International Accounting Issues - Essay Example

? International Accounting Table of Contents Foreign Currency Hedging 3 Extent and Nature of Foreign Currency Exposure 3 Major risks of the business 4 Significant risk factor related to Investors 5 Project on which IASB is working 5 Potential impact on HDFC 7 Conclusion 8 Reference 9 Bibliography 10 Appendices 11 Foreign Currency Hedging The primary Indian economic environment under which the company operates in poses challenge of lingering concerns over the global prospects of growth and the financial stability on the basis of the international funding and external demand. Moreover, the local headwinds such as the increasing trend of the interest rates, policy impediments and the inflation has added on to the shaky global environment on the growth of the domestic frontier. Furthermore, muted global sentiments were followed by acute financial instability that led to decrease in the totaling of net capital inflows US $66 billion as against net inflows of US $62 billion a year ago. Thus the exchange rates were under pressure heading to period leading to intense depreciation at the time of a steep fall in the global risk sentiments forcing RBI to interrupt so as to stabilize the unit of domestic currency. As for the foreign currency the Bank has entered into the contract of foreign currency derivative with its customers to lay them off on matched basis in the inter-bank market. The foreign currency hedging is made on the spreads on the customer transactions. The risk management body of the company undertakes hedging and the methods are thus used for assessing the effectiveness of hedging. The hedging taking place may be against a single liability or asset or a portfolio of the same (HDFC Bank Ltd., 2012, pp.110-124). Extent and Nature of Foreign Currency Exposure The Bank has entered into derivatives and foreign exchange deals after setting up counterparty credit limits on the basis of the counterparty’s ability to meet obligations in the event of foreign currency exposure. For such like endeavors the bank does not bear any market risks but only carries the credit risk associated with the counterparty. The Bank generally maintains a provision for the standard assets inclusive of the credit exposures on the basis of current market to market value of interest rate and gold and foreign exchange derivatives contract at stipulated level by the RBI from time to time. For the overseas branches of HDFC the provisions are maintained at a much higher level by the respective regulator of RBI. The effect of translation exposure of the company has resulted in translation reserve of the company amounting to Rs. 251,651,000 on 31st March, 2012. However, the treasury segment usually consists of the net interest earnings from the bank’s investment portfolio, money market lending and borrowing, losses or gains on the investment operation and on account of trading in derivatives contract and foreign exchange. The non-monetary as well as the monetary foreign liabilities and assets of non integral foreign operations. These are then translated based on the rates of closing exchange notified by FEDAI related to the Balance Sheet date thereby resulting in profit or loss of the company that arises out of exchange differences which gets compiled in the Foreign Currency Translation Account till the disposal of the net investment in the non integral foreign operations (Raynor, 1999, p.156). Major risks of the business Since the intensification of the global financial crisis of 2008, risk related to the domestic growth of the company was a hindrance faced from the external environment of the company. The Bank also faces risk related to the Technology Risk Management of the company generally resulting in the cyber fraud. The other critical risks faced by the bank are the operational risk, credit risk and the market risk. Credit risk aroused from the non-payment of the loaned amount of the company whereas the market risk associated with the interest rate risk and the liquidity risk of the company. These risks cause a hindrance to the regular working of the company. The company has come up with the solution of capital adequacy. Through the maintenance of adequate capital in the company it will be in a position to manage and assess all the risks associated with the company and put forth a robust risk management framework for the company. To fight back the dilemma of credit risk the company has come up with credit models for the management of the credit transactions and the credit process product programs. This cost effective approach helped the company in reducing the credit risk of the company thereby yielding returns for the company (Goyal & Joshi, 2012, pp.18-19). Significant risk factor related to Investors Credit risk is one of the primary risks that are faced by the banking sector. Individual exposures based on granularity gives rise to retail credit risk, which gets intricately monitored on the portfolio; across customer segments and various products. This helps in tracking the creditability of the company thus making it easier for the investors and shareholders of the company to take their decisions carefully. The