. Mohammad Iqbal Saifee Group Head Audit & Inspection
Mr. Talib Rizvi Group Head Priority Banking & Wealth
Management

Mr. Tariq Mir GM International Business

Mr. Ather Shehab Executive Incharge Establishment &
Administration

Mr. Mahmood Ashraf General ManagerCredit Monitoring

Mr. Falak Sher Chief Compliance Officer

15
 Mr. Imtiaz Ahmad Sheikh GM Information Technology
Mr. M. Mudassar Aqil GM Human Resource & Quality
Assurance
Mr. Haroon Khalid GM Risk Management

Vision and Mission

12. Vision:- To be the premier organization operating locally & internationality

that provides the complete range of financial services to all segments under one
roof.

13. Mission:- To develop & deliver the most innovative products, manage
customer experience, deliver quality services that contributes to brand strength,
establishes a competitive advantage and enhances profitability, thus providing
value to the stakeholders of the bank.

Credit Rating

14. PACRA, a premier rating agency of the country, has rated the bank ‘AA’
(double A), Entity Rating for long term and A1+ (A one plus) for the short term.
These ratings denote a very low expectation of credit risk, strong capacity for
timely payment of financial commitments in the long term and by highest capacity
for timely repayment in the short term, respectively. The ratings of first and
second and third unsecured listed and subordinated TFC issues of PKR 650
million, PKR 1,250 million and Rs.1,325 million have been maintained at AA-
(Double A minus).

Bank Al-Falah branch network

15. The Bank is fully aware that the branch network has direct implications on
the services that it provides to its customers. We offer services through a network
of 160 branches and 60 state of the art ATM machines

(a) Conventional Branches

(b) Islamic Banking Branches
(c) Overseas Branches
(d) ATM Machines

Departments of Bank Al-Falah

16. As far as Bank Al-Falah Ltd is concerned, it is one of the top in all-
domestic commercial banks in Pakistan. The rapid increase in branch network
shows the Bank’s performance within seven years, which is worth considerable.

17. However, this branch works with mostly all banking operations, which are
normally performed by every commercial bank. It has basically following
departments under which it operates all functions of bank diligently.

18. These are mainly ; account opening department ; remittances

department ;clearing department ; accounts department ; warid telecom

16
department ; cash department; car financing department ; credit department ;
credit card department ; trade financing department

SWOT Analysis of Bank Al-Falah

19. Here we have applied this very useful technique to identify the strengths,
weaknesses, opportunities and threats of Bank Al-Falah.

(a) Strengths

(i) Strong Financial Position :- As we can see in the financial

statements of the bank, the financial position of the organization is
very sound and its profitability is in increasing. The Earning per
share has been increased on a rate of about 50%, which is a very
positive sign.

(ii) Highly Qualified Employees:- The bank has highly qualified

and skilled workforce and it has succeeded to attract the best
banking professionals from across the country due to its growing
pace and sound reputation.

(iii) Conducive Environment :- The management of the bank is

very much concerned with the development of and improvement of
the working environment. The bank has state of the art and purpose
built branches where all the modern technologies are provided to
get the efficiency of the workforce and the customer satisfaction.

(iv) Govt. Support and Encouragement :- As the owners of the

bank belong to UAE and the type of their investment in Pakistan is
a foreign investment, the govt. is fully supporting the bank
management due to its policy to maximize the foreign investment in
the country, to get the economic prosperity.

(v) Fastest Growing Financial Institution :- Due to its successful

business policies and the strong financial position the bank has
achieved the reputation of fastest growing financial institution in the
country. It has greatly increased the customer’s confidence in the
bank.

(vi) Huge Expansion Plan :- Due to its strong financial position

the bank has undergone a huge expansion plan to compete with
the existing bank all over the country and with the passage of time
the branch network is expanding at a very good pace.

(vii) Young and Energetic Workforce :- As the bank is a newer

one in the country, the bank has an advantage over its competitors
because the majority of its workforce is young and not very much
over aged. Thus the bank is getting maximum out put from its
young and energetic workforce by spending comparatively less on
their remunerations.

17
 (viii) Islamic Banking Division :- The bank is one of the pioneers
of the commercial banks who have started the Islamic Banking
along with their conventional banking. The bank has a separate
network of its Islamic Banking Division which has 16 branches
across the country and this network is also expanding at a very
good pace.

