ACCTING 2501 Financial Accounting : Market Practices Changes

ANZ was alleged to set the interest rates on business and other commercial loans to the benefit of the bank. Australian Securities and Investments Commission started to investigate this breach in March 2016. ASIC is the regulator of the financial market, which is responsible to provide a fair and transparent financial market and protect the interests of investors.

1.a) How should business and other commercial loans be reported in ANZ 2016 financial statements? Your answer should refer to supporting paragraphs presented in relevant accounting standards.
b) Will ANZ need to report ASIC allegation regarding Bank Bill Swap Rate (BBSW) in 2016 financial statements? How should this be reported? You should provide appropriate paragraphs from AASBs as evidence of your answers.
c) Identify and explain two (2) factors relevant to banking sector that would impact on the value of financial assets in ANZ.

ANZ are required to pay $212,500 by ASIC for breaching the lending laws and market manipulations when it offered ANZ assured overdraft to its customers.
$212,500 penalty for breaching responsible lending laws when offering overdraft

2.a) How should the fine payment be recorded and reported in ANZ financial statements?
Explain your answers with supporting paragraphs from relevant accounting standards.
2.b) How would ASIC investigation over ANZ assured overdraft be reported in ANZ 2015 and 2016 annual report?

It was reported that ANZ is exposed to bad debt risk due to high debt ratio in energy and oil service companies, according to SMH article ANZ, CBA face debt risk as energy producers

3.a) What is the appropriate accounting treatment for ANZ to write off bad loans from its books as shown in 2016 financial statements? Explain and support your answers by relevant paragraphs of AASBs and 2016 annual report.

b) Discuss the impact of the potential default on ANZ future year financial position and performance.

Part I: a:

A commercial loans is the arrangement which is based on the debt ad exists between the business and the financial institution which is used for the purposes of funding the majority of the capital expenditures and also covers the various operational costs that the company would not be in a position to afford otherwise.

There are many of the upfront costs and the regulatory hurdles that holds back these smaller businesses from having a direct access to the markets of debt and equity for the purposes of financing. This is somewhat similar to the consumer credit, smaller businesses also rely on the lending products such as the line of credit, loans that are unsecured in nature and also the term loans (AASB, 2017).

Since, the commercial loans forms a part of the liability, they must be recorded as a liability of the company under the heading of non-current liability in the financial statements (Wiley, 2017).

b: The ASIC’s allegation regarding Bank Bill Swap Rate (BBSW) would be termed as a contingent liability since these are the potential liabilities. This may or may not arise. And also these depends on the future events of the company. The main examples of a contingent liability includes the warranty of the products of the company, the guarantee of the party loan of the company and the law suits that are filed by the other parties as against the company. These contingent liabilities hence are the potential liabilities and since, they depend on the future events that occurs or that may not occur, so they become the future actual liability (Accounting coach, 2017).

The rules of accounting for these contingent includes the fact that if there is a contingent loss, which is probable and if the amount of that loss could be estimated, then the company would record that liability on the balance sheet along with the loss in the statement of profit and loss.

 In case, the contingent loss is remote, then there would be no liability or loss which is recorded and there would be no need to report the same in the financial statements. In case, the contingent loss lies somewhere in the between, then the same would be disclosed in the notes to the financial statements (Marssd, 2017).

The contingent liabilities are not recognised in the balance sheet but are disclosed in the notes to the financial statements since there is a remote possibility of settling the same as the possible obligation.

Hence, the liability that would be the result of that allegation by ASIC would form the part of the notes to the financial statements.

c: The risks include the fair values and the hedging and derivatives.

All of the financial instruments are reported at the fair values and when it comes to the estimation of the fair values, then the group would use the market prices that are quoted in the market for the financial instrument. If there is no active market for that financial instrument, then the same would be based on the fair value which would be based on the estimates of the fair value or other of the techniques that are widely accepted in the market. The valuation models that are used in the stated case assesses the impact of the bid and ask spread along with the counter party credit spreads and also many of the factors that influences the fair value which has been determined by the participants in the market. The selection of the most apt valuation techniques along with the methodology and the inputs requires the use of the judgment. These are reviewed and are also updated as the market practices changes.

The other risk is the risk involved in the derivatives and hedging. The bans sells these as a part of their daily operations and also hedges the risk associated with the rate of interest, price risk, credit risk and also other such exposures that are connected with the non-trading positions. The hedging instruments have been designed for the purposes of deriving the fair values and also the cash flows that is expected to be offset as against the changes in the fair value or the cash flows of the designated hedged item. Any items which has bene hedged is an asset, liability, firm commitment and also there is a high probability of the forecast of the various transactions that exposes the bank to the changes in the fair values and also of the future cash flows, are designed as being hedged.

A judgement is required for the purposes of selecting and designating the hedging relationship and also when it comes to the assessment of hedge effectively. IAS 39 with relates with the financial instruments includes the recognition and the measurement that does not specify any one single method for the purposes of assessing the effectiveness of the hedge prospectively or retrospectively (ANZ annual report, 2016).

Part II: a:

The amount of the fine would be included in the financial statements as a current liability since a current liability is the liability of the entity which is classified as current as and when the same expects to be settled as a liability in the normal operating cycle, it holds the liability mainly for the purposes of trading, as and when the liability is due to the settled within the period of 12 months after the date of reporting. Also, when there is an unconditional right that defers the settlement of the liability for the period of 12 months after the date of reporting. It is the liability that is at the option of the counterparty and is also the result of the settlement by the issue of the instruments of equity which does not affect the classification of these equity instruments. Then, in such cases, the entity would classify the same as a non-current liability (AASB, 2017).

b: The contingent liabilities are not recognised in the balance sheet but are disclosed in the notes to the financial statements since there is a remote possibility of settling the same as the possible obligation.

It is the liability which has the possible obligation of the payable contingent which is based on the future course of the events which is not in the control of the entity or which has the present obligation of not currently deeming to be probable or not measurable with some of the sufficient liability. In respect of these contingent liabilities, an estimation of the financial effects will have to be made and also there would be an indication of the various uncertainties that are involved which includes any reimbursement is possible. In case, these disclosures are not possible, then a statement as to why the same is not possible must be made (Wiley, 2017).

Hence, the investigations would be reported as a contingent liability for the company.

Part III: a:

Writing off is the accounting term that refers to the action wherein the book value of the asset would be declared as 0. A write down is the lowest asset book value. But t would not take the value as 0. In any of the case, the loss would always enter into the system as an expense.

The bad debt written off by the company is included in the income statement under the head of credit impairment change under movement in provision for credit impairment by financial class asset (Business case analysis, 2017).

Generally, the following entry is passed for the bad debt expense.