UK: Review of banks’ accounts

Last Updated: 20 September 2005
Article by Cliff Rana, Marc Dumbell and Eric Wooding

Most Read Contributor in UK, August 2017

Foreword – Deloitte review of banks’ accounts

We are pleased to present our annual review of banks' accounts. The review is based on disclosures made in the Report and Accounts of the ten largest UK banks by market capitalisation and covers reporting periods ended during the calendar year 2004; for many, the last to be prepared under UK GAAP.

What is at first striking about a set of Report and Accounts is simply their sheer size with a number of banks' accounts now running to well over a few hundred pages. Whilst the need for greater disclosures has been very much driven in the recent past by developments in accounting standards, company law and the requirements from a greater need to detail corporate governance arrangements, it is pleasing to see that all banks go beyond this and make some very good voluntary disclosures. The core of these centre around business performance, market developments and descriptions of the business and the products offered. The banks also use these reviews to detail their successes in terms of their position in the market, involvement in high profile transactions or simply reminding us of recognition achieved within the industry. Theses disclosures tend to be given either in a separate section in the Report and Accounts or within an expanded Operating and Financial Review. The challenge is of course ensuring that the information presented is useful and meaningful to a reader and on balance all banks' have achieved this. What is clear is that the Report and Accounts now act more than simply a historical record of financial performance; they provide a useful source of insights into the whole organisation.

This year’s review has focused on three areas; disclosures around market and credit risk, segmental reporting and disclosures and commentary dealing with preparations for the introduction of International Financial Reporting Standards (IFRS). The disclosures provided by most banks on market and credit risk tend to be more qualitative than quantitative. Bank's provide detailed descriptions of how risk is managed but quantitative measures of risk have remained relatively unchanged over the past few years.

The introduction of Basel II will force banks to re-think what they need to show in this area. The segmental information provided by banks is quite naturally dependent on whether they are in the group of international banks or those with primarily a domestic focus. The quality of segmental disclosure, when taken together with information given outside of the mandatory notes to the financial statements, has improved significantly over the last few years. In the area of IFRS, there is very limited disclosure in the 2004 Report and Accounts themselves setting out the preparations for the introduction of IFRS and the key impacts on the business. We have therefore reviewed the preliminary announcements to ascertain the level of commentary on IFRS. The disclosures made vary considerably across the banks which is not surprising given the infancy of the regime and the lack of a clearly defined requirement around what should have been disclosed. This is clearly an area that we will major on in our 2005 annual review.

Cliff Rana
Partner
Banking & Securities Practice

Transition to IFRS

IFRS

With the aim of improving the transparency of international financial markets, the requirement for listed EU companies to apply IFRS for accounting periods beginning on or after 1 January 2005 brings an unprecedented, and for many investors unintelligible, step change in the reporting of financial results for UK banks.

While the requirements have not been applied to financial statements for periods prior to 2005 there are factors that have contributed UK banks including (in some cases significant) reference to the impacts of IFRS in their 2004 financial statements. The underlying driver of these disclosures is to inform investors of the key impacts of IFRS and its effect on their prior understanding of the financial information.

Guidance was issued by the Committee of European Securities Regulators (CESR) in December 2003 setting out a number of recommendations, in relation to communicating to investors, including certain disclosures proposed for inclusion in the 2004 financial statements. The Financial Services Authority (FSA), who is a key member of CESR, subsequently endorsed the guidance, highlighting the requirements to listed companies and followed this up, albeit after most of the listed UK banks had completed their 2004 financial statements, with a letter to the CEO of each listed company highlighting the recommended disclosures.

Key recommendations made by CESR in relation to IFRS:

  • disclose quantified information in relation to the change to IFRS on its 2004 financial statements as son as this can be done in a sufficiently reliable manner;
  • not to publish quantified information on the impact of the change to IFRS without having performed sufficient quality control and, where applicable, audit checks;
  • if quantified information is not available at the time of publication of 2004 financial statements then describe plans and degree of achievement in their move towards IFRS, including the general policies to address the operational and control issues as well as the risks and uncertainties associated with the transition as they affect the business.
  • at the latest the comparative quantitative information should be released before the interim information.
  • quantified information to include items noted by IFRS 1, IG 63, namely:
  • reconciliation of shareholders equity as at date of transition, with notes explaining impact on each line item;

  • reconciliation of shareholders equity as at date of last set of published financial statements;

  • reconciliation of profit and loss account under UK GAAP to IFRS; and

  • explanation of main adjustments to the cashflow statement.

Following the CESR recommendations, the Institute of Chartered Accountants in England & Wales, (ICAEW) announced their recommendation that:

  • companies begin by providing narrative explanation of key changes to accounting policies in the 2004 annual report or preliminary announcement, or by means of a separate announcement to the market; and
  • then in a separate and later exercise, restated 2004 GAAP numbers could then be published together with explanatory material, ideally in advance of the 2005 six-monthly accounts.

In particular, the situation for UK banks was made difficult since not all the standards had been finalised or fully endorsed by the EU by the time of reporting the 2004 results.

The UK bank’s response to the recommendations issues and the need to inform investors on a timely basis of the key changes expected to impact the financial results, a common response from many of the major UK banks was to disclose:

  • in an initial presentation to analysts – initial indicators of key changes resulting from IFRS with indicative quantitative impacts;
  • in the 2004 financial statements – a narrative explanation and indicative range of quantified values for key changes to accounting policies and significant IFRS/ UK GAAP differences; and
  • in a separate communication to the market in advance of the 2005 interim financial results – qualitative information including updated Balance sheet, Income statement, Statement of changes in equity and equity and profit & loss reconciliations between UK and IFRS.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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