Chapter 13 · Part 13 — A Complete Worked Bank

Fifteen transactions, traced through every statement

Deposit, loan, default, write-off, share issue, bonus, lease, acquisition — and one loan followed across five years.

43 of 51 · 16 min

Transaction 3 — Interest accrues on that loan (11% p.a., one month)

100,000,000 × 11% × (1/12) = NPR 916,667

Dr  Interest receivable / Loans              916,667
    Cr  Interest income                                 916,667

Statement	Effect
Balance sheet	Loans (or Other assets) +917
P&L	Interest income +917 → profit +642 after 30% tax
Cash flow	NONE — no cash received
Distributable profit	! If uncollected at year end, it is stripped out via Interest receivable (Part 7.9)

Transaction 4 — Customer repays NPR 50,000,000 principal + NPR 5,500,000 interest

Dr  Cash and cash equivalent               55,500,000
    Cr  Loans and advances to customers                50,000,000
    Cr  Interest receivable                             5,500,000

Release the Stage 1 ECL on the repaid portion:
Dr  Allowance for impairment                  600,000
    Cr  Impairment charge/(reversal)                      600,000

Statement	Effect
Balance sheet	Cash +55,500; Loans −50,000; Receivable −5,500
P&L	Impairment reversal +600 → profit +600 (interest was recognised earlier)
Cash flow	Operating: Interest received +5,500; Loans and advances +50,000 (inflow)

Ratio effects:

CD ratio       ▼    NLA  ▲    RWA  ▼  →  CAR  ▲
Distributable profit  ▲ — previously accrued interest now RECEIVED,
                          so the Part 7.9 adjustment REVERSES (+)

Transaction 5 — The loan goes bad: classified Substandard, moves to Stage 3

Regulatory provision required at 25% (illustrative [R]):
   50,000,000 × 25% = 12,500,000
NFRS 9 lifetime ECL:
   PD 100% × LGD 35% × EAD 50,000,000 = 17,500,000

HIGHER OF the two = NPR 17,500,000  ← NFRS 9 wins here
Allowance already held                    600,000
Incremental charge                     16,900,000

Dr  Impairment charge for loans          16,900,000
    Cr  Allowance for impairment                     16,900,000

AND interest accrual STOPS. Future interest on cash basis only.

Statement	Effect
Balance sheet	Allowance +16,900 → net loans −16,900
P&L	Impairment −16,900; plus interest income forgone ~5,500/yr
Cash flow	NONE — impairment is non-cash
Equity	Retained earnings −11,830 (after 30% tax relief)

Ratio effects:

NPL ratio           ▲      Coverage        ▲ (more provision)
Net NPL             ▲      Credit cost     ▲
RWA                 ▲ (higher weight on impaired exposure) [R]
CAR                 ▼▼ (capital down AND RWA up — the double hit)
ROA, ROE            ▼      EPS             ▼
Operating cash flow —      Deferred tax asset  ▲

The lesson — quantify the double hit (Part 8.D.7):

Impairment charge          16,900
Interest income forgone     5,500
                          ───────
Total pre-tax impact       22,400  on a NPR 50m loan

A loan going bad costs far more than its provision.

Transaction 6 — Write-off of a fully-provided loan of NPR 20,000,000

Dr  Allowance for impairment              20,000,000
    Cr  Loans and advances to customers               20,000,000

Statement	Effect
Balance sheet	Gross loans −20,000; Allowance −20,000; net loans UNCHANGED
P&L	NONE — the cost was recognised when the allowance was built
Cash flow	None
Equity	None

Ratio effects:

NPL ratio       ▼  (numerator AND denominator both fall)
Coverage        ▼  (allowance falls faster than NPL, proportionally)
Net NPL         —  (unchanged: net loans and net NPL both unaffected)
CAR             —

Transaction 7 — Bank buys NPR 5,000,000,000 of 91-day treasury bills at a discount

Purchase price 4,925,000,000; face value 5,000,000,000

Dr  Investment securities                4,925,000,000
    Cr  Cash and cash equivalent                     4,925,000,000

