DEPARTMENT OF ACCOUNTING, FEDERAL UNIVERSITY

OF KASHERE, GOMBE STATE

ACCOUNTING FOR FOREIGN OPERATIONS

INTRODUCTION
Accounting for foreign operations is now referred to as “the effect of changes in foreign
exchange rates” according to IAS 21. Thus foreign branches are branches situated outside the
country where the head office of the firm/business organization is located. Before accounting for
the operations of a foreign branch, the activities of the foreign branch has to be converted into
the home currency of the head office.

The following terms were defined and used in IAS 21 with the meanings specified. The terms are
related to the discussion of IAS 21: The effect of changes in foreign exchange rates.

i. Closing Rate: It is the spot exchange rate at the end of the reporting period.
ii. Exchange Difference: Exchange difference is the difference resulting from translating a
given number of units of one currency into another currency at different exchange rates.
iii. Exchange Rate: Exchange rate is the ratio of exchange for two currencies.
iv. Fair Value: Fair value is the price that would be received to sell an asset or transfer a
liability in an orderly transaction between knowledgeable market participants at the
measurement date.
v. Foreign Currency: A foreign currency is the currency other than the functional currency
of an entity.
vi. Functional Currency: Functional currency is the currency of the primary economic
environment in which the business operates.
vii. Foreign Operation: Foreign operation is an entity that is a subsidiary, an associate, joint
arrangement or a branch of a reporting entity, the activities of which is based or
conducted in a country or currency other those of the reporting entity.
viii. Monetary Items: monetary items are units of currency held and assets and liabilities to be
received or paid in a fixed or determined number of units of currency.
ix. Net Investment in a Foreign Operation: It is the amount of the reporting entity‟s interest
in the net assets of that operatyion.
x. Presentation Currency: Presentation currency is the currency bin which nthe financial
statements are presented.
xi. Spot Exchange Rate: Spot exchange rate or spot rate is the exchange rate for immediate
delivery.

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CONVERSION Vs TRANSLATION
Conversion is the exchange of one currency for another currency while Translation is the
expression of another currency in the terms of the currency of the reporting operation.

IJS 21define a foreign currency transaction as follows:

A foreign transaction is a transaction, which is denominated in or requires settlement in a foreign

currency, including transactions arising when an entity:

a. Buys or sells goods or services whose price is denominated in a foreign currency;

b. Borrows or lends funds when the amount payable or receivable are denominated in a
foreign currency;
c. Otherwise acquires or disposes of assets, or incurs or settle liabilities, denominated in a
foreign currency.

Determinant of Functional Currency

Functional currency is the currency of the primary economic environment in which the entity
operates. The primary economic environment in which the entity operates is normally the one in
which it primarily generates and expends cash. An entity considers the following in determining
its functional currency:

a. The currency:
i. That mainly influences sales prices for goods and services (this will often be the
currency in which sales prices for its goods and services are denominated and
settled); and
ii. Of the country whose competitive forces and regulation mainly determine the
sales prices of its goods and services.
b. The currency that mainly influences labour, material and other costs of providing goods
or services (this will often be the currency in which such costs are denominated and
settled).

IAS 21 further provides that, the following factors may also provide evidence of an entity‟s
functional currency:

a) The currency in funds from financing activities (i.e. issuing debt and equity
instruments) is generated.
b) The currency in which receipts from operating activities are usually retained.

Where the indicators above do not reveal what the functional currency of an entity is, then the
manager have to make judgments as to which currency faithfully represent the economic effect
of its transaction the most. Accordingly, once determined, the functional currency is not changed
unless there is a change in those underlying transactions, event and conditions.

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An entity with foreign operations must determine whether any of such foreign operations such as
a subsidiary or a branch has the same functional currency with the reporting entity. The
following factors are considered in doing this according to IAS 21.

a. Whether the activities of the foreign operation are carried out as an extension of the
reporting entity, rather than being carried out with a significant degree of autonomy. An
example of the former is when the foreign operation only sells goods imported from the
reporting entity and remits the proceeds to it. An example of the later is when the
operation accumulates cash and other monetary items, incurs expenses, generates
income and arranges borrowings, all substantially in its local currency.
b. Whether transactions with the reporting entity are a high or low proportion of the
foreign operation‟s activities.
c. Whether cash flows from the activities of the foreign operation directly affect the cash
flaws of the reporting entity and are readily available for remittance to it.
d. Whether cash flows from the activities of the foreign operation are sufficient to service
existing and normally expected obligation without funds being made available by the
reporting entity.

Presentation Currency
This is the currency a reporting entity use for financial statements. The reporting entity is entitled
to present its financial statement in any currency, so that in some cases the presentation currency
may differ from the functional currency.

Monetary Vs Non-Monetary Items

Monetary items are balances owed by or to an entity that will be settled in cash. Examples will
be payable for goods supplied, loan, cash and debtors for goods supplied. Non-monetary assets
will include property, plant and equipment, inventory and amounts prepaid for goods.

Rules on Recording Foreign Currency Transaction Carried out Directly by the Reporting
Entity

Initial Recognition
All transactions are entered in the book at the spot currency exchange rate between the foreign
currency and the functional currency on a transaction date. An entity average may be used for a
period where it is appropriate. It will be inappropriate where exchange rate fluctuate
significantly. Therefore in practice the spot rate is almost always used.

At Subsequent Dates
Amount paid or received in settlement of foreign currency monetary item during the accounting
period are translated at the date of settlement.

At the state of financial position date monetary balances retranslated at closing rate.

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Non-monetary items are historical cost remain at their original rate. Non-monetary items at fair
value are translated at the rate on the date the fair value was determined.