(b) Weaknesses:

(i) Waiver of charges :- Currently the middle management of

bank Al-Falah is the big reason for waiver of charges. Bank Al-
Falah loosing a lot of its income likes (Cheque book charge, online
charges, statement charges, and other things) because of
management. This is a weakness of bank Al-Falah.

(ii) Inexperienced workforce :- As the majority of the workforce

consists of young professional, they lack in their experience. And
sometimes lack of experience becomes a hurdle while serving to
the customers. It is the point where they feel difficulty while
competing the other bank, which have a very experienced
workforce.

(iii) Over work Load on Employees :- It was observed in the

branch that as compared to huge business the bank is dealing in,
the no. of employees is lesser and thus there is an increased
workload on the employees. Due to this the efficiency of the
employees is reduced.

(c) Opportunities

(i) Rapidly Growing Economy :- At present the Pakistan’s

Economy is growing on a very fast pace. The rapid growth of
economy has resulted in the increase in the growth rate of all
economic sectors especially in the banking sector which is growing
at a fastest speed than ever and in future the growth is expected to
increase even a higher rate.

(ii) Increased Interest Rates :- The SBP has revised the interest
policy and the interest rates have been linked with the KIBOR rates.
Due to which the banks interest rate has been substantially
increased which will greatly increase the banks’ profitability.

(iii) Mega Projects Financing :- As the increase in overall

business activity in the country, the investors are launching various
types of Mega Projects especially in housing and textile the bank
has a great opportunity to finance these projects at very profitable
term.

(iv) Huge Demand for Consumer Financing :- The increase in

per capita income and overall economy has resulted into a great
demand for the consumer financing especially for home finance and
car financing and it is said that this trend will increase more in

18
 future. The bank can earn a lot by focusing on its consumer
financing sections.

(v) Merger with UBL :- After the privatization of United Bank

Limited, the management of the BAL has purchased the majority
shares of the UBL, and it is planning to merge these two banks. As
UBL is the second largest bank in the country, this merger can
make the bank the largest bank of the country.

(vi) Growing Trend of Islamic Banking :- There is a very good

growth trend in the Islamic banking in the country and in the world
as well. BAL has the advantage of having full fledged Islamic
Banking network and the growth in this particular field can be very
fruitful for the bank.

(vii) Spending Practices of Mass :- As the Pakistani’s are known

for their extravagant practices, and to fulfill their funds requirements
they don’t hesitate from getting loans from banks. Thus there is a
very good scope for the bank to run successful business in such
circumstances.

(d) Threats:

(i) Uncertainty of Economy :- Although the economy is growing

at a good pace, but there are many factors which results in the
uncertain position of the economy. Such as political uncertainty,
WTO, increase in poverty etc. etc. As a result there are permanent
threats of future risks and losses for the bank.

(ii) High Rate of Inflation :- The inflation rate of the country has
gone above the 10%. This can result into an unfavorable situation
for the bank. And especially when the ownership of the bank is UAE
based, the net spread for them can substantially decrease.

(iii) Trend of Mergers :- There is a trend of mergers among the

banks to become prominent in the market and to get the maximum
market share. This trend can result into the union of some leading
banks which can give tough time to the bank and it will become
difficult for the bank to compete with them.

(iv) Privatization of Banks :- Due to its privatization policy, the

govt. is privatizing the state owned banks. The change in
management may result in the increase in the efficiency and
productivity of the banks. Thus it can become a threat for the bank.

(v) Risk of Defaults :- As discussed earlier that there is a trend

of launching mega projects in the country. And every one is
involved in this trend without taking any measure for the
successfulness of these projects. This can result into the failure of
this project which can make it difficult for the banks to recover their
funds from these defaulters.

