ELEMENTOS DE COMPOSICIÓN ESTÉTICOS

3.2 Specific Guidance

4.0 Conclusion 5.0 Summary

6.0 Tutor Marked Assignment 7.0 References/Further Reading 1.0 Introduction

Financial statements of banks are guided and regulated by legislation enacted and amended from time to time. These laws and regulation explain when and how financials of banks should be report and presented.

Bank financial reports are regulated by standards issued by International accounting Standard board, with IFRS 10; financial instrument-disclosure occupying a prominent place.

2.0 Objectives

At the end of this unit, you should be able to:

 Identify the relevant laws that regulate banking operation in Nigeria.

 Identify some specific provisions relating to account of banks.

 Describe financial statement of bank 3.0 Main Content

3.1 law and regulations of Banks in Nigeria

The Laws regulating the establishment of banks in Nigeria include principally:

Companies and Allied Matters Act, Cap. C. 20 LFN 2004; Banks and Other Financial Institutions Act, Cap.

B.3 LFN 2004; and Central Bank of Nigeria Cap C4 LFN 2004.

Companies and Allied Matters Act. (CAMA)

Banks operating in Nigeria are corporate bodies. They must firstly be incorporated as a company under the CAMA by complying with the requirements in respect of registration of such a company. See Sections 18, and 35 CAMA See also Section 2(1) BOFIA. Once a company is incorporated, it becomes a body corporate by the name contained in the memorandum of association to carry out business. See Sections 37 and 38 (1) CAMA.

Banks and other Financial Institutions Act. (BOFIA)

The BOFIA was enacted in 1991 along with a new CBN law to ensure close monitoring and complete control of the financial system in the country by the regulatory body. The BOFIA repealed the Banking Act 1969 and consequently also repealed the Banking Amendment Acts 1970, 1972, 1975 and 1976.

BOFIA regulates banking and other financial institutions by prohibiting the carrying on of such businesses in Nigeria without valid license owned by a company duly incorporated in Nigeria. In pursuance of prudence and accountability, BOFIA makes it mandatory for a bank not later than four (4) months after the end of its FY to:

116 s (i) Publish in a daily Newspaper printed in and circulating in Nigeria and approved by the CBN (BOFIA Section 27

(ii) Disclose in detail in such publication penalties paid as a result of contravention of any policy guidelines which are in force during the FY in question and auditor’s report shall reflect such contravention (BOFIA Section 27 (2)); and,

(iii) Any bank which fails to comply with any of the requirements of Section 27 is in respect of each failures guilty of an offence and liable on conviction to a fine of N100,000 (BOFIA Section 27(5).

Central Bank of Nigeria Act 1958.

The Central Bank of Nigeria was established as a body corporate under S.1. CBN Act. The Act provides for the powers of the Bank to print currency notes and coins and the monopoly of issuing them.The general operation powers of the CBN are contained elaborately under Section 26 while the activities it is prohibited from undertaking are stipulated under S. 28. The CBN is entrusted with certain services which it renders to the Federal. It is also mandated to act as banker to other banks in Nigeria and outside Nigeria, very importantly, it has power to make and alter rules and regulations for the good order and management of its activities.

Nigeria Deposit Insurance Corporation Act Cap N102 Laws of the Federation of Nigeria (NDIC Act)

The Act grant complementary oversight responsibilities to Nigeria Deposit Insurance Corporation (NDIC) NDIC effectively took off in 1989 and was set up to provide deposit insurance and related services for banks in order to promote confidence in the banking industry. The NDIC is empowered to examine the books and affairs of insured banks and other deposit taking financial institutions. Licensed banks are mandated to pay 15/16 of 1 per cent of their total deposit liabilities as insurance premium to the NDIC. A depositor's claim is limited to a maximum of N50, 000.00 in the event of a bank failure.

Bills of Exchange Act. (BEA)

This Act deals with cheques, which is a bill of exchange that is commonly used by commercial banks, (“whose business includes the acceptance of deposits withdrawable by cheques”) S. 66 BOFIA. By virtue of Section 73 BEA “ Acheque is a bill of exchange drawn on a banker payable on demand. Therefore, the provisions of the BEA apply to a cheque. There are specific provisions in respect of cheques under the BEA such as presentment of cheque for payment S. 74, crossed cheques. S. 78-84. In Addition, other provisions of the BEA in respect of bills of exchange generally apply to cheques, so banks are bound by them.

Other statutes regulate the activities and financial reporting of the Banking industry in Nigeria are:

 Nigeria inter-bank settlement system guideline (NIBSS)

 Nigeria Automated Clearing system guideline (NACS)

 Security and Exchange Commission Guidelines (SEC)

 Circular issued from time to time by the Ministry of Finance

 International Accounting standards issued by International accounting Standard Board 3.2 Specific Guidance

Minimum Capital

The President shall on the advice of the Central bank of Nigeria (CBN) determine, from time to time, the appropriate minimum paid up share capital of each category of banks subject to subsection (1) of this section. The minimum shareholders’ fund of banking institutions shall in respect of:

(a) Universal banks be at N25 billion (b) Bureau de change be at N500 million (c) Micro finance banks be at N20 million (d) Mortgage institutions be at N2 billion

117 s Cash Reserves, Special Deposits and specified Liquid Assets

The BOFIA requires every bank to maintain with the CBN, cash reserves and special deposit and hold specified liquid assets or stabilization securities, as the case may be, as prescribed by the Central Bank by virtue of section 39 of central bank of Nigeria Act, 1991 (as amended) where both assets and liabilities are due.