Treatment of Exchange Differences on Foreign Currency Transactions

Exchange differences arising on the settlement of monetary items or on translating monetary
items at rate different from those at which they were translated on initial recognition during the
period or in previous financial statement shall be recognized in profit or loss in the period in
which they arise, unless the company has entered into a hedging transaction under IAS 39
Financial Instruments: Recognition and Measurement. If the parent has taken a foreign loan to
act as a hedge against the foreign investment the exchange differences on the loan can be
recognized directly in equity to offset the exchange differences on foreign subsidiary. Hedge
accounting is only available if group meets strict criteria which can prove difficult to meet in
practice.

Note that the profit or losses on foreign currency transaction affect the cash flow and are
therefore realized.

Translation of the Account of Foreign Operations Where the Functional Currency is the
same as that of the Parent
If the functional currency of the foreign operation is the same as that of the parent then this
means the foreign operation is primarily influenced by the parent‟s currency and will be
evaluating its financial performance in the parent‟s currency. Therefore, the financial statements
that will be the starting point for the consolidation will be prepared in the home currency and the
consolidation will be just as for any other subsidiary.

The Use of a Presentation Currency other than the Functional Currency

Paragraph 39 of IAS 21 provides that the results and financial position of an entity whose
functional currency is not the currency of a hyperinflationary economic shall be translated in to a
different presentation currency using the following procedures:

a. Assets and liabilities for each statement of financial position presented (i.e. including
comparatives)shall be translated at the closing rate at the date of statement of financial
position;
b. Income and expenses for each statement presenting profit or loss and other
comprehensive income (I.e. including comparatives)shall be translated at exchange rates
at the date of the transactions; and spot rate.
c. All resulting exchange differences shall be recognized in other comprehensive income.

For practical reasons, a rate that approximates the exchange rate at the dates of the
transactions, for example an average rate for the period, is often used to translate income and
expenses items. However if exchange rate fluctuate significantly, the use of the average rate
of a period is inappropriate.

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The exchange differences referred to in (c) above result from:
a. Translating income and expenses at the exchange rate at the date of the transactions
and assets and liabilities at the closing rate.
b. Translating the opening net assets at the closing rate that differs from the previous
closing rate.

The exchange differences are not recognized in profit or loss because the changes in exchange
rate have little or no direct effect on the present and future cash flow from operations. The
cumulative amount of the exchange differences is presented in a separate component of equity
until disposal of the foreign operation. When the exchange differences relate to a foreign
operation that is consolidated but not wholly-owned, accumulated exchange differences arising
from translation and attributable to non-controlling interests are allocated to, and recognized as
part of, non-controlling interest in the consolidated statement of financial position.

Illustration 1
Shola Ltd has a year-end of 31st January. On 13th October 2021, Shola Ltd buys goods from Jolly
Inc. an European supplier for €250,000. On November 4th, Shola Ltd settles the goods in full.

Exchange rate:

13th October 2021 £1: €1.45

4th November 2021 £1: €1.55

Required:
Show the accounting entries for this transaction

Illustration 2
Tunde Ltd purchased an item of plant from a foreign supplier for cash of €100,000. Tunde Ltd is
a US company and the exchange rate at the time was $1 = €1.50.

Required:
At what value in $ will the asset be recorded?

Illustration 3
Bula Ltd purchased an item of plant on 1st June from a foreign supplier on one month credit for
€100,000. Bula Ltd is a United State firm.
Exchange Rates:

1 June: $ = €1.50
21 June: $ = €1.40

Required:
How will this transaction be dealt with in the account for the year to 21st June?

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Illustration 4
International Accounting Standard 21 deals with the effect of foreign exchange rates:

You are required to:

a. Explain:
i. What you understand by functional currency as contained in IAS 21
ii. Explain the requirement for initial recognition of a transaction in the functional
currency.
b. A Nigerian company (Sukairajo Plc) purchased equipment from a foreign supplier
(Fordex Plc) for £600,000 0n 31st March 2023 when the exchange rate was £1 = ₦200.
The company sold goods to a foreign customer for £350,000 on 30th September 2023,
when the exchange rate was £1 = ₦200. As at the company‟s year-end on 31st October,
2023, theses amount were still outstanding. The closing exchange rate was £1 = ₦220.
The company‟s functional currency is in Naira.
You are required to:
Calculate the exchange difference that would be recorded in the statement of financial
position for the period ending 31st October, 2021.

Illustration 5
On the 31st October, 2017, Rukaiyatu Ltd acquires 60% of the ordinary shares of Franca Ltd a
United Kingdom company. As at the date of acquisition, the balance on retained earnings of
Franca Ltd was £20,000. The summarized statement of financial position as well as, the
statement of comprehensive income as at 31st October 2021 was as follows.

Statement of financial position as at 31st October, 2021

Rukaiyatu Ltd Franca Ltd

₦ £

Non-Current Assets 140,000 90,000

Cost of investment in Franca Ltd 4,500 --------
Current Assets:
Inventories 25,000 17,200
Trade receivables 60,500 20,000
Franca Ltd 4,000 --------
Cash in hand 11,000 800
100,500 38,000
Current Liabilities:
Trade payables 60,000 18,000
Rukaiyatu Ltd -------- 8,000
Taxation 20,000 12,000
80,000 38,000

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Bonds 50,000 16,000
Total Assets less Liabilities 115,000 74,000
Equity:
Share capital 52,000 6,000
Retained earnings 63,000 68,000
115,000 74,000

Statement of comprehensive income for the year ended 31st October, 2021
Rukaiyatu Ltd Franca Ltd
₦ £

