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Welcome to the session on Business Combinations & Consolidated Financial Statements.

Welcome to the session on Business Combinations & Consolidated Financial Statements.

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Welcome to the session on Business Combinations & Consolidated Financial Statements.

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  1. Welcometo the session on BusinessCombinations & Consolidated Financial Statements. Thanks for joining us. Please be seated…. We will be starting the session shortly.

  2. Business Combinations & Consolidated Financial Statements Your Presenter Today: Altaf Noor Ali Chartered Accountant

  3. 1st & 2nd Session 9-1am=240 min • Nice Meeting You. • Participant’s experience of ‘Consolidation’. • How learning about this subject can benefit you? • My approach to this Session as Presenter. • Accounting Concepts: The Basics • A discussion on Accounting Practices of State Bank of Pakistan • Recording & Reporting of National Accounting Practices of ‘Engro’. Improvements. • Conclusion

  4. What happens to Business Combinations? ‘The pooling of interest method of accounting for business combinations is no more there’. Hence, there is no ‘criteria’ anymore for pooling of interest. There is no more controversy on this topic. The IFRS-3 ‘Business Combinations’ focuses on ‘recording’ of acquisitions. There is no reason for us to discuss POI. Reference to it will be made in 3rd Session.

  5. 3rd Session: 2.30-5 pm=150 min • Recap of earlier Sessions. Recording & Reporting Accounting Practices of US Companies: • ‘Pfizer’, and • ‘ExxonMobil’. • Conclusion.

  6. A journey of thousand miles starts with a single step!

  7. So Nice to Meeting You… Lets know each other well. Tell us: • Your Name • Your position and department • The most interesting aspect of your job. Feel free to express yourself in Urdu or English.

  8. ‘Consolidation’: Use of Term • ‘The stock market is going to consolidate itself around the present index level’. • ‘The consolidated position of banks shows increase in deposits by 10% from previous year’. • ???

  9. Key Question for ParticipantsHow can learning about Consolidated Financial Statements be helpful and relevant for you personally??

  10. Your Presenter’s approach to this session. • Relaxed • Interactive • Practical My goal is to transfer knowledge…. and with your cooperation, I promise to do so to the best of my ability - in an interesting manner.

  11. HELP WANTED! Three teams of TWO VOLUNTEERS to do the RECAP at the beginning of 2nd and 3rd Session

  12. So….Lets begin from what is ‘accounting’? In the beginning there were dinosaurs….

  13. Tell me:What is an ‘accounting equation’?E = mc2E = A - L

  14. Tell me: What is an ‘asset’?

  15. Tell me: What is a ‘liability’?

  16. Tell me: What is ‘equity’?

  17. Tell me: What is ‘income’?

  18. Tell me: What are ‘expenses’?

  19. Tell me: What is ‘profit’?

  20. Tell me: What is ‘loss’?

  21. Tell me: Is ‘profit’ or ‘loss’ a part of ‘assets’?

  22. Tell me: Should an ‘accounting equation’ must always be equal?

  23. Tell me: An ‘accounting equation’ that equals is absolutely correct in terms of maths and contents?

  24. Tell me: ‘Net Asset Value’ means Assets – Liabilities or simply, Equity.True/False

  25. Tell me: ‘Net Asset Value’ = ‘Book Value’. True/False

  26. Tell me: The difference between ‘Net Asset Value’ of an entity at two different time intervals is net profit or loss, [assuming no change in capital].True/False

  27. Basic Financial (or Accounting) Statements • Balance Sheet • Income Statement (or Profit & Loss Account) • Statement of Changes in Equity • Cash Flow Statement • Explanatory Notes.

  28. Tell me: Can a corporate have more than one set of figures for ‘assets’, ‘liabilities’, ‘equity’, ‘income’ and ‘expenses’ for a single time period?

  29. Tell me: Why do corporates need to have ‘subsidiaries’?

  30. Let us go Practical now and study ‘SBP’.

  31. State Bank of Pakistan:A discussion on Consolidation Altaf Noor Ali Chartered Accountant

  32. State Bank of Pakistan:A discussion on ConsolidationFinancial Reporting Structure Consolidated Financial Statements of SBP and its subsidiaries. Financial Statements of SBP Financial Statements of SBP BSC Financial Statements of NIBAF

  33. AUDITORS’ REPORT TO THE SHAREHOLDERS We have examined the annexed consolidated financial statements comprising consolidated balance sheets of the Issue and Banking Departments of the State Bank of Pakistan and its subsidiaries, SBP Banking Services Corporation and National Institute of Banking and Finan ce (Guarantee) Limited as at June 30, 2005 and the related consolidated profit and loss account, consolidated cash flow statement and consolidated statement of changes in equity together with the notes forming part thereof, for the year then ended. We have also expressed separate joint opinions on the financial statements of the State Bank of Pakistan and its subsidiary, SBP Banking Services Corporation. The other subsidiary, National Institute of Banking and Finance (Guarantee) Limited was audited by another firm of chartered accountants, whose report has been furnished to us and our opinion in so far as it relates to the amounts included for such company, is based solely on the report of such other auditors.