risk arising out of the absence of the secondary market gives rise to the liquidity risk of the company. The market risk of the company is also related to the interest rate fluctuations in the market. The third most important risk in the business is the operational risk which arises from the internal inadequacy of the policies and norms thus made by the company. This has prompted the company to take effective measures towards implementing of processes that will enhance the process of reporting of operational losses and issues related to operational risk, wherein the affected areas are reviewed quickly and the gap is addressed suitably. These factors are crucial for the investors or the shareholders of the company before formulating their investment portfolio of the company (HDFC Bank Ltd., 2012, pp. 2-10). Project on which IASB is working IASB has very recently updated project on revenue recognition. It had replaced the very general revenue recognition requirements as it was putting the preparers to rely on the US GAAP for specific guidance. In 2011 the boards decided that re-exposure was required due to the special nature of the revenue. Substantively redeliberations on the same are expected to be completed in 2012 with the final standard being issued in 2013. This would help the company to have a finer dimension about the revenue over the long-run. Secondly, lease obligations were being considered the significant source of the off balance sheet financing. By undertaking this project IASB wanted to improve the financial reporting by lessees and lessors. In July, 2011 the boards came to the decision that although all the deliberations were not completed yet sufficient information were there to strike at the conclusion. The benefit that can be withdrawn from this is that the company will have a better and separate system of accounting for the leases of the company. In insurance contracts; where the projects were further developed by IASB in close coordination with FASB to provide a better accounting system. Both the boards came to the decision of measuring the cost related to the insurance contracts on the basis of different modeling which included the identification of the changes in estimate. This also covered the risk margin of the measurement of the liability and the treatment related to the acquisition costs. Hence, the company will get a full estimate of the cost associated with the insurance contracts thus helping the management of the company to incur continuous earnings. Lastly, IASB has undertaken the project related to the investment entities. The IASB graded a class of entities as investment entities wherein they would not consolidate in entities that are controlled by them. Instead the fair value measurement would be carried out by them projecting the respective profit and loss of the company. This would not only help the company have knowledge of the true value of the company but also help its investors protecting them from the market risks (Clark, 2012, pp.6-10). Potential impact on HDFC Revenue recognition is an important element with respect to HDFC Bank. Here the interest income of the company is recognized on the basis of accrual system from the Income Statement of the company, except for the non-performing assets of the company that are recognized on being realized as per the RBI rule. The interest income on the investment of loans is recognized at their effective rates. Dividend on preference shares, mutual funds and equity shares are recognized as income when the right to receive the dividend is established. Thus all the income of the company can be recognized on fulfilling certain norms led down by the governing body in which the company operates in. However, through the proper implementation of the rules it will become easier for the company’s overseas branch to operate smoothly. Thus the investors of the company will have clarity regarding the revenue generated by the company which will help boost their confidence as an investor of the company. Lease obligation is another accounting dilemma for all companies as the rules related to the accounting of the same is not clearly defined. The project undertaken by IASB will help in generating an effective financial report with respect to the lease accounting of the company. Usually during lease accounting of the company the cost of the company are escalated considering assets taken under the operating lease that are recognized in the Income Statement of the company over the lease term. Thus a stability with the lease accounting of the company will be executed which in turn will benefit the stakeholders of the company in the long-run. The financial impact that occurred after the implementation of IFRS 9, led to improved financial instruments accounting. Credit risk related to the liability of the company were given special importance, measurement and clarification of the assets of the company was enhanced and most importantly the fair value accounting of the items of the company led to the proper estimation of the company over the period of time (International Financial Reporting Standard, 2009, pp.5-8). Conclusion On the basis of the study conducted on the internal accounting