| The financial statement for the fiscal year is a crucial document for companies to internally check the results achieved and verify the achievement of aims that have been set. Furthermore. it is the main means by which administrators communicate the results achieved by the company to shareholders over the course of the financial year. It is first and foremost a means of communication that provides information on three key aspects of company management:the balance sheet, the profit/loss figures, and the financial situation. In recent years, the way businesses draw up the financial statement for the fiscal year has been subjected to a series of challenges and an intense process of reforms:reforms in accounting, statutory and fiscal reforms, and reforms connected to more general phenomena. All business, including banks, have been forced to deal with the need to adapt to international accounting principles in response to the globalisation of economies, which has triggered wide-reaching accounting system harmonisation processes.Banks are the main category of institutions in the financial system, on both a national and an international level. Like many other businesses, banks also produce their own financial statement for the fiscal year every year, which is the set of documents that every company must draw up periodically to represent its assets and liabilities and its financial and economic situation. Banks or credit companies, are financial intermediaries in that their main activity is collecting sources from surplus economic units (or rather those that have positive savings) to then transfer the available assets thus obtained to deficit economic units (businesses, public bodies, and personal customers) for their investment and consumption activities. Unlike other types of financial intermediaries, banks issue financial liabilities that perform the functions of a currency (bank deposits) and thus have a monetary function.A business’s financial statement for the fiscal year comprises three documents:the balance sheet, the profit and loss statement, and the financial report (or explanatory note). The balance sheet represents the totality of the assets and liabilities; in any financial statement, the relationship that holds is that the total of the assets is equal to the total of the liabilities added to the capital owned. Liabilities refer to the amounts that a company owes to suppliers, financial institutions, and shareholders. All businesses contract debts in order to raise capital and finance their establishment and operations.It is possible to read the balance sheet of a bank thinking that the liabilities represent sources from which funds derive, whereas the assets represent the uses of these funds. From this it follows that banks can obtain funds by taking them as their own capital or as debts to depositors, to underwriters of bonds, to other intermediaries, or to the central bank itself. These funds are utilised in activities such as purchasing stocks and shareholdings and granting loans, but they can also be used to acquire non-financial assets.The bank’s profit and loss statement reports the operating costs and revenues. These include the interest received on investments in securities, especially those matured on loans paid at a level on average higher than that paid on liabilities. The profit and loss statement can be divided into two parts:the operative section (which provides information on costs and revenues that are the direct result of the bank’s regular operations), and the non-operative pert (which provides information on the revenues and expenditures associated with activities that are not strictly connected to the regular banking operations). The financial report is an integral part of the financial statement for the fiscal year; although its informational content derives from the balance sheet and from the profit and loss statement for the period, its provides irreplaceable information that cannot be deduced from these statements. The assessment of the financial dynamic. in fact, passes necessarily from the analysis of the financial statement for the fiscal year. This dynamic can be generated for indexes and flows:the analysis for indexes is based on ratios and margins between the amounts of the assets and liabilities and of the profits and losses. It is a static and "instant" survey, which takes the amounts in a given period into account. The dynamic analysis for flows, on the other hand, is based on the examination of more than one yearly financial statement to reveal the variations for the period. While with the indexes it is possible to obtain a picture of the business management in terms of assets, liabilities, income, and the financial situation, the analysis for flows can also reveal the causes of variations in these values. From a structural perspective, the financial report should reveal the cash flows deriving from operational activities, cash flows deriving from investment activities, and cash flows deriving from financing activities. The first refer to flows generated or absorbed in the context of operational activities, which are not connected with investment operations or of a financial nature. The second concern ordinary business activities, or rather operations that contribute to generating profit or loss in financial years by sustaining costs and generating revenues. For example, these flows can involve proceeds deriving from products or provision of services, payments to employees. etc. The cash flows deriving from investment activities include negative and positive flows from acquisitions and transfers of tangible, intangible, and financial assets. The cash flows deriving from financing activities and operations with partners involve positive and negative flows from the acquisition or repayment of financial resources in the form of debt or risk capital. These include dividends paid to partners.In order to carry out their own activities, banks need to have capital, which can be their own or debt capital. This capital is acquired through capital markets. The bank’s own capital derives from issuing shares and bonds, whereas the debt capital derives from deposits made by personal customers, other businesses, or public bodies. In recent decades, in order to meet the requirements of their customers, banks have started to provide a wider range of services:credit services (acting as intermediaries between those who offer capital and those who require it); monetary services (the possibility of using