Revenue 430,000 140,000

Opening inventories 70,000 21,200
Purchases 250,000 80,000
Closing inventories 25,000 17,200
Cost of sales 295,000 84,000
Gross profit 135,000 56,000
Dividend received 2,400 Nil
137,400 56,000
Depreciation 40,000 12,000
Other expenses 10,600 4,000
Interest paid 7,000 2,000
Total expenses 57,600 18,000
Profit before taxation 79,800 38,000
Taxation 20,000 12,000
Profit after taxation 59,800 26,000
Dividend paid 25,000 8,000
The following information is also made available:
i. Exchange Rates were as follows for the period:
At 31st October, 2017 ₦1=£5.0
st
Average for the year ending 31 October, 2021, an approximation of the
Rate on the date of trading transactions and expenses ₦1=£4.0
st st
At 31 October/ 1 November 2020 ₦1=£3.5
st
At 31 October, 2021 ₦1=£2.0
ii. It is assumed that the functional currency of Franca Ltd is the Euro
iii. An amount of £1,380,000 was written off goodwill as an impairment charge in the
current year and £2,760,000 in the previous years.
iv. NCI is measured using method 1
Required:
Prepare the consolidated statement of financial position and income statement for Rukaiyatu Ltd
and its subsidiary Franca Ltd as at 31st October, 2021.

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Accounts of Banks
In preparing account for banks, the following regulatory requirements need to be observed:

i. Companies and Allied Matters Act (CAMA) 2004 as amended

ii. Banking and other Financial Institutions Act (BOFIA) 2020 as amended
iii. Central Bank of Nigeria (CBN) Prudential Guidelines 2020 as amended
iv. International Financial Reporting Standard (IFRS)

LOAN LOSS PROVISIONING

Credit portfolio classification system for facilities other than “Specialized loans”

a. Banks shall review their credit portfolio continuously (at least once in a quarter) with a
view to recognizing deterioration in credit quality. Such reviews shall classify banks‟
credit exposures based on the risk of default.
b. In order to facilitate comparability of banks‟ classification of their credit portfolios, the
assessment of risk of default shall be based on criteria which shall include, but are not
limited to repayment performance and borrower‟s repayment capacity on the basis of
current financial condition.
c. For syndicated facilities, the classification shall be the same across all banks involved in
the syndication. Thus, the worst classification by any of the banks involved in the
syndication shall apply across board.
d. Credit facilities (financial instruments exposed to credit risk such as loans, advances,
overdrafts, commercial papers, bankers‟ acceptances, bills discounted, leases, guarantees,
and other loss contingencies connected with a bank‟s credit risks) shall be classified as
“performing”, “watchlist” or “non-performing” as defined below:
1. Performing facility: A credit facility is deemed to be performing if all due
principal and interest payments have been settled or if not past due by more than
30 days.
2. Watchlist facility: – A facility where principal and/or interest is past due by 31 to
90 days.
3. Non-performing facility: A credit facility shall be deemed as non-performing
when any of the following conditions exists:
i. interest or principal is past due for more than 90 days;
ii. interest past due for 91 days or more have been capitalised, rescheduled or
rolled over into a new loan;
iii. off balance sheet obligations crystallise.
e. Non-performing credit facilities shall be classified into three categories namely, sub-
standard, doubtful or lost on the basis of the criteria below:

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 1) Sub-Standard The following objective and subjective criteria shall be used to
identify sub-standard credit facilities:
i. Objective Criteria: credit facilities on which past due principal and/or
interest remain outstanding for at least 91 days but not more than 180
days.
ii. Subjective Criteria:
a) Credit facilities which display well defined weaknesses which
could affect the ability of borrowers to repay such as inadequate
cash flow to service debt, undercapitalisation or insufficient
working capital, absence of adequate financial information or
collateral documentation, irregular payment of principal and/or
interest, non-performing facilities with other banks and inactive
accounts where withdrawals exceed repayments or where
repayments can hardly cover interest charges.
b) Significant deterioration in credit rating of the borrower/obligor
between initial recognition and the reporting date
c) Significant financial difficulty of the borrower;
d) Grant of concessions to the borrower/obligor by its lender(s) for
economic or contractual reasons relating to the borrower/obligor‟s
financial difficulty, especially where the lender(s) would not
ordinarily consider such concession(s);
e) It is probable that the borrower will enter bankruptcy or other
financial reorganization;
f) The purchase or origination of a financial asset at a deep discount
that reflects credit losses.
2) Doubtful The following objective and subjective criteria shall be used to identify
doubtful credit facilities:
i. Objective Criteria: facilities on which unpaid principal and/or interest
remain outstanding for at least 181 days but not more than 360 days.
ii. Subjective Criteria: facilities which, in addition to the weaknesses
associated with sub-standard credit facilities reflect that full repayment of
the debt is not certain or that realisable collateral values will be
insufficient to cover bank‟s exposure.
3) Lost Credit Facilities The following objective and subjective criteria shall be used
to identify lost credit facilities:
i. Objective Criteria: facilities on which unpaid principal and/or interest
remain outstanding for more than 360 days and off-balance sheet
engagements that have crystalized.
ii. Subjective Criteria: facilities which in addition to the weaknesses
associated with doubtful credit facilities, are considered uncollectible and

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 are of such little value that continuation as a bankable asset is unrealistic
such as facilities that have been abandoned, facilities secured with
unmarketable and unrealizable securities and facilities extended to
judgment debtors with no means or foreclosable collateral to settle debts.
f. A restructured or rolled-over facility shall not be treated as a new facility.
g. Where a credit facility already classified as “non-performing” is renewed, restructured or
rolled-over, that facility shall retain its previous classification as if the renewal,
restructuring or roll over did not occur.
h. For a credit facility classified as “non-performing” to be reclassified as “performing”, the
borrower must effect cash payment such that outstanding unpaid interest does not exceed
30 days.
i. When a facility rescheduling is agreed with a customer, provisioning shall continue until
it is clear that the rescheduling is working at a minimum, for a period of 90 days.
j. For a “non-performing” or “watchlist” facility to be re-classified as “performing”,
outstanding interest and due but unpaid principal shall not exceed 30 days. Similarly, for
a “non-performing” to can be re-classified as “performing”, outstanding interest and due
but unpaid principal shall not exceed 30 days.
k. Banks are required to adopt the criteria specified in paragraphs 6.01(a) to 6.01(e) to
classify their credit portfolios in order to reflect the recoverable values of their credit
facilities.
l. Banks should note that the CBN reserves the right to object to the classification of any
credit facility and to prescribe the classification it considers appropriate for such credit
facility.