For the purpose of this section, specified liquid assets are:

(a) Currency notes and coin which are legal tender in Nigeria;

(b) Balances at the bank;

(c) Net balances at any licensed bank and money at call in Nigeria;

(d) Treasury bills and treasury certificates issued by the Federal Government;

(e) Inland bills of exchange and promissory notes re-discountable at the Central Bank; and (f) Negotiable Certificate of deposit approved by the Central Bank

(g) Such other negotiable instruments may from time to time be approved by the Central Bank.

Conditions for payment of dividends No bank shall pay dividend until:

(a) All its preliminary expenses, organisational expenses, share selling expenses, brokerage, losses incurred and other capitalised expenses not represented by tangible assets have been written-off;

(b) Adequate provision has been made for contingent losses on risk assets, liabilities, off balance sheet commitment; and

(c) It has complied with capital ratio requirement specified by section 13(1) of the Act.

Reserve for Small Scale Industries

CBN monetary and credit policies require each bank to set aside 10 percent of its profits for the financing and promotion of small scale industries in Nigeria.

Illustration 1

An extract from the books of EZINWA Commercial Bank Plc revealed the following as at 31 December.

Nmillion

Issued Ordinary Share Capital 250,000

Statutory Reserves 189,000

Profit Before Taxation 102,000

Taxation 36,000

Profit After Taxation 66,000

Dividend paid 20,000

Calculate how much should be transferred to reserve in relation to small and medium enterprises equity investment scheme. Assuming the bank has only been in existence for five years.

SMIEIS Reserve 5% of PAT 5 x 66,000 million

100 = N3,300m Prudential guidelines

118 s A credit facility is deemed to be performing if the payment of both principal and interest are up to date in accordance with the agreed repayment terms. The interest accrued on it should be recognised as income in the financial statement for performing loan made provision of 1%.

Prudential guidelines issued by the CBN required banks to classify non-performing loans and advances, and to provide for loan impairment as follows:

Substandard credit facilities

Doubt credit facilities Lost credit facilities

Remark Facilities remain

inactive for 90 days

Facilities inactive for 180-360 days

Facilities inactive for over 360 days Interest income Interest suspended Interest suspended Interest suspended Principal amount 10% provision 50% provision 100% provision

Illustration 2

The following are extracted from the notes to the accounts of Moore Commercial Bank Plc

Loans and advances: N‟million

Performing 400

Non-performing - Substandard 90 Doubtful 150 Lost 40 Calculate the amount of provision for bad debts.

Solution

Performing – N400 @ 1% N4m Substandard N90m @ 10% N9m Doubtful N150 @ 50% N75m Lost N40m @ 100% N40m

128m

PREPARATION OF PUBLISHED FINANCIAL STATEMENTS FOR BANK

Banks and other financial institutions are also required to comply with the accounting requirements of Banks and Other Financial Institutions Act, 1991 (as amended), in preparing their financial statements.

Disclosure requirements

In addition to the disclosure requirements of IAS No 1, Information to be disclosed in Financial Statements, Banks should also disclose the following:

(a) Accounting policies in respect of identification and provision for losses of non-performing loans, nature of off -Statement of financial position engagements, such as letters of credits, bonds, guarantees, indemnities, acceptances, and trade related contingencies such as documentary credits and methods used to recognise income thereon.

(b) Income statements, stating each principal revenue item:

(i) interest income, split between bank and non-bank sources (ii) interest expenses, split between bank and non-bank sources.

(iii) Credit related fee income and expenses.

A bank should not offset one item of revenue or expense by deducting it from another item of revenue or expense.

(c) Assets and liabilities in the Statement of financial positions to be grouped according to their nature and listed in the order of their liquidity and maturity. Assets should start with cash and short-term funds while liabilities with loan stock.

(d) A maturity profile of risk assets and deposit liabilities classified into the following

119 s categories:

Under 1 month 1 - 3 months 3 - 6 months 6 - 12 months Over 12 months

The above maturity profile should be based on the expected normal repayment periods of the assets and liabilities.

(e) The amount of provision for loan losses, segregated between principal and interest.

Provision for losses of "off-Statement of financial position" engagements should be shown separately as component of other liabilities.

(f) An analysis of the movements in the various categories of loan loss provision should be disclosed.

(g) One item of asset or liability should not be offset by deducting another asset or liability unless a legal right of 'set-off' exists.

(h) An analysis of loans and advances between "performing" and "non-performing" loans.

(i) The nature and amount of contingencies and commitments arising from the "off Statement of financial position" engagements which the bank has undertaken and analysis between the different classes of contingencies. "Off Statement of financial position" engagements should not form part of Statement of financial position totals.

(j) The major items that make up its "other assets" and "other liabilities" in form of notes to the accounts.

FORMAT OF THE REVENUE ACOUNT