debt securities, cheques, and credit cards as currency); transmission of monetary policy impulses (these affect the process of producing and distributing the national income by granting credit):investments services, such as managing financial instruments on behalf of third parties; additional services such as paying utilities. collection of bills, etc., and services to support the development of businesses (financial assistance and services designed to help businesses).Banks are very complex to run, and as well as pursuing of profit, they have to direct their efforts at achieving liquidity and solvency targets. They need to operate in a condition of liquidity, maintain a state of solvency. and generate profit. By achieving these objectives, banks reach a state of equilibrium from a financial perspective (liquidity), from the perspective of assets and liabilities (solvency), and from an economic perspective (profitability). Banks therefore use a technique for financial statements that seems different to that of other non-bank businesses. This is due to the fact that the sales of banks consist of interest revenue and commissions, whereas the purchases consist of interest payments. Furthermore, the assets include banking investments and the liabilities include deposits (in the broad sense). One can assert that the debts of banks are currency.A commonly used term in the world of banking is "financial instruments". which should not be confused with the broader category of "financial products". In fact, these are contractual operations that constitute the subject of the activities of investment businesses and banks, whereas financial instruments have a precise legal meaning. They are contracts aimed at the transfer of money in space (bank cheques, credit cards) and in time (bank deposits. shares, loans, bonds, etc.). or at the transfer of risk (insurance, swaps, etc.). This term therefore refers to transferable securities, which are securities that can be negotiated in the capital market, such as shares in companies, bonds, and other debt securities.There are. therefore, different types of financial instruments available on the market that often have very different properties and risk profiles. For example, in the case of a bond, whoever purchases it becomes a financial backer of the party who issues the security (which could be a bank, the state, or a business) for a set period of time. In the event that someone decides to sells the security before it matures, they may make a profit or a loss on the capital invested, depending on whether the price of the bond has increased or decreased compared to the original price. The risk of a lack of repayment or lack or payment of interest only arises in the event that the issuing company becomes insolvent. Pooled investment funds, on the other hand. are collective assets that combine the savings of a number of investors with the aim of investing these resources in financial products. The funds are entrusted to asset management companies who have a different legal nature and different capital to those of the funds. The characteristic of funds is the diversification of investment they guarantee; even the risks are lower compared to shares and bonds. The aim of the asset manager is to increase the value of the assets managed so that each participant can earn an increase proportional to their own contributions.In the case of derivatives, another type of financial instrument, the value "derives" from or rather, depends on, the value of another good or financial asset called "underlying", which could be financial (such as shares, interest and exchange rates, etc.) or material (such as gold or oil). Anyone who buys a derivative commits themselves to buying the asset underlying the contract when the derivative matures. Analogously, anyone who sells a derivate instrument commits themselves to handing over the underlying asset when the derivative matures (the main types of derivative are future contracts, forward contracts, swap contracts, and option contracts). Particularly interesting are structured bonds that incorporate derivative components, the yield of which is linked to the yield of certain parameters (indexes or combinations of stock indexes, exchange rate, etc.) on the basis of a mechanism set out in the issuance regulation. These are instruments that are characterised by significant oscillations in value and by greater difficulty in predicting their yield. Being financial intermediaries who deal with financial instruments, including high risk ones, banks expose themselves to liquidity risks, a term that indicates the bank’s inability to meet payment obligations economically and promptly within the contractual deadlines. In recent years, in particular since2007, banks have been going through a severe financial crisis; the system crisis was partially caused by the lack of transparency in the financial statements of some American banks. The harmonisation of international accounting principles is an attempt to remedy this situation.The adoption of international accounting principles (IAS/IFRS) has had interesting consequences for the valuation of financial instruments. Before they were introduced, in fact, there was no univocal definition of a financial instrument, although many systems had already drawn up a list of financial instruments. In the case of Italy, reference should be made to article1of Legislative Decree no.50/1998. The definition is currently found in IAS32paragraph11. which defines a financial instrument as a contract that creates a financial asset for one party and a financial liability or equity instrument for another party. IAS39. on the other hand, distinguishes financial instruments in relation to the functional purpose in the management of the business (it distinguishes between financial assets and liabilities). At the time of the initial recognition, the financial instruments are entered in the balance sheet at the fair value. They can therefore be valuated differently, at the amortised cost or at the fair value. IAS27,28and31stipulate specific rules regarding shareholding in subsidiaries, affiliated companies, and jointly controlled companies. All financial instruments must be periodically subjected to the impairment test procedure (IAS39paragraphs58-70). If the test reveals objective indexes that indicate a loss in value of the financial instrument, the book value must be reduced and the amount of the loss reported in the profit and loss statement. In our organisation, the