Numerical Examples

Pages:230-255
SUMMARY

Introduction. Part 1. Base Data Set. Background. The Basic Data Set of Financial Accounts. Computation of a Base Data Set of FSIs. Part 2. Accounting Rules. Treatment of Gains and Losses on Financial Instruments in the Income and Expense Statement. Example 1. Example 2. Example 3. Example 4. Treatment of Interest on Nonperforming Loans. Example 1: Loan performs through to maturity as envisaged by ... (see full summary)

 
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Introduction

1. This appendix provides a series of numerical examples to illustrate key compilation and methodological concepts described in the Guide and to provide guidance on how to calculate FSIs. The examples are grouped together in the following three sections.

Part 1: A base data set of examples consisting of income and expense and balance sheet statements, as an illustration of how the agreed FSIs can be calculated.

Part 2: Examples illustrating the accounting rules for (1) gains and losses on financial instruments and (2) interest income on nonperforming loans.

Part 3: Examples illustrating consolidation and associated sector-level issues, including (1) an extended base data set, (2) examples illustrating the sector-wide consolidation of capital, and (3) examples illustrating accounting for goodwill in sector- wide capital.

While the focus of these examples is on the deposit- taking sector, they can also apply to other corporate sectors. This appendix therefore includes in addition the following section:

Part 4: A discussion of calculating FSIs for non- financial corporations.

Part 1 Base Data Set
Background

2. To illustrate the principles involved, a base data set for income and expense, balance sheet, and associated memorandum items is provided below, which is used to calculate FSIs. The data set provided is consistent with the guidance in Chapter 4 and Chapter 6. Nonetheless, some simplifying assumptions are made to put aside the consolidation issues (and the additional data needs) relating to the interbank positions and flows that are described in Chapter 5. These simplifying assumptions are relaxed in the later examples on consolidation in Part 3.

The Basic Data Set of Financial Accounts

3. In this example, the economy has three deposit takers. There are no financial relations among them, nor do they have foreign branches or investments in foreign subsidiaries and associates. 1 End-period financial statements (income and balance sheet accounts) for the three resident deposit takers are presented in Tables A5.1 and A5.2, together with the aggregated income and balance sheet statements.

4. All three deposit takers extend loans to residents of the local economy, but the sectoral allocation differs. Each deposit taker also extends some loans to non- residents; a geographical distribution is reported as an addendum to the balance sheet. Deposits from (non- bank) residents in the local economy are the main form of funding, but deposit takers 2 and 3 have also raised some significant amounts through the issuance of debt securities. Financial derivative instruments are used by all three deposit takers but are limited to interest rate swaps. On the income and expense side, deposit taker 1's performance is weaker than the other deposit takers', reporting zero net income for the period.

Computation of a Base Data Set of FSIs

5. Using the guidance in Chapter 6 and the base data set of financial accounts, Table A5.3 presents the agreed FSIs at the sector level and, for illustrative purposes, for each bank individually. Moreover, where relevant, the value of the numerator and denominator for each FSI is shown. Because of the lack of financial relations among the three resident deposit takers, the sector-level FSIs can be calculated using the aggregated balance sheet and income statement data shown in Tables A5.1 and A5.2, without the need for sector-level consolidation adjustments discussed in Chapter 5. Furthermore, since the deposit takers have no foreign operations, the construction of FSIs on a domestic basis is sufficient for this economy.Page 231

Table A5.1. Income and Expense Statements: Deposit Takers-Aggregated Data*

(In millions of U.S. dollars; unless otherwise stated)