Provision for facilities other than “Specialized loans”

a) Banks are required to make adequate provisions for perceived losses based on the credit
portfolio classification system prescribed. Two types of provisions (that is specific and
general) are considered adequate to achieve this objective.
b) Specific provisions are made on the basis of risk of default on credit facilities while
general provisions are made in recognition of the fact that a performing credit facility
may be inherently risky.
c) Consequently, banks shall make provisions for credits as specified below:
i. General Provision - 2 per cent of outstanding balance of performing facilities or
as may be advised by the CBN from time to time.
ii. Specific provisions shall be applied as follows:
 For facilities classified as non-performing, interest overdue by more than
30 days shall be suspended and recognized on cash basis only.

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  For facilities classified as non-performing principal repayments that are
past due shall be fully (100 per cent) provided for and recognized on cash
basis only.
 For outstanding principal of credit facilities classified as “watchlist”, 5 per
cent provision on the outstanding principal amount.
 For principal repayments that are not yet due on nonperforming credit
facilities, provisions shall be made on the outstanding principal balance as
follows:
 Sub-Standard: 20 per cent;
 Doubtful: 50 per cent;
 Lost: 100 per cent.
d) Provisioning and classifications under shall apply to commercial, commodities financing,
corporate, retail and consumer credits as well as facilities granted to federal, state and
local governments and their parastatals. Other credits or facilities not specifically
classified as specialized loans are also subject to provisioning.

Credit portfolio classification system for “Specialized loans”

a) Without prejudice to the developmental (intervention) facilities of the CBN, a specialized

loan has the following features:
i. The economic purpose of the loan is to acquire or finance an asset, which
typically serves as the collateral for the loan.
ii. The tenor of the loan shall not be less than two years.
iii. The cash flow generated by the collateral is the loan‟s sole or almost exclusive
source of repayment.
iv. The terms of the facility give the bank control over the collateral and the income
it generates.
v. The primary determinant of credit risk is the variability of the cash flow generated
by the collateral rather than the independent capacity of a broader commercial
enterprise.
b) Banks shall review their credit portfolio continuously (at least once in a quarter) with a
view to recognising deterioration in credit quality. Such reviews shall classify banks‟
credit exposures based on the perceived risks of default. In order to facilitate
comparability of banks‟ classification of their credit portfolios, the assessment of risk of
default shall be based on criteria which shall include, but are not limited to, cash flow
performance of the asset financed/collateral and the borrower‟s repayment capacity on
the basis of current financial condition.
c) For syndicated specialised loans, the classification shall be the same across all banks
involved in the syndication. Thus, the worst classification by any of the banks in the
syndicate shall apply across board.
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 d) Banks may consider granting obligors a moratorium on principal repayment and/or
interest based on the cash flow characteristics of the asset.
e) Specialised loans shall be classified as “performing”, “watchlist” or “non-performing” as
defined below:
i. Performing facility: A specialised loan is deemed to be performing if all due
principal and interest payments have been settled or if not past due by more than
90 days.
ii. Watchlist facility: A specialised loan shall be classified as „Watchlist‟ where the
overdue repayment obligation is between 5 and 15 per cent of the total
outstanding amount due or aggregate instalments thereof are overdue by 91 to 180
days.
iii. Non-performing facility: A credit facility shall be deemed as non-performing
when any of the following conditions exists:
iv. interest or principal is past due for more than 180 days;
v. interest past due for 181 days or more have been capitalised, rescheduled or rolled
over into a new loan;
vi. off balance sheet obligations crystallise.
f) Non-performing credit facilities shall be classified into four categories, namely sub-
standard, doubtful, very doubtful or lost based on the criteria below:
1. Sub-Standard: The following objective and subjective criteria shall be used to
identify sub-standard credit facilities:
i. Objective Criteria: where the overdue repayment obligation is more than
15 per cent but less than 25 per cent of the total outstanding amount or
aggregate instalments thereof are overdue by at least 181 days and not
more than two years.
ii. Subjective Criteria: a loan regarding which:
 A project milestone has been missed,
 There are indications that financial resources needed to complete
the project are insufficient,
 The contractor or borrower has recorded loss of its key
management staff,
 The contractor or borrower has filed for bankruptcy or been
declared bankrupt,
 There has been deterioration in the asset‟s debt coverage ratio,
2. Doubtful loans: The following objective and subjective criteria shall be used to
identify doubtful credit facilities:
i. Objective Criteria: where the overdue repayment obligation is more than
25 per cent but less than 35 per cent of the total outstanding amount or
aggregate instalments thereof are overdue by more than 2 years but not
more than three years.