criteria for identifying participating and assimilated securities set out by the Income Tax Consolidation Act are different to those set out by IAS32, which has forced legislators to dictate a coordination rule. Realising that the new accounting principles would cause severe fluctuations in balance sheet results, the banking sector also took an interest in this development, given that accounting results are linked to both the banks’regulatory capital and the rating of entrusted businesses. As things currently stand, there are still different accounting systems, and harmonisation, although underway, certainly cannot be considered to be complete. In fact, if we had to draw up the financial statements for the fiscal year for an American bank and an Italian bank, we would realise that the documentation required and the instruments used are to a certain extent similar, but the regulations are very different. And it is precisely this need to iron out the discrepancies that is currently the subject of fierce debate. The need to harmonise the accounting rules of the member countries of the European Union has become increasingly urgent over the course of the past few years, even though the adoption of international accounting principles has created (and is still creating) quite a few problems. These problems are especially connected to the need for member states to adapt the principles to their internal regulations. The concept of fair value in particular seems key nowadays in the context of the application of accounting principles. This is because the estimation of the fair value efficiently meets all the expectations of the globalised market. In fact, it allows administrators of companies themselves to seize the financial opportunities offered by the market so as to fully take advantage of price trends, exchange rates, and interest rates.One instrument that has proved to be of particular interest in the context of accounting principles is the impairment test. This is an instrument used by businesses, including banks, the purpose of which is to verify that the assets entered in a balance sheet have a real value that is not greater than the market value, or rather the recoverable value if the asset were to be disposed of by the bank. The rules for applying the impairment test are set out in IAS36. Impairment of Assets, which establishes general principles for verifying the book value of assets entered in the balance sheet, and indicates what information should be provided in the explanatory notes to the balance sheet. The impairment test is therefore an accounting mechanism on the basis of which assets must be entered in the balance sheet at a value no greater than the recoverable amount. The scope of application of IAS36is limited, in that it cannot be used for assets to which other IAS/IFRS apply that already contain specific provisions for recognising and valuating them. The field of application of the standard is limited to tangible and intangible fixed assets and participatory investments in subsidiaries, associated companies, and joint ventures valuated according to the cost criterion (and thus excluded from being regulated by IAS39).On the basis of the general rules established by§9of IAS36, if on the balance sheet date there is an indication of a lasting reduction in the value of an asset, the entity must estimate the recoverable value of that asset. From this it follows that determining the recoverable value at the end of each year is not automatic, but is subordinate to the positive outcome of the phase of screening for the existence of conditions of impairment in value. In other words, faced with an impairment indicator, one must first of all evaluate its significance and possible effect on the recoverable amount. At the time in which a loss is determined, it must, from an accounting perspective, be entered in the profit and loss account as a cost, as long as it is not entered at a revaluated value; in this case it is valuated according to IAS16. Once the loss has been recognised, it must be amortised in future financial years.IAS36also stipulates that, in cases where it is not possible to estimate the recoverable value of an individual asset, it is up to the entity to determine the recoverable value of the cash generating unit (CGU) to which the asset belongs. CGUs, therefore, must be determined at the most basic possible level of asset aggregation, where assets are understood as individual items. A particularly delicate aspect is that of identifying CGUs. This is not only because it has practical consequences, but also because of the importance it has for goodwill and corporate assets, such as the real estate used as a head office. In the process of identification, one must not underestimate the fact that CGUs cannot be created by combining any assets together, but must always be an expression of a business unit that the business’s internal management control is capable of monitoring in terms of its operation and the cash flows it generates. Apart from the technical aspects, it is worth remembering that the international accounting principles are drawn up by the International Accounting Standards Board, a body governed by private law. The need for such a body began to be felt at the end of the Second World War with the consequent evolution of the financial markets and intensification of trade. The new political and economic framework that was established made it clear that greater harmonisation of the principles governing arrangement of corporate financial statements was needed. This was necessary in order to be able to compare the financial statements of companies belonging to different countries, as well as to judge the reliability of businesses to which to provide goods, services, or credit. This is the context within which the initiative of the professional accounting institutions of England. America, and Canada should be placed. This initiative was then taken up and spread in1972on the occasion of the world congress of accountants, which was held in Sydney. During the congress, it was proposed to set up a body, the purpose of which would be to harmonise the technical rules for drawing up corporate financial statements. This was how the International Accounting Standards Committee (IASC) came into being, which Italy joined in1978. Since then, the international accounting principles have been constantly monitored and subjected to tests and improvements, always with the aim of making them as homogenous as possible