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Disclosure of Contingent Liabilities and Assets in ANZ Bank's Financial Statements

Question:

Discuss About The Financial Statements Monitoring Mechanisms?

As ASIC only commenced legal proceedings in the Federal Court on 4 March 2016, at the reporting date of 30 September 2016, these proceedings are in the early stages and no reliable estimate can be made as to the amount of obligation, or whether there will be an obligation.  Therefore, in accordance with 1AASB 137 Paragraph 14, no current provision needs to be made for the possibility of a contingent liability resulting from the litigation by ASIC.

However, AASB 137 Paragraph 16 outlines that whether or not it is likely that a present obligation exists, an entity shall disclose a contingent liability, unless the possibility of an outflow is remote.  It would therefore be more likely that the ANZ should disclose the contingent liability, as there is probably a more than remote possibility that there will be an outflow of resources embodying economic benefits, in the future, as a result of the court proceedings by ASIC.  It would be advisable to disclose now to avoid the chance of non-compliance.

Below is the Note to the Financial Statements which ANZ included in its 2015-2016 Financial Statements in respect to these allegations.

Other Contingent Liabilities and Contingent Assets

  1. ii) Proceedings in relation to Bank Bill Swap Rate (BBSW)

On 4 March 2016, ASIC commenced court proceedings against ANZ. ASIC is seeking declarations and civil penalties for alleged market manipulation, unconscionable conduct, misleading or deceptive conduct, and alleged breaches by ANZ of certain statutory obligations as a financial services licensee. ASIC has subsequently initiated similar proceedings against two other Australian banks. ASIC’s case against ANZ concerns transactions in the Australian interbank BBSW market in the period from March 2010 to May 2012. ANZ is defending the proceedings. The potential civil penalty or other financial impact is uncertain.

ANZ has disclosed the contingent liability in accordance with AASB 137.  At the very least, ANZ was required to provide a brief description of the nature of the contingent liability, in accordance with AASB 137 Paragraph 86, which is what they have done.  They have also informed interested parties that the financial impact is uncertain and have therefore not provided an estimate of the financial effect as required in Paragraph 86, ‘where practicable’. A Reference is also made to the BBSW proceedings in ‘Principal Risks and Uncertainties Paragraph 28’, where the contingent liabilities as at 30 September 2016 are listed.

In these cases, there were clearly the present obligations resulting from past events, being that it was clear that ANZ had not sought to determine the actual credit limit required by the customers and had given them no options to elect a different overdraft amount, as required by the National Credit Act, which is administered by ASIC.  Therefore, there would be probable outflows of resources embodying economic benefits, as a result of ANZs actions.  Along with this, a reliable estimate could be made of the amount of the obligation due the fact that ASIC has a scale of fine amounts available. AASB 137 Paragraph 14 requires that a Provision is made when all of these requirements are met.  The estimated fines should be recorded as a Contingent Liabilities at the time ANZ was notified of the proceedings.

ANZ Bank's Overdraft and Cash Management Policy

As the fines were due for payment 16 August 2016, the Contingent Liability would no longer appear in the Financial Statements at the end of the period because it would have already been paid.  However, shareholders who had followed media releases would expect to find some kind of detail about the proceedings and payment in the Notes to the Financial Statements, as these kinds of events affect the decisions of investors and therefore, it has impact on returns on investment. The fact that the fines are not an admission of guilt, does not take away from the requirements of AASB and the fact that there was an outflow of resources.

All that can be found is the following, insignificant references, as part of the Chairman’s Report and Notes to Financial Statements 2016:

‘There is no doubt that mistakes have been made within the banking sector. At ANZ this has resulted in regulatory investigations, concerns over the conduct of staff and legal action involving former customers’ (Chairman’s Report ANZ 2016 Annual Report).

Moreover, in the Notes to Financial Statements 40: Other Contingent Liabilities and Contingent Assets (v) Other Regulatory Reviews - ‘The nature of these investigations and reviews can be wide ranging and, for example, currently include a range of matters including responsible lending practices, wealth advice and product suitability, conduct in financial markets and capital market transactions’.