  34. State Bank of Pakistan and its Subsidiaries – Issue DepartmentConsolidated Balance Sheet at June 30, 2005 ASSETS Rs.000>>> 2005 2004 Gold reserves held by the Bank 53,870,00447,532,115 Foreign currency reserves 472,513,815500,312,132 Special Drawing Rights of the IMF 11,794,613 13,826,690 Notes and rupee coins: - Indian notes representing assets receivable from the Reserve Bank of India 592,981 543,793 - Rupee coins 2,961,213 2,799,163 3,554,194 3,342,956 Investment in securities=9 162,802,630 45,671,523 Commercial papers 78,500 78,500 Assets held with the Reserve Bank of India 1,251,952 1,139,741 705,865,708 611,903,657 LIABILITIES Bank notes issued= 12 705,865,708 611,903,657

  35. State Bank of Pakistan and its Subsidiaries - Banking DepartmentConsolidated Balance Sheet at June 30, 2005 ASSETS Rs.000>>> 2005 2004 Local currency 145,618 160,830 Foreign currency reserves 139,513,286132,021,383 Earmarked foreign currency balances 11,937,0003,780,277 Special Drawing Rights of the IMF 1,774,629- 153,370,533 135,962,490 Reserve tranche with the IMF 10,315 10,062 Securities purchased under agreement 9,115,545 - Current a/c of the Govt of Balochistan 2,114,045 5,533,119 Investments 199,272,646 124,986,262 Loans, advances & bills of exchange 224,254,125 200,225,826 Balances due from the Govts of India and Bangladesh (former East Pakistan) 4,082,161 3,846,494 Fixed assets 7,132,706 7,476,036 Other assets 7,938,056 12,911,864 Total assets 607,290,132 490,952,153

  36. State Bank of Pakistan and its Subsidiaries - Banking DepartmentConsolidated Balance Sheet at June 30, 2005 LIABILITIES Rs.’000>>> 2005 2004 Bills payable 1,099,683 494,365 Current accounts of the Government* 104,917,734 448,889,002 Securities sold on repurchased term 1,208,613 - Deposits of banks & financial institutions 196,312,269 156,170,805 Other deposits and accounts 86,622,086 83,028,804 Payable to the International Monetary Fund196,653,981 102,405,234 Other liabilities 24,010,325 20,313,153 510,824,691 411,301,363 Deferred liability - staff retirement benefits 9,779,959 9,151,321 Deferred income 414,061 286,195 Total liabilities 521,018,711 420,738,879 Net assets 86,271,421 70,213,274

  37. State Bank of Pakistan and its Subsidiaries - Banking DepartmentConsolidated Balance Sheet at June 30, 2005 Rs.’000 2005 2004 Share capital 100,000 100,000 Capital receipt 1,525,958 1,525,958 Reserves 16,714,474 16,714,474 Unappropriated profit 10,060,000 - 28,400,432 18,340,432 Unrealised appreciation on gold reserves 51,646,593 45,205,621 Surplus on revaluation of fixed assets 6,194,503 6,637,328 ‘Minority interest’29,893 29,893 86,271,421 70,213,274 Contingencies and commitments

  38. Tell me: What is the reason for appearance of ‘Minority Interest’ in the previous slide?

  39. The Reason for Minority Interest ‘Minority Interest’ will appear in a consolidated balance sheet of an entity when there is a subsidiary, controlled by the entity, but not fully owned by it. In case of SBP, it is because of Nibaf. Note 10 of financial statements of SBP shows that it owns 59.4% of nibaf. [page 164] Nibaf share capital = Rs. 73,628,092. [page 208] 59.4% Share of sbp is Rs. 43,735,089? 40.6% Share owned by others = Rs. 59,893,006? Agreed? You will notice this is exactly the figure appearing in the balance sheet. Let us refer to the previous slide.

  40. Q&A: Minority Interest • Suppose that ‘S’ is a subsidiary with a paid up capital of Rs. 50 m, owned fully by ‘H’. What would be the amount of the ‘minority interest’ appearing in the consolidated balance sheet of H at 30 June 2006? • Why is it that a company with fully owned subsidiaries would not have ‘minority interest’? • Suppose that ‘S’ is a subsidiary with a net asset value of Rs. 100 m. Its share capital comprises of 10 m shares out of which ‘H’ owns 6 m shares. What would be the amount of ‘minority interest’ appearing in the consolidated balance sheet of ‘H’ at 30 June 2006? • ‘Minority interest’ is not a user-friendly term; it should renamed as ‘minority shareholders’ interest’. True/False.