with the US GAAP (Generally Accepted Accounting Principles), the system that governs business accounting in the United States. At least to begin with, it was decided in Italy to leave companies free to adopt or not adopt the accounting principles drawn up by the IASC. Subsequently, however, with the Legislative Decree of the28th February2005. no.38, the government made it mandatory for listed companies, banks, and insurance companies to draw up their consolidated financial statements according to the IFRS rules, and thus to draw up financial statement for the fiscal year according to these principles as of2006. This was, in fact, a compulsory decision, considering the profound differences between drawing up financial statements according to the conventional national rules and the IAS principles. Unlike the conventional method, which valuated balance sheet items according to the historical cost (which resulted in the items, which do not take capital gains into account, having constant values from year to year), the international accounting principles considered the market value, thereby indicating the real performance of the business and the values of the assets.In the United States, the US GAAP are established by the Securities and Exchange Commission, which was set up in the early thirties after the Wall Street Crash. At the time, the government determined that the Commission had to draw up a set of rules that had to be observed when compiling annual financial statements. The purpose of these rules was to ensure that financial statements provided clear and reliable information about the economic and financial conditions of the companies themselves, so that everyone who had a relationship, or was considering entering into one, with a company, could make fully-informed decisions. The DSEC, however, delegated the task to the Certified Public Accountants (CPA), associations of accounting and auditing professionals. The only condition that was imposed was that the principles, known as standards, had to have an authoritative basis, i.e., they had to be issued by a technical body that was reliable in terms of rationality and suitability. Over time, many bodies became involved with drawing up these principles. until, in1973. the Financial Accounting Standards Board established itself over the others. The GAAP are divided into three categories:pervasive principles, broad operating principles, and detailed principles. It is important to remember that these principles have been developed through established practice, without having a clear and predefined logical basis. There is a reason why people talk in terms of "generally" accepted principles. When considering the IAS/IFRS and the US GAAP, it is important to remember one date:April2007. It was at this time that the then president of the United Sates, the President of the European Council, and the President of the European Commission signed an agreement that stipulated that both Europe and the United States would commit themselves to promoting conditions for the recognition of the US GAAP and the European IAS/IFRS, without providing for reconciliations in the two jurisdictions. This was a commitment that had to be fulfilled by2009. The issue, however, is that there are numerous similarities, but also many differences between the two categories of accounting systems. For example, both systems require the indications in financial statements to follow the principles of comprehensibility, relevance, reliability, and comparability. The financial statements are also consistent, except in the case of the statement of net changes. In fact, in this case, according to the IAS/IFRS, the financial statement must consist of a separate document to the other statements. According to the US GAAP, on the other hand, the changes in net assets can be indicated in the notes to the financial statements. Another similarity concerns the balance sheet (regulated in the US GAAP by Regulation S-X issued by the SEC). Like the provisions of the IAS/IFRS principles, the American principle also provides a schema that requires two opposing sections of net assets and liabilities (there is also a general clause that makes it mandatory to add new entries when necessary). For the profit and loss statement, the US GAAP provide a schema based on simple information and the option to modify the schema of the document year by year. The only thing that is mandatory is to maintain consistency between the various documents so that they can be compared more easily (there are two types of profit and loss statement:single step and multiple step).In the face of the increasingly urgent need to harmonise accounting principles, in2010, the need for private and public entities to express national accounting authorities led the Italian Accounting Body (OIC, which as of2001has been replaced by the Italian National Council of Certified Accountants and Bookkeepers) to begin drawing up new accounting principles. The first set of principles was published on the23rd December2011; subsequently, a new series of principles was published on the27th April2012. These were accounting principles aimed at Italian corporations that draw up financial statements on the basis of the provisions of the Italian Civil Code. Coordinating its efforts with the activities of other European standard setters, the OIC provides technical support for applying international accounting principles and European accounting directives in Italy. It also provides assistance to the national legislature in issuing accounting standards and standards for adapting internal financial statement regulations to European directives and international accounting principles.The need felt by the various bodies mentioned to formulate accounting principles that were as homogenous as possible was due to the need to protect the various market players, including investors, clients, financiers, or market analysts. For banks, like all companies that publish consolidated financial statements, it is mandatory to draw up the financial statement for the fiscal year following international accounting principles. In Italy, the power to set forth the new rules for drawing up financial statement of banks was entrusted to the Bank of Italy, which issued official memorandum no.262/06to regulate the new rules for consolidated and individual financial statements. It was article6of Legislative Decree38/2005that granted the Bank of Italy the power to intervene in defining shared regulations for the bodies