Deposit Taker 1 Deposit Taker 2 Deposit Taker 3 Aggregation
A B C A + B + C
1. Interest income 400 800 300 1,500
(i) Gross interest income 400 800 300 1,500
(ii) Less provisions for accrued interest on nonperforming assets - - - -
2. Interest expense 100 140 100 340
3. Net interest income (= 1 minus 2) 300 660 200 1,160
4. Noninterest income 250 700 400 1,350
(i) Fees and commissions receivable 110 300 200 610
(ii) Gains or losses on financial instruments 50 100 100 250
(iii) Prorated earnings 50 140 20 210
(iv) Other income 40 160 80 280
5. Gross income (= 3 plus 4) 550 1,360 600 2,510
6. Noninterest expenses 500 600 150 1,250
(i) Personnel costs 300 300 100 700
(ii) Other expenses 200 300 50 550
7. Provisions (net) 50 80 10 140
(i) Loan loss provisions 50 80 10 140
(ii) Other financial asset provisions - - - -
8. Net income (before extraordinary items and taxes)
(= 5 minus (6 + 7)) - 680 440 1,120
9. Extraordinary items - - - -
10. Income tax - 272 176 448
11. Net income after tax (= 8 minus (9 + 10)) - 408 264 672
12. Dividends payable - 300 140 440
13. Retained earnings (= 11 minus 12) - 108 124 232

* For a description of the line items, refer to Chapter 4. purposes, for each bank individually. Moreover, where relevant, the value of the numerator and denominator for each FSI is shown. Because of the lack of financial relations among the three resident deposit takers, the sector-level FSIs can be calculated using the aggregated balance sheet and income statement data shown in Tables A5.1 and A5.2, without the need for sector-level consolidation adjustments discussed in Chapter 5. Furthermore, since the deposit takers have no foreign operations, the construction of FSIs on a domestic basis is sufficient for this economy.

Part 2 Accounting Rules
Treatment of Gains and Losses on Financial Instruments in the Income and Expense Statement

6. In the Guide, it is recommended that gains and losses on financial instruments that are valued at market or fair value in the balance sheet be included in the income and expense statement in the period in which they arise. Numerical examples are provided below to illustrate the application of the Guide 's recommendation and highlight the asymmetries that can arise at the sector level in the absence of consistent reporting of such gains and losses.

Example 1

7. This example, set out in Tables A5.4 and A5.5, illustrates the Guide 's approach to recording unrealized gains and losses on traded instruments and highlights the impact over time of adopting a different approach.

8. In this example, deposit takers 1 and 2 purchase a traded financial asset during period 1 at a purchase price of 100. Deposit taker 1 revalues the asset at its market price at the end of each period and records unrealized losses during periods 2 and 3 in the income statement. The asset is sold during period 4, and deposit taker 1 records a gain of 5 during this period. This approach is in line with the Guide 's recommendations. Therefore, as can be seen in Table A5.4, lower retained earnings are recorded in the periods 2 and 3 when unrealized losses arise, and a small gain is recorded in period 4, when the asset is sold.Page 232

Table A5.2. Balance Sheets: Deposit Takers-Aggregated Data*

(In millions of U.S. dollars, unless otherwise stated)

Deposit Taker 1 Deposit Taker 2 Deposit Taker 3 Aggregation
A B C A + B + C
Balance Sheet
14. Total assets (= 15 + 16 = 31) 12,450 18,201 7,450 38,101
15. Nonfinancial assets 500 500 300 1,300
16. Financial assets (= 17 through 22) 11,950 17,701 7,150 36,801
17. Currency and deposits 200 200 100 500
18. Loans (after specific provisions) 9,200 13,900 5,350 28,450
(i) Gross loans 9,250 14,400 5,600 29,250
(i.i) Interbank loans 1,000 900 600 2,500
(i.i.i) Resident - - - -
(i.i.ii) Nonresident 1,000 900 600 2,500
(i.ii) Noninterbank loans 8,250 13,500 5,000 26,750
(i.ii.i) Central bank - - - -
(i.ii.ii) General government 400 5,000 2,000 7,400
(i.ii.iii) Other financial corporations 500 2,000 - 2,500
(i.ii.iv) Nonfinancial corporations 7,000 2,000 - 9,000
(i.ii.v)Other domestic sectors 350 2,500 2,500 5,350
(i.ii.vi) Nonresidents - 2,000 500 2,500
(ii) Specific provisions 50 500 250 800
19. Debt securities 2,250 3,000 1,300 6,550
20. Shares and
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