19
Financial Performance

20. Financial performance of Bank Alfalah Limited for the year 2008 is as
follows.

BALANCE SHEET
BANK ALFALAH LTD
AS on December 31, 2008

20
 PROFIT & LOSS ACCOUNT
BANK ALFALAH LTD
For year ended on December 31, 2008

21
 CASH FLOW STATEMENT
BANK ALFALAH LTD
For year ended on December 31, 2008

Concluding Remarks

22
21. Accounting standards have a decisive influence on determining the profit
figure, and consequently on the capacity to generate own funds. If such
standards do not consider the effect potentially arising from legal prescriptions
regarding banks profit distribution and their capacity to maintain certain capital
levels, banks' financial independence may be seriously jeopardised. In this
respect, IASs/IFRSs establish the criteria for determining profit without
considering the associated profit distribution arrangements and drawing on the
principle that companies have the power to provide for the distribution of profits
and set their level of capitalisation, contrary to what is the case for many banks.
In this connection, the accounting treatment established by IASs/IFRSs for
unrealised gains and for building up provisions may prove problematic for banks.

22. Application to banks of IAS , which provides for the crediting of unrealized
exchange rate gains to the income statement, may interfere to some extent in the
implementation of monetary policy, contributing to the weakening of the bank’s
financial strength and being construed as an indirect loan to governments.

23. The application of IAS may, in the context of certain portfolios, bring about
the same effects as IAS , this time related to the price of securities or other
financial instruments.

24. The application of IAS precludes the recognition of provisions to hedge

against whatsoever future risks and, specifically, exchange-rate and price risks,
thereby exacerbating the effects of IASs .

25. There are other IASs/IFRSs whose application may be of dubious

usefulness to banks (e.g. balance-sheet structure, cash flow statement). There
are also cases, such as monetary gold or banknotes in circulation, for which no
IAS exists that envisages their specific nature for banks.

26. In order for a company to claim compliance with IASs/IFRSs within the
notes to the financial statements, the standards establish that full compliance
must be the case. Otherwise, any reference to compliance would not be
permitted.

27. Banks should consider their special characteristics and singular legal
framework when setting their accounting standards so as to avoid financial
weakening. This would in turn ensure that their financial statements offer a
sufficient measure of transparency and comparability.

23
ASSIGNMENT NO 2

FINANCIAL ACCOUNTING
(MBA-528)

PRESENTED TO:
HAFIZ M. ISHAQ

PRESENTED BY:
JAWAD ABBAS
MBA SPRING 2009
ROLL NO. AD51I580
REGN NO. 09-PRI-09956

24
APPLICATION OF INTERNATINAL
ACCOUNTING STANDARDS IN
PUBLIC COMPANY

25
 ACKNOWLEDGEMENT
All gratitude and thanks to almighty “ALLAH” the gracious, the most merciful and
beneficent who gave me courage to undertake and complete this task. I am very
much obliged to my ever caring and loving parents whose prayers have enabled
me to reach this stage.

I am grateful to almighty ALLAH who made me able to complete the work

presented in this project. It is due to HIS unending mercy that this work moved
towards success.

I am are highly indebted to our course instructor Mr. Hafiz M Ishaq and the
management of Bank Alfalah Ltd Mall Road Branch Rawalpindi for providing us
an opportunity to analyze the brand like “Bank Al-Falah" which is vital ingredient
of MBA program. I feel great pleasure on the accomplishment of this project.

26
 ABSTRACT

This paper is designed to understand and the application of International

Accounting Standards (IAS) in a public company .For the purposes of this paper,
references to international accounting standards will invariably be to those issued
by the International Accounting Standards Board (IASB), whether they are called
International Accounting Standards (IASs) or International Financial Reporting
Standards (IFRSs).
However the standards are named (IASs or IFRSs), they may be deemed the
only truly international Accounting Standards, due both to their aim of universality
(validity for any country) and to the general scope of companies to which they
refer (indeed, no explicit reference in the standards seems to exclude any type of
company).

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 CONTENTS

Introduction.......................................................................................... 1

Users of financial statements............................................................... 2

Qualitative characteristics..................................................................... 3

IAS 1 (revised 6 September 2007)........................................................ 3

PRESENTATION OF FINANCIAL STATEMENTS................................ 3

Structure and content of financial statements......................................... 4

Income Statement.................................................................................... 5

Balance Sheet......................................................................................... 5

IAS 2 - INVENTORIES............................................................................ 6

IAS 8 - ACCOUNTING POLICIES........................................................... 7

IAS 16 - PROPERTY, PLANT AND EQUIPMENT................................... 9

IAS 18 - REVENUE................................................................................... 12

CASE STUDY (BANK ALFALAH LIMITED) ……………………………….. 14

CONCLUDING REMARKS..................................................................... 24

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