Chapter 24: Specialized Industries

Banks and Similar Financial Institutions

Perspective and Issues

Disclosure requirements relating to financial statements of banks and similar financial institutions are contained in IAS 30. A broad definition of the term "bank" has been given by IAS 30 and covers all those enterprises (whether the word bank is included in their name or not)

1. Which are financial institutions

2. Whose principal activities are to accept deposits and borrow money with the intention of lending and investing

3. Which are within the scope of banking and similar legislations

Since banks' operations differ in many material respects from other commercial enterprises and liquidity and solvency is of paramount importance, their financial reporting inevitably will be somewhat specialized in nature. In recognition of their special needs, IAS 30 lays down a number of disclosure requirements. Some of these disclosures may seem unusual from the standpoint of other commercial enterprises and may be perceived by users of the banks' financial statements as excessive or superfluous; however, these disclosures have been made mandatory for banks, keeping in view the special characteristics of banks' operations and the role they play in maintaining public confidence in the monetary system of the country through their close relationship with regulatory authorities (such as the country's central bank) and the government. Further, a bank is exposed not only to liquidity risks but even risks arising from currency fluctuations, interest rate movements, changes in market prices, and counterparty failure. These risks are associated not only with assets and liabilities, which are recognized on a bank's balance sheet, but also with off-balance-sheet items. Thus, certain disclosure requirements as outlined by IAS 30 relate to off-balance-sheet items as well.

The development of IAS 30 took about ten years, an inordinate amount of time when contrasted to other standards produced by IASC. This was partly because of IASC's efforts to obtain input from bankers worldwide, and partly due to the regulated nature of the banking industry, which adds to the complexity of imposing uniform disclosure requirements across national boundaries.

Although IAS 30 applies exclusively to financial statements of banks and similar financial institutions, it does not, of itself, define all the disclosures required by those entities. They must also conform to the requirements of standards such as IAS 24 (related parties) and IAS 16 (long-lived assets). IAS 7 incorporates special provisions that are applicable to financial institutions, and its appendix illustrates the use of the direct method by financial institutions.

Apart from minor revisions necessitated by the enactment of new standards, IAS 30 has remained intact since its promulgation. However, over the past half-decade the IASC (and now the IASB) came to recognize that there was the need to update and conform IAS 30 to the many standards produced since its issuance. In 1999, a project to do this was started, and the IASB is continuing with this, with its project on deposit taking, lending, and securities activities—which would apply to entities other than those regulated as banks. It is expected that a new standard will be exposed and possibly finalized in 2003.

Sources of IAS

IAS 1, 7, 16, 18, 24, 30, 32, 37, 39