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 ii. Subjective Criteria: Loans that in addition to subjective criteria for
classifying specialised loans as sub-standard, show the following
weaknesses,
 Available evidence suggests that the project will not be delivered
on time,
 There are indications that the contractor lacks adequate capacity to
complete the project,
 A key project sponsor has failed to honour its financial
commitment,
 Insolvency of any of the project participants where this will have a
material adverse effect on the project, or
 For agricultural loans, where a major disease epidemic has affected
the crop or animal production funded by the loan.
3. Very doubtful loans: The following objective and subjective criteria shall be used
to identify very doubtful specialised loans:
i. Objective Criteria: where the overdue repayment obligation is more than
35 per cent but less than 45 per cent of the total outstanding amount or
aggregate instalments thereof are overdue by more than 3 years but not
more than four years.
ii. Subjective Criteria: Loans that in addition to subjective criteria for
classifying specialised loans as doubtful, show the following weaknesses,
 There has been a cost overrun,
 The appraised value of the collateral become lower than the
carrying value of the loan,
 There is evidence that the project may not be profitable,
 Failure of the project to pass completion test, or
 Due to any reason whatsoever, the projected cash flows cannot be
realised
4. Lost loans: The following objective and subjective criteria shall be used to
identify lost specialised loans:
i. Objective Criteria: where the overdue repayment obligation is more than
45 per cent of the total outstanding amount or aggregate instalments
thereof are overdue by more than 4 years.
ii. Subjective Criteria: Loans that in addition to subjective criteria for
classifying specialised loans as very doubtful, show the following
weaknesses:
 The project has been abandoned, or
 For agricultural products, the crop funded by the loan has failed.
g) A restructured or rolled-over specialised loan shall not be treated as a new facility.

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 h) Where a specialised loan already classified as “non-performing” is renewed, restructured
or rolled-over, the loan shall retain its previous classification as if the renewal,
restructuring or roll over did not occur.
i) For a specialised loan classified as “non-performing” or “watchlist” to be reclassified as
“performing”, the borrower must effect cash payment such that outstanding interest and
due but unpaid principal shall not exceed 90 days. Similarly, for a specialised loan
classified as “non-performing” to be reclassified as “watchlist”, outstanding interest and
due but unpaid principal shall not exceed 180 days.
j) When a loan rescheduling is agreed with a customer, specific provisioning shall continue
until it is clear that rescheduling is working at a minimum, for a period of 90 days.
k) Banks are required to adopt the criteria specified in „a‟ – „j' above to classify their
specialized loans. The Central Bank of Nigeria reserves the right to object to the
classification of any credit facility and to prescribe the classification it considers
appropriate for such credit facility.

Provisioning for “Specialized loans”

a. Banks are required to make adequate provisions for perceived losses on their
specialized loans portfolio using the classification system prescribed in order to
reflect their true financial condition. Specific and general provisions are considered
adequate to achieve this objective.
b. Specific provisions are made on the basis of risk of default on specialized loans while
general provisions are made in recognition of the fact that a performing loan may be
inherently risky.
c. Consequently, all banks shall make provisions for credits as specified below:
1. General provision at 2 per cent of the outstanding balance of performing
specialized loans or as the CBN may advise from time to time.
2. Specific provisions shall be applied as follows:
i. For facilities classified as non-performing, interest overdue by more than
90 days shall be fully provided for and recognized on cash basis only.
ii. For facilities classified as non-performing, principal repayments that are
past due by 180 days shall be fully (100 per cent) provided for and
recognized on cash basis only.
iii. For outstanding principal of facilities classified as “watchlist”, 5 per cent
provision on the outstanding principal amount.
iv. For principal repayments that are not yet due on nonperforming
specialized loans, provisions shall be made on the outstanding principal
balance as follows:
 Sub-Standard, 20 per cent;
 Doubtful, 50 per cent;
 Very doubtful, 75 per cent

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  Lost, 100 per cent.
d. The classifications and provisioning for specialized loans shall take into
considerations the cash flows and gestation periods of the different loan types.

Collateral Adjustment for Lost Facilities

To encourage utilisation of more credit enhancement and mitigation strategies, collateral

adjustments shall be applied in loan provisioning. This process considers the quality and
realizability of underlying collaterals pledged against loan facilities.

1. For collateral to be considered for “Haircut Adjustments”, it must be:

i. Perfected;
ii. Realizable, with no restrictions on sale; and
iii. Regularly valued with transparent method of valuation
2. All documentation used in collateralized transactions must be binding on all parties and
legally enforceable in all jurisdictions. Banks must conduct sufficient legal review to
verify this and have a well-founded legal basis to reach this conclusion, and undertake
such further review as necessary to ensure continuing enforceability.
3. Valuations of residential and commercial properties shall be carried out by an
independent professional valuer. The valuer while assigning any values to the mortgaged
residential and commercial property shall take into account all relevant factors affecting
the saleability of such assets including any difficulty in obtaining their possession, their
location, condition and the prevailing economic conditions in the relevant sector,
business or industry.
4. The values of mortgaged residential and commercial properties so determined by the
valuer must be a reasonably good estimate of the amount that could currently be obtained
by selling such assets in a forced / distressed sale condition. Valuers shall also mention in
their report the assumptions made, the calculations / formulae/ bases used and the method
adopted in the determination of the values i.e. the forced sale value (FSV).
5. The following are collateral instruments eligible for collateral adjustment:
i. Cash (as well as certificates of deposit or comparable instruments issued by the
lending bank) on deposits with the bank which is incurring the counterparty
exposure.
ii. Treasury bills and other government securities.
iii. Quoted equities and other traded securities.
iv. Bank guarantees and receivables of blue chip companies.
v. Residential legal mortgage
vi. Commercial legal mortgage vii. Other collaterals as defined by the CBN from
time to time.

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Credit Portfolio Disclosure Requirement

a. Each bank is required to provide in its audited financial statements, an analysis of its
credit portfolio into “performing”, “watchlist”, and “non-performing” as defined in
these Guidelines
b. The amount of provision for deterioration in credit quality (that is, losses) shall be
segregated between principal and interest.
c. A maturity profile of credit facilities based on contracted repayment programme, shall
be provided along with the maturity profile of deposit liabilities in the financial
statement.
d. Banks are also to provide a vintage analysis of their portfolios as follows:
e. Other details as required by the CBN circular on “minimum information to be
disclosed in financial statements”.

