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TABLE OF CONTENTS
Title
page #
Introduction
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 2 - 5
Brief Bank Backgrounds
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 5 - 6
Barclays’ 2005 Consolidated
Income Statement ~~~~~~~~~~~~
7
Barclays IAS 1 & 10
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 8 - 9
Barclays IAS 8
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 10 - 11
Barclays IAS 30
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 11
NatWest’s 2005 Consolidated
Income Statement ~~~~~~~~~~~ 12
NatWest IAS 1
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 13 - 14
NatWest IAS 8
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 15
NatWest IAS 30 & 10
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 16
Conclusion
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 17
Reference
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 18 - 19
INTRODUCTION
In any contemporary
operating organisation, progress that the company is making is recorded as
basis of assessing the stewardship of management and for making economic
decisions. A financial statement analysis is one such yardstick that takes
into consideration current and future financial situation in an attempt to
determine a financial strategy to help achieve organisational goals. As
formally defined by Riahi-Belkaoui in 1998, financial analysis ‘is an
information processing system used to provide relevant information for
decision making’ (p. 1). Various accounts from the published financial
statements are evaluated in relation to each other to form performance
indicators, which are then compared to ‘established’ standards. Ratios are
normally calculated from the financial statements to assess the
profitability, solvency, working capital management, liquidity, and
financial structure of an organization. They may also be calculated over a
period to enable an analysis of trends to be formulated or compared to
other similar companies or industry averages.
Financial statements are,
according to Bandler (1994 p. 1), the ‘universally accepted tools for
analysis of a business entity’. If properly understood, they let the users
know how good a company looks and how well it has been doing. They are, at
best, an approximation of economic reality because of the selective
reporting of economic events by the accounting system, compounded by
alternative accounting methods and estimates (Fried, Sondhi & White 2003).
The purpose of financial statements is to provide users (business owners,
lenders, managers, suppliers, customers, attorneys and litigants and
employees and job seekers) with a set of financial data that, in summary
form, fairly represents the financial strength and performance of a
business (Bandler 1994). They reveal opportunities and provide protection
against financial pitfalls. Ideally, financial statements analysis
provides information that is useful to present and potential investors and
creditors and other users in making rational investment, credit and other
similar decisions (Fried, Sondhi & White 2003). Further, they are
comparative measurements of risk and return to make investment or credit
decisions as they provide one basis for projecting future earnings and
cash flows.
Epstein (2005) claims that
executives and managers use the information that they glean from financial
statements analysis to know how well the company is doing financially as
well as information about problem areas so they can make changes to
improve the company’s performance. Employees, on the other hand, need to
know how well they are meeting or exceeding their goals and to know where
they need to improve. Potential employees review the company’s financial
statements so as to gain an insight on the suitability and stability of
the company they are planning to apply to as an employer of choice.
Creditors need to understand a company’s financial report to determine
whether they should risk lending more money to the company and to find out
whether the company is meeting the minimum requirements of any loan
programs that are already in place. Investors need information to judge
whether or not the company is a good investment. Government agencies need
to be sure that the firm is complying with regulations set by them.
Suppliers need to figure out if the company is a good choice to do
business with. Attorneys and litigants need the information from the
analysis to back-up their evidences for or against a company.
The basic financial
statements are: the balance sheet, the income statement and the cash flows
statement. The balance sheet shows how a company stands at a given moment
and attempts to show how much a corporation has and how much it owes
(Graham & Meredith 1998). What it has is shown on the asset side, what it
owes is shown on the liability side. Graham and Meredith (1998) relate
that the assets consist of the physical properties of the company, the
money it holds or has invested, and the money that is owed to the company.
Intangible assets, if there are any, are also found in the balance sheet
on the asset side. On the liability side are shown not only the debts of
the firm, but also reserves of various kinds and the equity or ownership
of interest of the stockholders. Debts incurred in the ordinary course of
the business appear as accounts payable, while more formal borrowings are
listed as bonds or notes outstanding. The stockholders’ interest is shown
on the liability side as Capital and Surplus, as they are generally
considered the debt of the company that they owe to the stockholders.
The income statement
shows how profitable the company was over a specific period of time.
Information enclosed in the said statement are usually most or all, and
sometimes more, of the following: sales, cost
of goods sold, beginning inventory, purchases, ending inventory, expenses
including advertising, depreciation, insurance, payroll taxes, rent,
repairs and maintenance, wage and salary and utilities (Bandler
1994). The statement of cash flows, on the other
hand, tells how much cash the company generated over the period of the
income statement and where it went. Items in the cash flows include
cash received from customers, cash paid to suppliers and employees,
interest and dividends received, interest paid, and income taxes paid
(Graham & Meredith 1998). These cash flows are computed by converting the
income statement amounts for revenue, cost of goods sold, and expenses
from the accrual basis to the cash basis. This is done by adjusting the
income statement amounts for changes occurring over the period in related
balance sheet accounts. In conducting the analysis,
regard will need to be paid to the accounting policies of the company and
the extent to which any creative accounting may have taken place.