  41. Q&A: Minority Interest Refer to the previous slide of minority interest… Why is ‘minority interest’ not disclosed as a part of ‘equity’ whereas it is contribution of other shareholders in the Group? Why ‘minority interest’ is not disclosed as a part of liability whereas it may need to be ‘acquired’ or purchased at a later stage to make a subsidiary fully owned by the Group? What is the nature of ‘minority interest’?

  42. A Note on Share Capital Rs.’000 2005 2004 Note 28>>>> SHARE CAPITAL Authorised share capital 1,000,000 Ordinary shares of Rs 100 each 100,000 100,000 Issued, subscribed and paid-up capital 1,000,000 Fully paid-up ordinary shares of Rs 100 each 100,000 100,000 The entire share capital of the Bank is owned by the Government of Pakistan except for 200 shares held by the Central Bank of India (held by Deputy Custodian Enemy Property, Banking Supervision Department, State Bank of Pakistan) and 500 shares held by the State of Hyderabad.

  43. State Bank of Pakistan and its SubsidiariesConsolidated Profit and Loss Account for the year ended June 30, 2005 Rs.’000s>>> 2005 2004 Discount, interest/mark-up and/or return earned 29,757,649 11,734,111 Interest / mark-up expense (2,284,108) (5,202,091) 27,473,541 6,532,020 Commission 692,958 496,454 Exchange gain / (loss) - net 13,827,713 755,172 Dividend income 1,502,639 1,422,058 Other operating income 327,904 367,824 43,824,755 9,573,528 Direct operating expenses Note printing charges (2,486,249) (1,963,777) Agency commission (1,743,991) (1,554,969) Provisions [loans, investments, other assets] (6,634,409) (566,906) 32,960,106 5,487,876 Establishment costs (5,779,637) (6,073,234) OPERATING LOSS 27,180,469 (585,358) Other income 4,203,976 7,241,967 6,656,609 Other charges (335,209) (548,111) NET PROFIT FOR THE YEAR….. 31,049,236 6,108,498

  44. State Bank of Pakistan and its SubsidiariesConsolidated Statement of Changes in Equity [Extract] for the year ended June 30, 2005 Rs.’000s>>> 2005 2004 Appropriation: Dividend to the Government of Pakistan @ Rs 10 per share (2004: Rs 10 per share) (10,000) (10,000)

  45. Tell me: Is there something wrong in the previous slide? Let us refer to it …

  46. Tell me: How can SBP transfer dividend (and unappropriated balance of profit) of 700 shares to the Government of Pakistan without proper disclosure??

  47. State Bank of Pakistan and its SubsidiariesConsolidated Cash Flow StatementFor the year ended June 30, 2004 Rs.’000s>>> 2005 2004 Profit for the year after non-cash items 41,289,935 15,075,209 (Increase)/decrease in assets Reserve tranche with the IMF (253) (502) Investments (155,428,609) (17,894,456) Discount income received 18,950 - Loans, advances and bills of exchange (28,106,793) (26,057,979) Foreign currency reserves not included in cash and cash equivalents (28,106,793) (1,528,452) Indian notes representing assets receivable from the Reserve Bank of India (49,188) (8,631) Assets held with the Reserve Bank of India (9,129) (33,929) Other assets - net 4,043,773 1,035,362 (196,873,499) (44,488,587)

  48. State Bank of Pakistan and its SubsidiariesConsolidated Cash Flow StatementFor the year ended June 30, 2005 Rs.’000s>>> 2005 2004 Increase/(decrease) in liabilities Notes in circulation 93,962,051 89,012,613 Bills payable 605,318 (177,566) Current accounts of the Government* 59,447,806 (38,362,020) Deposits of banks and financial institutions 40,141,464 14,505,757 Securities sold under repurchase term (68,109,552)- Other deposits and accounts 3,593,282 2,060,651 Payable to the International Monetary Fund (5,751,253) (18,528,150) Other liabilities - net 17,658,252 (240,555) 141,547,368 48,270,730 Net change in assets and liabilities (14,036,196) 18,857,352

  49. State Bank of Pakistan and its SubsidiariesConsolidated Cash Flow StatementFor the year ended June 30, 2005 Rs.’000s>>> 2005 2004 Payment of retirement benefits and employees' compensated absences (479,566) (2,123,594) Receipt of dividend income 1,502,639 1,431,808 Gold purchased - (64,589) Fixed capital expenditure (352,766) (264,026) Proceeds from disposal of fixed assets 976,789 272,923 1,647,096 (747,478) Dividend paid to the Government of Pakistan (10,000) (10,000) Increase in cash and equivalents during the year (12,399,100) 18,099,874 Cash and equivalents at beginning of the year 650,298,878632,199,004 Cash and equivalents at end of the year 637,899,778 650,298,878

  50. Tell me: Lets have another look at the Cash Flow Statement: • What is the reason for change? • How this statement can be made more meaningful?