of HDFC Bank, it can be said that a few strength and weaknesses of the company can be specified. The derivative deals of the bank with its counterparties because it has sound knowledge of products related to the derivative market and the risks associated with it. The bank has a strong market leadership in the field of cash settlement for the majority of its stock exchanges in the country. However the substandard assets of the company are quite a hindrance for its growth plan as these classes of assets have credit weaknesses which jeopardize the bank into earning random losses for the company. The other weakness of the company is its present financial condition which is not appropriate to deal with the economic turmoil of the country at large (Hirsch, 2000, p.503). Reference Clark P., 2012. Prepared for joint Capital Markets Advisory Committee and Global Preparers Forum Meeting. [Pdf]. Available at: . [Accessed on: 13 Sept. 2012]. Goyal K.A. & Joshi V., 2012. Indian Banking Industry: Challenges and Opportunities. [Pdf]. Available at: . [Accessed on: 13 Sept. 2012]. HDFC Bank Limited. Annual Report. [Pdf]. Available at: . [Accessed on: 13 Sept. 2012]. HDFC Bank Ltd., 2012. Securities Annual Report. [Pdf]. Available at: . [Accessed on: 13 Sept. 2012]. Hirsch M. L., 2000. Advanced Management Accounting. United States: Cengage Learning. International Financial Reporting Standard, 2009. IFRS 9 Financial Instruments. [Pdf]. Available at: . [Accessed on: 13 Sept. 2012]. Raynor W. J., 1999. The International Dictionary of Artificial Intelligence. United States: Global Professional Publishing. Bibliography Datt R. & Sundharam K.P.M., 2009. Indian Economy. New Delhi: S. Chand Group. HDFC Bank Limited, 2012. About Us. [Online]. Available at: . [Accessed on: 13 Sept. 2012]. HDFC Bank Ltd. Businesses. [Online]. Available at: . [Accessed on: 13 Sept. 2012]. Appendices Appendix 1.1: Income Summary Company: HDFC Bank Ltd. Currency: Rupees Period: 2011-2012 thousands (‘000) Income Summary   (Rupees in '000)   As at 31st March,2012 As at 31st March,2011 Total Income 325,300,466 242,633,649 Less: Cost of goods sold (61,742,416) (45,327,948) Gross Profit 263,558,050 197,305,701 Less: Expenses 273,629,559 203,369,640 Net Profit / (loss) 113,413,323 84,591,957   Stock exchange price/share: at near balance sheet date: 2526 : a current date: 602.15 Note: All expenses adjusted Appendix 1.2: Balance sheet Company: HDFC Bank Ltd. Currency: Rupees Period: 2011-2012 thousands (‘000)   Balance Sheet (Rupees in '000)     As at 31st March,2012 As at 31st March,2011 Assets       Non-Current         Property, plant and equipment N/A N/A   Investment 974,829,094 709,293,656   Fixed assets 23,471,940 21,706,480   Investment accounted for using equity method N/A N/A   Biological assets N/A N/A   Financial assets 149,910,945 251,008,158         Current         Financial assets held for sale N/A N/A   Inventories N/A N/A   Advances 1,954,200,292 1,599,826,654   Cash and cash equivalents 59,466,318 45,680,191   Other assets (note1) 217,216,401 146,010,773 Total assets   3,379,094,990 2,773,525,912 Less: total liabilities   3,079,848,255 2,519,762,364 Equity   299,246,735 253,763,548   Equity shares issued: 2346688270 (31st March,2011: 465225684 of Rs.10 each) Equity shares of Rs. 2 each Note 1: Other assets are more than 2% of the total assets because it comprises of the deferred tax amount of Rs. 144,889 lakhs. Appendix 1.3: Financial Notes Assets Non-Current: Property, plant and equipment: Being a part of the fixed assets of the company is valued at the depreciated price of the product; thus adding to the cost of the company. Investment: Investments is inclusive of both foreign exchange transactions and derivative products that are dealt within the purview of the country. Fixed assets: Fixed assets are stated at cost less the depreciated value of the company; wherein cost is inclusive of all the company related expenditures. Financial assets: These are the liquid assets of the company those related to the derivatives earnings and loan earnings of the company. Current: Advances: Advances are classified into performing and non- performing based of the formulation of the guideline of RBI. Interest on the non-performing advances is generally transferred to the suspense account and not recognized in the Income Statement until received. Cash and cash equivalents: These generally include balances with the RBI, cash in hand and other bank and money at call under short notice. Other assets: The unrealized assets of the company along with the derivatives contract falls under the other assets category of the company. Total Liabilities: Total liabilities of the company include all the obligations of the company that are differentiated into long-term and short-term. Long-term liability of the company can be dealt with in a stipulated time of 5years or more whereas short term liabilities of the company needs to be met immediately within a year or so. Equity: The capital of the company borrowed from the shareholders of the company is treated as the equity of the company. This bears the liability of payment of dividend to its shareholder’s and hence is treated as a liability. Read More