As Fridson & Alvarez (2002) asserted, ‘financial statement analysis is an
essential skill in a variety of occupations’ that need to be possessed and
understood. Following is the
financial statements analysis of Barclays and National Westminster Banks
and how the statements help users of such information into assessing the
stewardship of management as well as making economic decisions.
BRIEF BANK BACKGROUNDS
Barclays.
Founded by John Freame and his partner Thomas Gould in
Lombard Street in 1690, the name Barclay became associated with the
company in 1736, when James Barclay - who had married John Freame's
daughter - became a partner. Today, Barclays is a UK-based financial
services group, with a large international presence in Europe, the USA,
Africa and Asia. It is engaged primarily in banking, investment banking
and investment management. In terms of market capitalisation, Barclays is
one of the largest financial services companies in the world. It has been
operating for more than 300 years with 25 million customers and 118,000
employees in over 60 countries. Barclays is the 3rd largest
bank in the United Kingdom, and on the global stage, the largest bank in
the world by total assets ($1.59 trillion), the 14th largest in the world
by Tier 1 capital ($32.5 billion), and the 15th largest in the world by
Market capitalisation ($71.6 billion) (‘Top 1000 World Banks 2006’ 2006).
National
Westminster.
In 1968 National Provincial
Bank (established in 1833) and Westminster Bank (established in 1836,
three years later), merged as National Westminster Bank. To both banks the
advantages were apparent - the merger enhanced balance sheet strength,
created opportunities to streamline the branch networks and enabled
greater investment in new technology.
The creation of the new bank
meant that many branches were closed to eliminate duplication; however new
branches were opened in areas such as university campuses and shopping
centers.
The National Westminster Bank became one of the Big 4 UK
Banks, with a large branch network of 3,600 branches. In March 2000, The
Royal Bank of Scotland Group completed the acquisition of NatWest in a £21
billion deal that was the largest take-over in British banking history.
NatWest is now part of a financial services group (Royal Bank of Scotland
Group) which is the second largest bank by market capitalisation in the UK
and in Europe and ranks fifth in the world.
BARCLAYS’
INCOME STATEMENT
The
consolidated profit and loss account of Barclays bank for the year ended
31st December 2005.
BARCLAYS’ PRESENTATION OF
FINANCIAL INFORMATION (IAS 1)
The Group has adopted
the requirements of International Financial Reporting Standards and
International Accounting Standards (collectively IFRS) as adopted by the
European Union for the first time for the purpose of preparing financial
statements for the year ended 31st December 2005. The effects of the
transition and a description of the differences between UK GAAP (the
former accounting standard used by Barclays) and IFRS accounting policies,
which are pervasive throughout last year’s financial results, are
presented in their Annual Report (p. 238-261). The objective of IAS 1
(revised 1997) is to prescribe the basis for presentation of general
purpose financial statements, to ensure comparability both with the
entity's financial statements of previous periods and with financial
statements of other entities. IAS 1 sets out the overall framework and
responsibilities for the presentation of financial statements, guidelines
for their structure and minimum requirements for the content of the
financial statements. Standards for recognising, measuring, and disclosing
specific transactions are addressed in other Standards and
Interpretations. An examination of the Group’s 2005 Annual Report (2005)
shows that Barclays’ set of financial statements include a consolidated
income statement (p. 147), a consolidated balance sheet (p. 148), cash
flow statement (p. 151) and notes (pp. 154-286), comprising a summary of
accounting policies and other explanatory notes, and a statement of
changes in equity (p. 150) as required in IAS 1.8. The existence of a cash
flow statement assists the users of Barclays’ financial statements in
predicting the entity's future cash flows and, in particular, their timing
and certainty. As required by IAS 1.25, Barclays prepared its financial
statements, except for cash flow information, using the accrual basis of
accounting starting 2004. IAS 1.36 requires that comparative information
shall be disclosed in respect of the previous period for all amounts
reported in the financial statements, both face of financial statements
and notes, and the Group has complied with this to a certain extent,
presenting only 2004 as the other comparative year. IAS 1.46 specifically
asks to clearly identify the financial statements, the reporting
enterprise, whether the statements are for the enterprise or for a group,
the date or period covered, the presentation currency and the level of
precision (thousands, millions, etc.), which Barclays could be observed to
have followed. For the particular contents and presentation of the
financial statements, a perusal would show that Barclays have adhered
strictly to IFRS (International Financial
Reporting Standards) standards, making it easy to
browse inside their 320-page 2005 Annual Report. Dividends were also
appropriately disclosed, as required by IAS 1.95. As a fact, the final
dividends for the year ended 31st December 2005 of 17.4p per ordinary
share of 25p each and 10p per staff share of £1 each have been recommended
by the Directors of Barclay and was reflected in the Annual Report. These
disclosure requirements by IFRS IAS 1 will have to be followed by the
Group for annual periods beginning on or after 1 January 2007, with
earlier application encouraged. In compliance with IAS 10, Barclays have
declared in their annual report that there have been no significant
events between the year end and the date of approval of these accounts
which would require a change to or disclosure in the accounts.