In the words of Gordon and During (2016), bank overdraft is a type of financing where the bank honours cheques in case of zero balance in the customer or business accounts and as a result, it depicts negative balance in the bank account. Moreover, a special type of bank overdraft is inherent, in which the cashbook balance is negative, while the bankbook balance is positive. However, as the presentation of those cheques is not made, the bank balance is not negative and there is absence of any actual bank overdraft (Council 2014).

According to “Paragraph 71 of AASB 101”, the other current liabilities are not settled as portion of the normal operating cycle; however, they are due for settlement within a year after the reporting period or held mainly for lending. These include bank overdrafts, dividends payable and other non-trade payables.

At times, ANZ Bank possesses the right in offsetting the balance of overdraft with another business bank account; the overdraft could be netted off against the other bank accounts that are maintained within the same bank. The net bank balance could be depicted in the form of balance of cash at bank. In case, ANZ does not possess the right to offset, the overdraft could be reported in the form of liability and in case; the overdraft is material, reporting needs to be made distinct from other liabilities. In addition, since ANZ Bank has to comply with AASB and IFRS, such overdraft needs to be treated in the form of cash and cash equivalents. However, the movement associated with the bank overdraft need not be reported in the statement of cash flows under any particular segment.

Provision for Bad Debts in ANZ Bank's Financial Statements

According to “Paragraph 4.9 of AASB 9”, an organisation is needed to reclassify its financial assets, in case; the goal of the business model related to those assets changes in the organisational context. However, the frequency of such changes is very limited. The senior management of the organisation need to ascertain those changes due to internal or external reporting and relevancy needs to be present with the organisational operations while demonstrating to the external parties (Aasb.gov.au 2017). Moreover, “Paragraph 5.9 (a) of AASB 9” states that an entity has a portfolio of commercial loans that it is intending to sell within shorter time span. The entity acquires an organisation managing commercial loans having the business model holding the loans for gathering the contractual cash flows. Thus, the commercial loan portfolio is not for sale anymore and the management of portfolio is now combined with the acquired commercial loans. All these are held for obtaining the contractual cash flows. 

ANZ Bank could depict all business and commercial loans in the form of borrowings in the liability side of the balance sheet statement. The reasons for providing and obtaining the business and commercial loans need to be disclosed in its annual report. Some of these reasons might include investment in real estate, supporting the ongoing operating losses and long-term software development (Minnis and Sutherland 2017). As a result, appropriate information would be available to all the stakeholders of ANZ Bank and the compliance with AASB 9 would be achieved fully.

The two major factors that have impact on the value of financial assets in ANZ Bank and having relevancy to the banking sector include the following:

An effective cash management policy assures that a bank has cash in hand to finance the working capital needs whether revenues are stable or fluctuating (Radebaugh 2014). Due to this, the practices of cash management are the primary factors influencing the financial assets in ANZ Bank. The aspects of cash management policy include formation of cash reserves and collections of accounts receivable. The cash reserves raise the cash value in bank account, which assures greater liquidity and ANZ Bank could clear its dues in case of cash decline due to falling revenues. On the other hand, the procedures related to collections of accounts receivable minimise the time needed to collect the owed money to the bank. Thus, it could be depicted as decline in accounts receivable and rise in cash on hand in the balance sheet statement.

As commented by Frias Aceituno, Rodríguez Ariza and Garcia Sánchez (2014), inappropriate controls raise the risk of staff fraud and theft that might reduce the cash and inventory values in the balance sheet statement of an organisation. Thus, ANZ Bank needs to incorporate cash controls like duty separation, restricted access to financial data, utilising receipts that are pre-numbered along with assuring that such receipts stay in order. Along with this, the bank needs to ensure inventory controls like scheduled and random inventory counts.