Disclosure Requirement for “Specialized loans”

a. Banks shall disclose total loans outstanding under each specialized loan as at year end
and provision against the loans.
b. Banks shall disclose non-performing loans by loan types in the financial statements and
the percentage to total loans along with movement of specific provision under each
category.
c. The non-performing loans shall be classified under each classification category i.e.
substandard, doubtful, very doubtful and lost.
d. Banks are to provide a vintage analysis of their portfolios as follows:

Classification and Provisioning for Other Assets

a. The term “other assets” relates to those asset items that are not shown separately in the
balance sheet of a bank. These items include impersonal accounts (of various
descriptions), suspense accounts such as frauds and cashiers‟ shortages, Cheque
Purchased, Uncleared Effects and Inter-Branch Items. The accounts could contain long
outstanding items, the origins of which had been forgotten, untraceable or irreconcilable.
In situations like these, the items if not material shall be written off and where material
(i.e. at least 10 per cent of aggregate balance of Other Assets) shall be classified as shown
below. It shall be noted that items enumerated below are by no means exhaustive
1. Sub-Standard Fraud cases of up to 1 month but less than 3 months old and under
police investigation regardless of the likely outcome of the cases. A minimum
provision of 20 per cent shall be made for “Other Assets” classified as sub-
standard.
2. Doubtful Items for doubtful classification shall include, but are not limited to
outstanding fraud cases of 3 to 6 months old, with slim chances of full recovery.

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 A minimum of 50 per cent provision shall be made for “Other Assets” classified
as doubtful.
3. Lost Items for lost classification shall include, but are not limited to the following:
i. Cheques purchased and uncleared effects over 30 days old and for which
values had been given.
ii. Outstanding fraud cases over 6 months old and involving protracted
litigation.
iii. Inter-branch items over 30 days old whether or not the origins are known.
iv. All other intangible suspense accounts over 30 days old.
v. Full provision (i.e. 100 per cent) shall be accorded to items classified lost.

Revolving and Overdraft Facilities:

a. Normally the first indication that a revolving or overdraft facility may be non-performing
is when the turnover on the account is considerably lower than anticipated when the
facility was arranged or when interest is charged which takes the facility above its
approved limit.
b. The following conditions shall be observed for a revolving or overdraft facility
i. There shall be “clean-up period1” of at least two (2) weeks before a revolving or
overdraft facility can be rolled-over.
ii. There shall be a maximum of 90 days “clean-up cycle2” on every revolving or
overdraft facility
iii. Except for new customers, the amount of facility shall not exceed 200 per cent of
average monthly turnover in the last six months
c. Banks are required to classify revolving or overdraft facilities as specified below:
i. Performing: Where all conditions of the contract are met and repayments are up to
date.
ii. Watchlist: a. Where any of the conditions listed in (b) above are not specified in
the offer/contract; and/or b. The turnover over the last 30 days is less than 75 per
cent of the turnover specified in the offer/contract.
iii. Non-performing:
a) Sub-standard – Where:
 One (1) clean-up cycle is not observed,
 The account is “above limit” for 30 consecutive days, or ac.
Turnover of the last 30 days is less than 50 per cent of the turnover
specified in the offer/contract
b) Doubtful – Where:
 Two clean-up cycles are not observed,
 The facility is “above limit” for 60 consecutive days, or ac.
Turnover of the last 30 days is less than 30 per cent of the turnover
specified in the offer/contract

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 c) Lost – Where:
 The facility has been operating “above limit” for 90 days,
 More than two clean-up cycles are not observed, or
 The facility expired but unpaid for more than 14 days
d) Banks are to make general and specific provisions on revolving/overdraft
facilities as follows:
i. General provisions: 2 per cent on performing facilities
ii. Specific Provisions: Specific provisions shall be made as follows:
 Watchlist: 5 per cent
 Sub-Standard: 20 per cent;
 Doubtful: 50 per cent; and
 Lost: 100 per cent. e) In the case of revolving and overdraft
facilities, where a facility rescheduling is agreed with a
customer, provisioning shall continue until it is clear that
the rescheduling is working at a minimum for a period of
90 days.

Facilities Without Approval

Banks shall not allow accounts to be overdrawn without due approval. For accounts that were
inadvertently overdrawn, the account shall be regularized within 30 days or be fully provided for.

Off- Balance Sheet Engagements

a. A proper appraisal of Off-Balance-Sheet engagements shall be undertaken with a view to

determining the extent of loss a bank may likely sustain. Off-Balance-Sheet items include
letters of credit, bonds, guarantees, indemnities, acceptances, and pending or protracted
litigations (the outcome of which may not be easily determined).
b. The following factors shall be taken into consideration in recognizing losses on Off-
Balance-Sheet engagements:
i. Date the liability was incurred
ii. Expiry date
iii. Security pledge
iv. Performance of other facilities being enjoyed by the customer, e.g. loans and
advances
v. Perceived risk.
c. Non-performing off balance sheet items shall be recognized on the balance sheet,
classified lost and provisions made in line with the provisions
d. Off-Balance-Sheet Engagements shall not form part of balance sheet totals while their
disclosure in note form shall distinguish between:

