46. Local circumstances or legislation may require or allow a bank to set aside amounts for losses on loans and
advances in addition to those losses which have been specifically identified and those potential losses which
experience indicates are present in the portfolio of loans and advances. Any such amounts set aside represent
appropriations of retained earnings and not expenses in determining net profit or loss for the period.
Similarly, any credits resulting from the reduction of such amounts result in an increase in retained earnings
and are not included in the determination of net profit or loss for the period.
47. Users of the financial statements of a bank need to know the impact that losses on loans and advances have
had on the financial position and performance of the bank; this helps them judge the effectiveness with which
the bank has employed its resources. Therefore a bank discloses the aggregate amount of the provision for
losses on loans and advances at the balance sheet date and the movements in the provision during the period.
The movements in the provision, including the amounts previously written off that have been recovered
during the period, are shown separately.
48. A bank may decide not to accrue interest on a loan or advance, for example when the borrower is more than
a particular period in arrears with respect to the payment of interest or principal. A bank discloses the
aggregate amount of loans and advances at the balance sheet date on which interest is not being accrued and
the basis used to determine the carrying amount of such loans and advances. It is also desirable that a bank
discloses whether it recognises interest income on such loans and advances and the impact which the non-
accrual of interest has on its income statement.
49. When loans and advances cannot be recovered, they are written off and charged against the provision for
losses. In some cases, they are not written off until all the necessary legal procedures have been completed
and the amount of the loss is finally determined. In other cases, they are written off earlier, for example when
the borrower has not paid any interest or repaid any principal that was due in a specified period. As the time
at which uncollectable loans and advances are written off differs, the gross amount of loans and advances and
of the provisions for losses may vary considerably in similar circumstances. As a result, a bank discloses its
policy for writing off uncollectable loans and advances.
GENERAL BANKING RISKS
50. Any amounts set aside for general banking risks, including future losses and other unforeseeable risks or
contingencies should be separately disclosed as appropriations of retained earnings. Any credits resulting
from the reduction of such amounts result in an increase in retained earnings and should not be included
in the determination of net profit or loss for the period.
51. Local circumstances or legislation may require or allow a bank to set aside amounts for general banking risks,
including future losses or other unforeseeable risks, in addition to the charges for losses on loans and advances
determined in accordance with paragraph 45. A bank may also be required or allowed to set aside amounts
for contingencies. Such amounts for general banking risks and contingencies do not qualify for recognition
as provisions under IAS 37, provisions, contingent liabilities and contingent assets. Therefore, a bank
recognises such amounts as appropriations of retained earnings. This is necessary to avoid the overstatement
of liabilities, understatement of assets, undisclosed accruals and provisions and the opportunity to distort net
income and equity.
52. The income statement cannot present relevant and reliable information about the performance of a bank if
net profit or loss for the period includes the effects of undisclosed amounts set aside for general banking risks
or additional contingencies, or undisclosed credits resulting from the reversal of such amounts. Similarly, the
balance sheet cannot provide relevant and reliable information about the financial position of a bank if the
balance sheet includes overstated liabilities, understated assets or undisclosed accruals and provisions.
ASSETS PLEDGED AS SECURITY
53. A bank should disclose the aggregate amount of secured liabilities and the nature and carrying amount of
the assets pledged as security.
54. In some countries, banks are required, either by law or national custom, to pledge assets as security to support certain deposits and other liabilities. The amounts involved are often substantial and so may have a significant impact on the assessment of the financial position of a bank.
TRUST ACTIVITIES
55. Banks commonly act as trustees and in other fiduciary capacities that result in the holding or placing of assets
on behalf of individuals, trusts, retirement benefit plans and other institutions. Provided the trustee or similar
relationship is legally supported, these assets are not assets of the bank and, therefore, are not included in its
balance sheet. If the bank is engaged in significant trust activities, disclosure of that fact and an indication of
the extent of those activities is made in its financial statements because of the potential liability if it fails in its
fiduciary duties. For this purpose, trust activities do not encompass safe custody functions.
RELATED PARTY TRANSACTIONS
56. IAS 24, related party disclosures, deals generally with the disclosures of related party relationships and
transactions between a reporting enterprise and its related parties. In some countries, the law or regulatory
authorities prevent or restrict banks entering into transactions with related parties whereas in others such
transactions are permitted. IAS 24, is of particular relevance in the presentation of the financial statements of
a bank in a country that permits such transactions.
57. Certain transactions between related parties may be effected on different terms from those with unrelated parties. For example, a bank may advance a larger sum or charge lower interest rates to a related party than it would in otherwise identical circumstances to an unrelated party; advances or deposits may be moved between related parties more quickly and with less formality than is possible when unrelated parties are involved. Even when related party transactions arise in the ordinary course of a bank's business, information about such transactions is relevant to the needs of users and its disclosure is required by IAS 24.
58. When a bank has entered into transactions with related parties, it is appropriate to disclose the nature of the related party relationship, the types of transactions, and the elements of transactions necessary for an understanding of the financial statements of the bank. The elements that would normally be disclosed to conform with IAS 24 include a bank's lending policy to related parties and, in respect of related party transactions, the amount included in or the proportion of:
(a) each of loans and advances, deposits and acceptances and promissory notes; disclosures may include the aggregate amounts outstanding at the beginning and end of the period, as well as advances, deposits, repayments and other changes during the period;
(b) each of the principal types of income, interest expense and commissions paid;
(c) the amount of the expense recognised in the period for losses on loans and advances and the amount
of the provision at the balance sheet date; and
(d) irrevocable commitments and contingencies and commitments arising from off balance sheet items.
EFFECTIVE DATE
59. This International Accounting Standard becomes operative for the financial statements of banks covering periods beginning on or after 1 January 1991.
