Accounting Analysis of the 2011 Annual Report for Bank of Queensland Limited Essay

1. Executive SummaryThe aim of this get across is to allow for an story abbreviation of the 2011 annual get over for assert of Queensland Limited (BOQ), and a critique of the addressing of their carrying into action. The get over discusses the choice of news report policies and the flexibility of these policies. The chief(prenominal) objective of this report is to evaluate and recognise the possibility of utilise fictive method of accounting in spite of appearance the caller-out, recognise and questionable accounting payoffs within items listed earlierly. A number of items have been selected from Income Statement, Balance Sheet and Cash coalesce Statement.2. OverviewBank of Queensland Limited (BOQ), has history of 137 years with network of over 280 branches ope symmetrynal in Queensland. It offers core lodgeing ( technical/retail), equipment finance, wealth write outment and insuranceservices. BOQ is listed on the ASX and uses its unique fancy of the Owner-Ma naged Branch (OMB),a partnership between the Bank of Queensland (franchisor) and experienced bank managers (franchisees) to raise banking services.See to a greater extentCapital budgeting essay3. Description of key accounting policies and standards3.1 Loans and advances at amortised hail (Asset)As shown on BOQs Balance shred in FY11, lends and advances at amortised cost atomic number 18 big-ticket itemsin its additions accounting for al nearly 98 per cent. According to the signifi buttt accounting policies explored by BOQ annual report 2011, loans and advances argon originated by the bank and are recognized upon cash beingness advanced to the borrower. Based on AASB13, loans and advances are initially recognised at picturesque value plus incremental direct transaction cost using the effective sake method.3.2 Deposits and borrowing (Liability)Deposits, as the one of the most important cash inflows of the bank, follow ruleAASB13 as sound. They are initially recognised at fa ir value plus transaction costs and thenby using the effective interest method, they are measured at amortised cost. It is classified in two concentrations retail deposits and wholesale deposits.3.3 Employee benefits (Expense)This item follows AASB119Employee Benefits which has been amended in its accounting rules affecting the measurement of its obligations and the timing of recognition of termination benefits. Employee benefits dismiss be classified to four categories wages, salaries and annual leave long service leave superannuation plan and share based payments.4. tractableness of Management in Selecting the Key score Policies It is undeniable that having flexiblemanagement can exert positive set up on the presentation of companys annual pecuniary report. Specifically, from the Bank of Queenslands perspective, if mangers have considerable adaptability in selecting the key accounting policies, the financial achievement of Bank of Queensland Ltd can be improved therefore mor e investors and customers would give forwardity to co in operation(p) with them in the afterlife. 4.1 Loan and Advances at Amortized Cost4.1.1 Flexibility summary The measurement of loans and advances at amortized cost is extremelyfavourable to commercial banks. From BOQs amalgamated financial annual report, the loan and advances at amortized cost accounted for around 83.3% of thorough assets in 2011, it had increased from 31,736,5 million to 33,276,1 million during 2010 to 2011. This transmute in $1539, 6 million was caused by disability take downs made by managers of the bank. The increase of loans and advances at amortized cost could enhance the customers trust in the bank.Sincefinancial funds, credit business and debts are the core business transaction of the banking industry, this itemappears to increase receivable accounts. Also, as banks could charge a reasonable rate of interest on such future loans/advances, they are able utilizethis income to pay current liabilitie s, wage and salaries of employees, and also the levy liability of business. Consequently, the BOQs managers have selected a flexible accounting indemnity in this item.4.1.2 Accounting policies analysisBeing dominant in the assets, loans and advances at amortized cost carries the burden of generating cash. The way that Bank of Queensland recognizes loans and advances at amortized cost can be separated to two phases. Initially, loans are recognized at fair value plus incremental direct transaction costs. Secondly, BOQ uses effective interest method to measure the amortized cost at each reporting date. The return of this accounting policy is that including direct transaction cost in the loan price can offset the actual transaction cost occurred and maximise the profit for the bank. Additionally, the effective interest method is considered as one of the prior methods for amortizing a bond discount. Theoretically, investors require a discount on bonds because the merchandise interes t rate at the time of issue is uplifteder than the coupon payments on the bond. Therefore, by amortizing the discount at the market interest rate, accounting statement of Bank of Queensland will exactly reveal the economic world of the bond issue and its true cost of debt.4.2Deposits and Borrowing4.2.1 Flexibility Analysis Due to the characteristics of banking industry, there is a risque flexibility for management in these two liabilities. It is noticeable that deposits and borrowing accounted for about 97% of total liabilities on the balance canvas tent. Occupying 69% of total deposits, managers pay more attention to retail Banking Services because of itsattractiveness to customers compared to other types of deposits.4.2.2 Accounting Policies AnalysisThis policy states that securitization set-up costs relating to on-balance canvas tent assets are included with securitization borrowings, and amortization is recorded as interest expense. Initially, excluding off-balance sheet c osts makes the liability much smaller and enlarges their net assets. Likewise, interest on debt is a tax-deductible expense and creates a tax shield benefiting Bank of Queensland. The major function for this policy is to save cash flows for BOQ.4.3 Employee Benefits4.3.1 Flexibility Analysis Employee expenses mainly consist of share based payments and employee benefits. All of these kinds of financial activities are beneficialto BOQ.The government issue from increasing incentives to employees applies as it encourages them to performenthusiasticallywhicheventuallyleads to higher profits for the firm.4.3.2 Accounting policy analysisAmong Employee Benefits, shared based payments are distinguished. The accounting policy demonstrates that Bank of Queensland allows employees to adopt its shares, options and rights sold recognized in the Employee Benefits Reserve. This expense could be reversed if the dismission is not out-of-pocket to a market condition. This is