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 i. direct credit substitutes, e.g. general guarantees of indebtedness (including
standby letters of credit serving as financial guarantees for loans and securities),
and acceptances (including endorsements with the character of acceptances)
ii. certain transaction-related contingent items (e.g. performance bonds, bid bonds,
warranties and standby letters of credit related to particular transactions;
iii. short-term self-liquidating trade related contingencies (such as documentary
credits collateralized by the underlying shipments)
iv. sale and repurchase agreements and assets sales with recourse, where the credit
risk remains with the bank;
v. forward asset purchases, forward deposits and partly-paid shares and securities,
which represent commitments with certain draw down;
vi. note issuance facilities and revolving underwriting facilities;
vii. other commitments (e.g. formal standby facilities and credit lines) with an
original maturity of over one year;
viii. similar commitments with an original maturity of up to one year, or which can be
unconditionally cancelled at any time.
ix. Commitments that are unconditionally cancellable, or that effectively provide for
automatic cancellation due to deterioration in a borrower‟s creditworthiness,
x. Lending of banks‟ securities or the posting of securities as collateral by banks,
including instances where these arise out of repo-style transactions (i.e.
repurchase/reverse repurchase and securities lending/securities borrowing
transactions)
e. Banks shall make a general provision of 2 per cent of the credit equivalent value (CEV)
of off-balance sheet engagements.
f. To compute the CEV, banks shall apply a credit conversion factor of 50 per cent to all
categories of off-balance sheet engagements.

Regulators‟ Power Over Adequacy of Provisioning

a) Where CBN believes that based on the bank‟s portfolio analysis, there is
excessive concentrations risk, or has industry knowledge of a delinquent
obligor and other subjective factors, the CBN can mandate banks to make
additional provision.
b) Some of the conditions that can make CBN to mandate banks to make
additional provision include:
i. Huge (excessive) concentrations in banks‟ portfolios.
ii. High number of watch listed or restructured or rescheduled loans.
iii. Adverse macro-economic developments affecting the industry to
which the bank is exposed.
iv. Poor board oversights and insider dealings etc.

NPL Limit
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Banks are required to manage their credit risk effectively. To this end, all banks are to ensure
that the level of NPLs in relation to gross loans does not exceed 5 per cent. 7

Financial soundness indicators and financial ratios

a. Banks are required as part of their risk management framework to institute a process for
computing financial ratios and financial soundness indicators for checking financial
health of each institution.
b. Benchmarks shall be set and actual results computed and compared to the benchmarks at
least on a quarterly basis. The report shall be presented to the Board of Directors or
appropriate Board Committees for deliberation and remedial actions as considered
necessary;
c. Illustrative examples of financial soundness indicators and financial ratios for banks are
presented in Annexures 1 and 3 8.0 Update of the Prudential Guidelines The CBN shall
review these Guidelines as and when necessary but not later than five years from the
effective date set out below. 9.0 Effective date These Guidelines shall take effect from
January 1, 2020 and supersedes the Prudential Guidelines for deposit money banks in
Nigeria issued on June 30, 2010.

Format of Banks
Income statement for the year ended 31st December, 20XX
Note ₦’000 ₦’000
Interest income 1 X
Interest expenses 2 (X)
Net interest income XX
Operating expenses 3 X
Provision for risk assets 4 X
Depreciation (X)
XX (XX)
Profit before taxation XX
Taxation 5
Profit after taxation
Appropriation:
Transfer to statutory reserve 6 X
Transfer to small scale industries reserves 7 X
Proposed dividend 8 X
(XX) (XX)
Retained profit for the year 9 XX
Transfer to general reserve (X)
XX
Earnings per share (EPS) in kobo X
Dividend per share (DPS) in kobo X

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 Format of Banks
Statement of Financial Position as at 31st December, 20XX
Assets: Note ₦’000 ₦’000
Cash and short term fund 10 X
Placements with other banks and financial institution 11 X
Bills discounted 12 X
Other investments 13 X
Loan and advances 14 X
Advances under Finance Lease 15 X
Other Assets 16 X
Equipment on Lease 17 X

Non-Current Assets 18 XX

Financed by:
Liabilities:
Deposit and currents accounts 19 X
Taxation 20 X
Deferred taxation 21 X
Other liabilities 22 X
(a) XX
Capital Reserve:
Called up share capital 23 X
Share premium 24 X
Statutory reserve 25 X
Small scale industries reserves 26 X
Non-current assets revaluation surplus 27 X
General reserve 28 X
Shareholders fund (b) XX

Total Liabilities (a + b) XX

Acceptances and guarantees 29 X

Notes to the Accounts

1. Interest Income:
Advances and overdraft
Treasury bills
Call money
Discounted bills

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 Less transfer to suspense account

2. Interest Expenses:
Interest paid on call money
Interest on staff current account
Short term fixed deposit
Savings account
Sundry operations

3. Provision for Risk Assets:

Performing (1% of Performing loans)
Substandard (10% of Non-performing laons)
Doubtful (50% of Non-performing loans)
Lost (100% of Non-performing loans)
XX
Old provision b/f
Increase/decrease in provision for the year
Add: Bad debts written off
Less: Recoveries during the year
Per income statement

4. Other Income:
Commission on turnover
Commission on discounted bills
Commission for collection
Commission on guarantee and bonds
Commission on NITEL bills collected
Foreign exchange earnings
Other sundry income

5. Profit before tax is stated after charging:

Director‟s emoluments
Auditor‟s remuneration
Insurance premium and deposit liabilities
Depreciation of non-current assets

6. Taxation:
Income and education tax based on profits profit for the year
Less over provision in the previous year

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 Add deferred taxation

7. Statutory Reserve:
Balance b/f
Transfer from income statement
Per statement of financial position

8. Small Scale Industries Reserve:

Balance b/f
Transfer from income statement
Per statement of financial position
9. Proposed dividend:
The dividend proposed is X kobo on each X Billion ordinary shares issued

10. Earnings Per Share (EPS):

The EPS is calculated using Profit after tax for the year on the X Billion ordinary shares
issued as at 13st December, 20XX

11. Cash and Short Term Funds:

Cash in hand
CBN current account
Cash reserve at CBN
Foreign bank current account
Call money with local banks
Treasury bills
CBN stabilization securities