BARCLAYS’ ACCOUNTING
POLICIES (IAS 8)
The Barclays Group, in
preparing the accounts found on pages 134 to 283 and the additional
information contained on pages 284 to 313, presented in the 2005 Annual
Report, has used appropriate accounting policies, supported by reasonable
judgements and estimates, and that all accounting standards which they
consider to be applicable have been followed. The company Directors has
responsibility for ensuring that the Group keeps accounting records which
disclose with reasonable accuracy the financial position of the Barclays.
Certain of these policies are considered to be important to an
understanding of the Group’s financial condition since they require
management to make difficult, complex or subjective judgements and
estimates, some of which may relate to matters that are inherently
uncertain.
Their
accounting policies include estimates which are
particularly sensitive in terms of judgements
and the extent to which estimates are used. Other accounting policies,
such as the determination of the cost of share-based payments also involve
significant amounts of judgements and estimates,
but the total amounts involved are not significant to the financial
statements. Management has discussed the accounting policies and critical
accounting estimates with the Board Accounts Committee. Their specific
accounting policies went under 30 heading for clarity of presentation (pp.
134-145). It discusses detailed information regarding the company’s
significant accounting policies in accordance to rules set by IFRS IAS 8.
An account of their accounting presentation followed the discussion of the
accounting policies, which was dutifully followed by the financial
statements of Barclays.
BARCLAYS’ DISCLOSURES IN FINANCIAL
STATEMENTS (IAS 30)
IAS 30 prescribes appropriate presentation and disclosure
standards for banks and similar financial institutions, which supplement
the requirements of other Standards, with the intention of providing users
with appropriate information to assist them in evaluating the financial
position and performance of banks and to enable them to obtain a better
understanding of the special characteristics of the operations of banks.
Barclays’ income statement for last year included such entries as interest
income, interest expense, dividend income, fee and commission income, fee
and commission expense, net gains/losses from securities dealing, net
gains/losses from investment securities, net gains/losses from foreign
currency dealing, other operating income, loan losses, general
administrative expenses other operating expenses as prescribed by IAS
30.10. Similarly, the balance sheet of the bank showed that trading and
financial assets amounting to £251,820m and
trading and financial liabilities totaling to £104,949m
in 2005 were designated at fair value, consistent with what is set by IAS
30.24, which says that a bank must disclose the fair values of each class
of its financial assets and financial liabilities as required by IAS 32
and IAS 39. An examination of the firm’s consolidated balance sheet also
shows that they have complied with IAS 30.18, which states that a bank's
balance sheet should group assets and liabilities by nature and list them
in liquidity sequence.
NATWEST’S
INCOME STATEMENT
The company’s consolidated income statement for the year ended 31 December
2005.
NATWEST’S PRESENTATION OF
FINANCIAL INFORMATION (IAS 1)
The 2005 Annual Report and
Accounts (2005) has, for the first time, been prepared in
accordance with IFRS adopted by the International Accounting Standards
Board, and interpretations issued by the International Financial Reporting
Interpretations Committee of the IASB as endorsed by the European Union.
The effects of the transition and a description of the
differences between UK GAAP and IFRS accounting policies, which are
omnipresent throughout the financial results of 2005, are presented the
said annual report. An assessment of their annual report shows that their
set of financial statements consists of balance sheets (p. 18), a
consolidated income statement (p. 17), statements of recognised income and
expense (p. 19) and cash flow statements (p. 20) together with the notes
corresponding items in the financial statements that need clarification
(pp. 21-81), a compliance with what is set by IAS 1.8.
An independent auditor’s report (p. 7)
confirmed that the bank’s financial statements give a true and fair view,
in accordance with IFRS as adopted for use in the European Union as
applied in accordance with the requirements of the Companies Act 1985, of
the state of the Bank’s affairs and that they have been properly prepared
in accordance with the Companies Act 1985. This is parallel to IAS 1.13
which says that the presentation requires the faithful representation of
the effects of transactions, other events, and conditions in accordance
with the definitions and recognition criteria for assets, liabilities,
income and expenses set out in the Framework of IFRS.
IAS 1.36 requires that comparative
information shall be disclosed in respect of the previous period for all
amounts reported in the financial statements, both face of financial
statements and notes, and NatWest has complied with this to a certain
extent by presenting 2004 as the other comparative year.