According to “Paragraph 7 of AASB 137”, provisions are defined as liabilities having uncertain amount or timing. In few nations, the provisions are utilised in the context of various items like impairment of assets, depreciation and doubtful debts. These are some adjustments to the carrying amounts of the assets. In order to write off bad debts from the annual report of ANZ Bank, if the accounts receivable of a business account is identified as uncollectible, it needs to be written off by removing the account from the section of accounts receivable. This method is considered as the allowance method and it complies with AASB 137 in an effective fashion (Crawford, Lont and Scott 2014).

In this case, the entry needed to write off the bad debt account has impact on the balance sheet accounts only. The allowance for doubtful accounts needs to be debited, while ANZ Bank is required to credit the accounts receivable (Ruch and Taylor 2015). Thus, the bank need not have to report any loss or expense in its income statement. This is because such write-off has been covered under the previous adjusting entries for the projected expense of bad debts. Moreover, after ANZ Bank has written off the bad debt, it is possible that the bank has been paid part or the entire written off account balances. In that case, the bank could reinstate the account through reversal of the write-off entry and processing of the written off amount.


At the time of loan issuance, a liability is created for the borrower along with an asset gain. The amount of the deposit increases with the supply of money (Everett 2015). At the time the borrower writes a cheque in contrast to the deposit. ANZ Bank needs to transfer the amount of reserve to the bank of the seller for clearing the cheque. The loan contract is still inherent with the borrower, but the liability of deposit has vanished. The bank of the seller has obtained the reserves along with an identical deposit liability. However, if the borrower defaults on the contract of loan, ANZ Bank could not obtain any amount of the principal lent. It then needs to write-off the overall loan amount in the form of an asset. It has resulted in loss in identical amount of its capital, which would minimise its capital/asset ratio. Since the liability of deposit has been transferred to another bank, the default could change the supply of money.

Based on the amount of capital lost, the loan portfolio might have to be shrinking on the part of ANZ Bank or it needs to sell new bank shares to stay in conformance to the rules of capital adequacy. In addition, ANZ Bank might need to acquire excessive reserves to meet the requirement of reserve ratio. However, as long as the solvency of the bank is maintained, it could normally borrow the needed reserves in the federal funds market or from the federal discount window.

References:

Aasb.gov.au. (2017). [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB9_12-09.pdf [Accessed 9 Oct. 2017].

Aasb.gov.au. (2017). [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf [Accessed 9 Oct. 2017].

Asic.gov.au. (2017). ASIC - Australian Securities and Investments Commission. [online] Available at: https://www.asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-063mr-anz-pays-212-500-penalty-for-breaching-responsible-lending-laws-when-offeringoverdrafts/ [Accessed 9 Oct. 2017].

Council, K.I., 2014. Annual Report 2015-2016.

Crawford, L., Lont, D. and Scott, T., 2014. The effect of more rules?based guidance on expense disclosure under International Financial Reporting Standards. Accounting & Finance, 54(4), pp.1093-1124.

Everett, C.R., 2015. Group membership, relationship banking and loan default risk: the case of online social lending.

Frias Aceituno, J.V., Rodríguez Ariza, L. and Garcia Sánchez, I.M., 2014. Explanatory factors of integrated sustainability and financial reporting. Business strategy and the environment, 23(1), pp.56-72.

Gordon, H.R. and During, C.Y., 2016. Quarterly Report.

Hillman, N.W., 2014. College on credit: A multilevel analysis of student loan default. The Review of Higher Education, 37(2), pp.169-195.

Minnis, M. and Sutherland, A., 2017. Financial statements as monitoring mechanisms: Evidence from small commercial loans. Journal of Accounting Research, 55(1), pp.197-233.

Radebaugh, L.H., 2014. Environmental factors influencing the development of accounting objectives, standards and practices in Peru. The international Journal of Accounting Education and Research. Urbana, 11(1), pp.39-56.

Ruch, G.W. and Taylor, G., 2015. Accounting conservatism: A review of the literature. Journal of Accounting Literature, 34, pp.17-38.

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