monitored. The result of this was that banks and financial bodies had to adhere to homogenous criteria for the sector when drawing up financial statements. The entities that have to draw up financial statements are identified on the basis of national legislation and not on the basis of the contents of IAS27(from which the exemption from compiling so-called "subconsolidated statements" is derived).As the situation currently stands, the new IAS/IFRS-compliant financial statement for banks (being IAS-compliant means intervening in the organisational and informational systems, which have to be adapted to collect the information required by the new reference accounting principles) includes the balance sheet, which is composed of a series of entries:net assets (valuation reserves and profit reserves). Furthermore, with the adoption of the international accounting principles, IAS32(which regulates the disclosures to be provided in financial statements) and IAS39(which valuates financial instruments) has also been introduced. It is useful to remember that IAS39identified four categories of financial assets:fair value through profit and loss, relative to the fair value, held to maturity (HTM), loans and receivables (L&R), and available for sale (AVS). The valuation criteria adopted, the fair value or the amortised cost, depends on the type of classification of financial assets.The financial crisis that has affected the global economy for the last few years has forced economic operators and institutional players to ask themselves a series of questions, and cast doubt on the validity of certain accounting principles, including the one stipulated by IAS39. In fact, some even consider this principle to be responsible for contributing to the American financial crisis, due to its marked used of fair value. The IASB was therefore invited to review IAS39; certain ad hoc measures were adopted, and a project was devised to replace IAS39. This project was intended to make financial statements more useful for helping users to make decisions by simplifying the classification and valuation of financial instruments. On the12th November2009, the IASB published IFRS9, which deals with the classification and valuation of financial assets.In the light of what has been said, it is possible to empirically analyse the financial statements for the fiscal year of two listed companies, the bank Monte Paschi Siena Spa and BNY Mellon, with the aim of identifying the differences in financial statement valuation of the two companies. Established in1492, the Monte dei Paschi bank is now the head of a considerably large group that is at the forefront in terms of market shares in various sectors. Monte dei Paschi also operates through its holding companies in various banking and financial sectors; as well as traditional areas, it is also involved in special credit, asset management, bancassurance, and investment banking. On the retail side of the business (personal customers and SMEs). Monte dei Paschi is a reference bank in all areas where it is established. It has been listed on the Mercato telematico Azionario (Telematic Stock Exchange) of the Italian stock market since1999and is part of the FTSE MIB index. In order to carry out the abovementioned empirical analysis, the starting point was the analysis of the structure of the balance sheet and the reclassified profit and loss statement of the Monte dei Paschi Group. The reclassified balance sheet (in millions of euros) was analysed for the period2008-2011, then the reclassified profit and loss statement with management criteria (millions of euros).What emerged was the importance of the income aspect, which serves to evaluate the state of health of a company, summarised in a series of indexes that concisely express a company’s ability to be profitable or lack thereof. The indexes that are most commonly used, and which were therefore examined, are the return on equity (ROE): net income/net capital; return on assets (ROA):net income/total assets, and return on capital:net capital+long-term debt/net income, an index that enables different sectors to be compared. The analysis revealed that, in the last year, the Group has experienced a series of problems in that the business has suffered negative return. It therefore finds itself in a situation in which costs greatly exceeded revenues, and the company was not able to obtain a return on the capital it had invested. The economic values, assets and liabilities, and the main management indicators for the period2008-2011were also examined. The impairment test was then applied. The intangible assets in the year2011were analysed, using the main parameters evaluated. The process of the impairment test is made especially difficult by the slowing down of global growth in this period, an aspect that was less evident in2008(despite the already evident signs of crisis). The impairment test was based on the economic and financial projections of the Group, forecast for the next five years (2012-2016), taking the evidence derived from the new macro-economic scene into account, and sticking to the strategic lines set out by the2011-2015Industrial Plan, which was approved in April2011(and thus to essentially and efficiently unchanged business strategies). The company performed the impairment test not only on the scenarios of the last few years, but in particular on the basis of the projections it had made for the future, performing a close analysis of the four year period2012-2016. The next step was to identify goodwill to the amount of nearly5million euros. The GCUs and the allocation of goodwill to CGUs were also identified. The data obtained revealed that the group had uncovered the need to carry out a depreciation of the goodwill allocated to the Private CGU to the amount of2,752.2million euros. This was due to the critical situation of the macro-economic context and the high level of uncertainty in the market. The analysis revealed the difficulties that the bank is facing in this period. The other company examined was BNY Mellon, a multi-section variable capital investment fund joint-stock company founded in Ireland in2000. The company is made up of35independent sections that all depend on the main holding company. The reference period used for this bank was the two-year period2008-2009, and that of2010-2011. The company’s balance sheet items are valuated in US dollars. To begin with, the combined profit and loss statemen... |
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