Notes to the
financial statements were presented in the annual report in detail,
expounding on such items in the financial statements as income
from trading activities, operating expenses, pension costs, operating
profit before tax, tax, profit attributable to preference shareholders,
ordinary dividends, profit dealt with in the accounts of the company, debt
securities and other such entries which needs further elaboration. This is
in compliance with IAS 1.103 which states that the notes must present
information about the basis of preparation of the financial statements and
the specific accounting policies used and two other characteristics of
notes on the accounts. Additionally, notes in the actual presentation of
the set of financial statements were cross-referenced to the relevant
note, in accordance to IAS 1.104.
Further,
IAS 32 ‘Financial Instruments: Disclosure and
Presentation’ and IAS 39 ‘Financial Instruments: Recognition and
Measurement’ were implemented by NatWest on 1 January 2005 and applied
prospectively from that date and, as permitted by IFRS, without restating
comparatives. Consequently, in the notes on the accounts affected by these
standards, comparative data for 2004 in accordance with previous GAAP have
been presented.
NATWEST’S ACCOUNTING
POLICIES (IAS 8)
There are 20 headings under
which the accounting policies and key sources of estimation uncertainty
are subdivided (pp. 8-16). The selection and application of their
accounting policies is in accordance with IAS 8.7 that when a
standard or an interpretation specifically applies to a transaction, other
event or condition, the accounting policy or policies applied to that item
must be determined by applying the standard or interpretation. The
financial statements of NatWest have been prepared on the historical cost
basis except that the following assets and liabilities are stated at their
fair value: derivative financial instruments, held for-trading financial
assets and financial liabilities, financial assets and financial
liabilities that are designated as at fair value through profit or loss,
available-for-sale financial assets and investment property. The reported
results of the bank are therefore sensitive to the accounting policies,
assumptions and estimates that underlie the preparation of its financial
statements. In order to become more accurate in their compliance with IFRS
standards, National Westminster is reviewing IFRS 7 and the amendments to
IAS 1 and IAS 21 and those to IAS 39 that it has not implemented, to
determine their effect on its financial reporting, as of the date of
publishing of the 2005 Annual Report and Accounts. The use of estimates,
assumptions or models that differ from those adopted would affect their
reported result, which is why in the accounting policies section, the
judgments and assumptions involved that are considered by the Board to be
the most important to the portrayal of its financial condition are
discussed.
NATWEST’S DISCLOSURES IN FINANCIAL
STATEMENTS (IAS 30)
A scrutiny of National
Westminster’s income statement would show that the bank grouped their
income and expenses by nature, in compliance with IAS 30.9. In the income
section, interest receivable and interest payable were grouped apart from
fees and commissions receivable, fees and commissions payable, income from
trading activities and other operating income, the former classified as
interest income and the latter as non-interest income.
For a financial asset and a
financial liability to be offset, IFRS require that an entity must intend
to settle on a net basis or to realize the asset and settle the liability
simultaneously. This is in accordance with IAS 30.13 and 30.23, which
included guidelines for the limited circumstances in which income
and expense items or asset and liability items are offset. On
implementation of said standard, the balance sheet value of financial
assets and financial liabilities of the National Westminster bank
increased by £34 billion. IAS 30.24 states that the fair values of each
class of its financial assets and financial liabilities as required by IAS
32 and IAS 39. The financial assets and liabilities of the company as of
January 1 2005 were designated as at fair value through profit or loss
valuing at £1,137m and £1,326m respectively, with a carrying value of
£1,062m and £1,259m under the United Kingdom GAAP. The firm also declared
that there have been no significant events between the year end and the
date of approval of these accounts which would require a change to or
disclosure in the accounts, in compliance with IAS 10 or Events after the
balance sheet date.
CONCLUSION
Both organisations
sufficiently complied with relevant accounting standards imposed by the
IFRS on its members. As much as can be gathered, it could be concluded
that both presentation of the set of their financial statements meets the
information needs of present and potential investors, evident in the
wealth of available and readily interpretable data to be found in the
balance sheets, income statements, statements of recognised income and
expense and cash flow statements, together with the notes corresponding
items in the financial statements that need clarification. Both IAS 1, 8,
10 and 30 have been closely complied with by Barclays and NatWest,
although there is a significantly more detailed explanation of the
accounting policies of the former as compared to the National Westminster
Bank firm.
The
extent to which users’ needs are addressed can be said to be highly
satisfactory for both companies. Both have
organized their set of financial statements in a way that will help create
better understanding of what is really happening within the company, for
utilisation of the variety of users
as basis of assessing the stewardship of
management and for making economic decisions. As main users of financial
statements analysis, investors read make use of such analyses to evaluate
the firm’s ability to add value to their investment. Both Barclays and
NatWest have achieved that end, each on their own level of effectiveness
of bringing across a good impression for the users of the set of financial
statements which are presented in their annual reports. |