12. Investments:
Loan notes stock
Commercial papers
Associated company

13. Loans and advances:

i. Analysis by securities quality:
Secured against real estate
Otherwise secured
Unsecured

Less: Allowance for doubtful a/c (Note 3)

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 Less: Interest in suspense
ii. Analysis of securities by performance:
a. Performing
b. Non-performing:
Substandard
Doubtful
Lost

14. Other Assets:

Suspense account

15. Non-Current Assets:

Details L&B P&M MV F&F Equip Total
₦‟000 ₦‟000 ₦‟000 ₦‟000 ₦‟000 ₦‟000
Cost at First xxx xxx xxx xxx xxx xxx
Additions xxx xxx xxx xxx xxx xxx
Disposals (xxx) (xxx) (xxx) (xxx) (xxx) (xxx)
At Last (a) xxx xxx xxx xxx xxx xxx

Depreciation:
At First xxx xxx xxx xxx xxx Xxx
Charged for the year xxx xxx xxx xxx xxx Xxx
At Last (b) xxx xxx xxx xxx xxx Xxx

NBV (a – b) xxx xxx xxx xxx xxx Xxx

16. Deposits:
Savings account
Current accounts
Deposit account
Call money from local banks
Domiciliary account

17. Other Liabilities:

Accrued charges (x + x)
Tax payables
Proposed dividend
Sundry balances

18. Deferred Taxation:

Balance at first
Charge for the year

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 19. Authorized and Issued Share Capital:
a. Balance b/f
Transfer from bonus issue reserve
b. Bonus issue reserve:
Balance b/f
Transfer to issued share capital

20. General reserve:

Balance b/f
Transfer from income statement
Illustration 1
The following balances were extracted from the books of Reliable Bank PLC as at 31st
December, 2023.
₦‟000 ₦‟000
Land and building 322,850
Plant and machinery 183,000
Motor vehicles 120,000
Furniture and fittings 118,500
Computer equipments 325,000
Accumulated depreciation:
Building 99,020
Plant and machinery 80,710
Motor vehicle 30,930
Furniture 55,360
Computer equipments 31,540
Interest paid on call money 172,350
Interest on staff current account 68,270
Interest on short-term fixed deposits 393,550
Interest on savings account 98,820
Interest on sundry operations 10,800
Bad debts 39,250
Salaries and allowances 521,400
General statutory expenses 143,240
Computer stationary expenses 204,140
Printing of check booklets 62,100
Legal fees 3,710
Transport and travelling expenses 38,960
Advertisement and public relations 89,330
Deposits insurance 124,840
Property insurance 39,720
Loan and advances 3,682,630
Social insurance charges 14,990

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 Suspense account 210,610
Investment in loan notes stock 350,000
Investment in commercial papers 210,000
Investment in associated company 623,350
Cash in hand 112,300
CBN current account 3,958,390
Cash reserve at CBN 1,500,000
Foreign bank current account 5,500,000
Call money with local banks 4,113,500
Treasury bills 220,000
CBN stabilization securities 193,460
Ordinary share capital of ₦1 per share 2,200,000
Reserve for bonus issue 2,800,000
Retained earnings 750,660
Statutory reserve 812,210
Small scale industry reserve 220,500
Domiciliary account 5,837,250
Customer‟s deposit for foreign currencies 217,300
Savings account balance 1,385,330
Current account balance 3,285,140
Deposit account balance 621,350
Call money from local banks 1,428,840
Company income tax over provision 2,360
Deferred taxation 2,000
Interest on treasury bills 681,600
Interest on call money 896,020
Interest on discounted bills 153,890
Interest on advances and overdraft 1,004,120
Commission on discounted bills 28,130
Commission on bills for collection 4,930
Commission on turnover 107,090
Commission on guarantee/bonds 6,580
Commission on NITEL bills collected 2,210
FOREX earnings 650,540
Other sundry income 111,710
Interest on suspense account 3,720
Bad debts recovered 78,610
Provision for bad and doubtful debts 179,410
23,769,060 23,769,060

The following additional information is provided for your consideration.

a. Loans and advances were made up of:
Loans secured against real estate ₦1,120,650,000
Otherwise secured ₦1,641,320,000

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 Unsecured ₦920,660,000
₦3,682,630,000

b. Performance of loan and advance are analyzed as follows:

Performing loans 70.5%
Substandard facilities 21.0%
Doubtful facilities 8.0%
Lost facilities 0.5%

20% and 30% of the substandard and doubtful facilities were due for payments as
at 31st December 2023 respectively. Provision for bad and doubtful debts should
be made on loans and advances in accordance with the provisions of the
prudential guidelines.
c. Salaries and allowances include director‟s emoluments of ₦25,000,000.
d. The balance on reserve for bonus issue should be transferred to ordinary share
capital accounts.
e. Make the necessary transfer to statutory and small scale industries reserves.
f. A dividend of 12k per share should be paid based on the new share capital.
g. Accruals includes the following:
i. Legal fees ₦2,290,000
ii. Audit fees ₦12,000,000
h. Non-Currents Assets are to be depreciated by applying the following rates:
i. Building 2%
ii. Plant and machinery 10%
iii. Motor vehicle 10%
iv. Furniture and fittings 12%
v. Computer equipments 15%
i. A provision of ₦330,640,000 should be made in the income statement to cover
company income and education tax while ₦20,000,000 should be provided for
deferred tax.
j. ₦5,000,000 out of interest on loans and advances should be transferred to
suspense account.
k. Some assets were revalued at 13st December 2023. The result of the revaluation
suggested that building should be revalued at ₦20,000,000 while plant and
machinery should be revalued at ₦17,000,000.

Required:

We are required to prepare a statement of comprehensive income for the year ended
31st December 2023 and a statement of financial position as at that date in a form
suitable for publication.

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