Accounting and Financial Analysis for Bankers
Accounting and Financial Analysis for Bankers tests how transactions are recorded and how statements are read: double entry, accrual, IFRS 9 impairment, income recognition, SBP reporting formats and ratios such as CAR and liquidity.
Core rules
- Every transaction has equal debits and credits; the trial balance proves arithmetic equality, not correctness.
- Accrual accounting recognises income when earned and expenses when incurred; interest on classified loans is usually moved to suspense rather than credited to income.
- Under IFRS 9, financial assets are classified by business model and cash-flow characteristics; impairment uses expected credit losses (ECL) in three stages: Stage 1 (12-month ECL), Stage 2 (lifetime ECL after significant increase in credit risk), and Stage 3 (credit-impaired).
- SBP reporting requires prescribed formats; capital adequacy follows Basel III with CET1, Tier 1 and total capital ratios.
- Analysis uses ratios: ROA, ROE, NIM, cost-to-income, NPL ratio, coverage ratio, liquidity and leverage.
Worked example
A loan of PKR 1,000,000 is 100 days overdue and classified as substandard. Instead of recognising accrued interest as income, the bank suspends it. A specific provision is calculated under SBP classification rules; if the required provision is PKR 250,000, the entry is debit impairment expense and credit provision for loan losses. The balance sheet shows the loan net of provision, and the income statement absorbs the charge. The NPL ratio rises because the loan is now non-performing.
Traps
- Crediting interest to income on a non-performing loan.
- Netting provisions against the loan instead of showing a provision.
- Treating a revaluation reserve as free capital for dividends.
- Confusing accounting profit with regulatory capital.