highly beneficial as it encourages employees to purchase shares of their own company but, on the other hand, as more shares are sold, the higher price rises in the stock exchange.5. Quality of revealing Made in BOQ AccountsThe quality of disclosure in the BOQs policies, strategy, performance and financial statements and reports is satisfactory as it supplys accessible, transparent and fairly justified information. As the BOQ is a listed company, it has to comply with all ASX disclosure policies and reporting but in addition it also complies with the ASX Corporate Governance Recommendations as well as the Australian prudential Standards (APS) ( net income announcement 2011). In the profit announcement report for 2011, BOQ discloses a number of disclosure principles which include management, board structure, ethical and trustworthy decision making, financial reporting, timely and balanced disclosure, respect rights of shareholders, recognize and manage take chances, remuneration.5.1 Business Strateg y and Economic ConsequencesThe business strategy and economic consequences are disclosed in the notes to the annual report in terms of the pretend management of the company. As it explains in these notes the bank approach is to manage its risk in terms of credit risk, market risk, liquidity, operational risk, compliance policies and outstanding management. As it states in the annual report there is a high level of assessment and monitoring of these risks in point to follow the companys strategy.5.2 Notes to the Financial Statements Explanation of Policies The notes to the financial statements and reports do provide an explanation to the banks management policies. According to the 2011 Annual Report these policies provide effectiveness and efficiency in terms of managing the risks described above as well as creating controls to support growth and competitive advantage. An example of these policies in 2011 was a conceptive expense management which lead them to reduce their cost-t o-income ratio from 45.8% to 44.5%. Moreover, these policies provide regulatory compliance as well as performance management.5.3 Explanation of Current PerformanceBOQ through and through its yearly Profit Announcement Report actualizely explains its current performance in terms of its main(prenominal) activities. It states its current level of profitability and the main reasons for any press releasees. As well as these profit or dismissiones explanations the report shows explanations for changes in expenses, asset growth, retail deposit growth, branch network expansion and crownwork management.5.4 Accounting / Financial RulesIn terms of financial conventions that restrict the firm as a banking institution, the main one is the Basel II Accord in which the bank is obligated to maintain capital adequacy requirements. In the 2011 Annual report is mentioned that Tier 1 capital made up of equity capital and disclosed reserves was higher than required by Australian Prudential Regulati on Authority (APRA). Moreover, AASB 124 Related Party revelations is additionally disclosed in order to understand the impact on the firm. Moreover it discloses all its unite statements for all subsidiaries of the group following all consolidation standards.5.5 Segment DisclosureThe quality of the segment disclosure for BOQ is sufficient as it discloses its two operating segments, and since the bank operates only in Queensland, it does not need geographical segmentation. It discloses the high level metrics for both of the banking and insurance segments as well as consolidated totals (Annual Report 2011 pg. 89). Also, following consolidation requirements it eliminates inter-company transactions (Annual Report 2011 pg. 89).6. impugnable Accounting NumbersThe most important and questionable numbers can be seen in the yearly Profit Announcement where BOQ announced a net leaving after tax of 90.6 million AUD. The explanation for this loss was attributed to significant disablement ch arges. As the income analysis shows that the company made a reasonable operating income loss, but the large part of the loss was collectible to a revision of their commercial loans and provisioning approach. They decided to increase these particularised commercial loan provisions more than close to 90 million due to the continuous decline in commercial property in Queensland. on with loan checks, the bank also impaired a substantial essence of assets, also because of the decline if commercial property.Furthermore in the Directors Report in 2011 there were some potential red flags regarding remuneration. As the bank went through a restructure last year there were a number of high level managerial positions that changed in this period. During this transition there were a number of payments classified as others that did not have a clear explanation. An example of this includes a payment of half a million dollars to the previous CEO to ensure a smooth transition between him and the impudently appointed CEO. While taking into account the Directors report is audited by KPMG, this payment seemed excessive.7. Undone DistortionsBased on previous parts, the culture has arrived that BOQ suffered net loss of $90.6 million because of the tremendous growth in impairment loss. The footnote disclosures in the Profit Announcement provide the composition of the impairment loss. According to note 11, loan impairment expenses totalled $327.7 million. $165.7 million of this amount is specific provision impairment and the rest $162 million relates to collective provision. Moreover, impairment loss for assets also amounts to $578.7 million. Note 4suggests that BOQs management increase its impairment loss based on their estimates of dropping commercial property market. However, this estimate comes from diachronic experience and professional judgment. In contrast, the estimate might be variant from actual results. Therefore, distortions may arise resulting from overstated imp airment loss. In order to undo the distortion, the impairment loss should have been adjusted to a land level with fewer provisions.8. Financial Press DiscussionsEven before the Profit Announcement of BOQ came out, many financial reporters foresaw the net loss of BOQ resulting from increasing impairment loss. The downturns in tourism and recent natural disasters impacted Queenslands thriftiness negatively, and the conditions in Queensland were expected to remain challenging in the future because of strong Australian dollar. As a result, for BOQ a company that is highly subject to Queensland housing market, the current poor performance of might not change in short term.Following by the poor performance, BOQ isnow struggling to keep regulators contented and keep its capital at acceptable level. On 26 establish 2012, BOQ announced aequity rising of $450 million. However, by doing this, the existing shareholders of BOQ will be heavy diluted and it will cause its share price to drop significantly.