Discount accretes over 91 days via EIR:
Dr  Investment securities                   75,000,000
    Cr  Interest income                                 75,000,000

Statement	Effect
Balance sheet	Investment securities +4,925,000; Cash −4,925,000
P&L	Interest income +75,000 over the tenor
Cash flow	Investing: Purchase of investment securities −4,925,000

Ratio effects:

NLA             ▲ (government securities are liquid)
RWA             ▲ minimally (low/zero risk weight [R])
CAR             ▲ (RWA barely moves, income adds capital)
Cash            ▼
CD ratio        — (neither loans nor deposits change)
ROA             ▼ marginally (lower yield than lending)

Transaction 8 — Sale of an FVOCI-designated equity investment

Cost NPR 500,000; carrying amount NPR 700,000
(NPR 200,000 cumulative gain sits in the fair value reserve)
Sold for NPR 700,000

Dr  Cash                                      700,000
    Cr  Investment securities                            700,000

Transfer the cumulative gain WITHIN EQUITY:
Dr  Fair value reserve                        200,000
    Cr  Retained earnings                                200,000

Statement	Effect
Balance sheet	Cash +700; Investments −700
P&L	NONE — the gain is never recycled
OCI	None in the current period
Equity	Fair value reserve −200; Retained earnings +200; total unchanged
Cash flow	Investing: Receipts from sale of investment securities +700

Ratio effects:

EPS             —  (no P&L effect at all)
ROE             —
Distributable profit  ▲ 200 — the gain moves into retained earnings
                              and BECOMES distributable

Transaction 9 — Purchase of PPE: 500 computers at NPR 90,000 each

Cost = 500 × 90,000 = NPR 45,000,000

Dr  Property and equipment                45,000,000
    Cr  Cash                                          45,000,000

Annual depreciation, 5-year life, straight line:
45,000,000 ÷ 5 = NPR 9,000,000

Dr  Depreciation & Amortisation             9,000,000
    Cr  Accumulated depreciation                        9,000,000

Statement	Effect
Balance sheet	PPE +45,000, then −9,000 per year
P&L	Depreciation −9,000 per year for 5 years
Cash flow	Investing: Purchase of property and equipment −45,000 in year 1 only
Equity	Retained earnings −6,300 per year (after tax)

Ratio effects:

Cost-to-income  ▲     ROA  ▼     RWA  ▲ (fixed assets carry a weight [R])
CAR             ▼     NLA  ▼

Transaction 10 — Rights issue: 10,000,000 shares at NPR 250 (par NPR 100)

Proceeds = 10,000,000 × 250 = NPR 2,500,000,000
Par      = 10,000,000 × 100 = NPR 1,000,000,000
Premium  = 10,000,000 × 150 = NPR 1,500,000,000

Dr  Cash                                2,500,000,000
    Cr  Share capital                                1,000,000,000
    Cr  Share premium                                1,500,000,000

Statement	Effect
Balance sheet	Cash +2,500,000; Share capital +1,000,000; Premium +1,500,000
P&L	NONE — a capital transaction, not income
Equity	+2,500,000
Cash flow	Financing: Receipt from issue of shares +2,500,000

Ratio effects:

CET1            ▲ 2,500,000   → CAR ▲▲ (both CET1 and total)
Shares outstanding 178.5m → 188.5m
EPS             ▼ 4,200,000,000 ÷ 188,500,000 = NPR 22.28 (from 23.53)
ROE             ▼ (more equity, same profit)
Net worth/share ▲ (35,420,000,000 ÷ 188,500,000 = NPR 187.90)
NLA             ▲

Transaction 11 — Dividend declaration and payment (5% cash on NPR 17,850,000 capital)

ON AGM APPROVAL:
Dr  Retained earnings                       892,500,000
    Cr  Dividend payable (Other liabilities)            892,500,000

ON PAYMENT (net of dividend tax [R] at, say, 5%):
Dr  Dividend payable                        892,500,000
    Cr  Cash                                            847,875,000
    Cr  Dividend tax payable                             44,625,000

Statement	Effect
Balance sheet	Retained earnings −892.5; then Cash −847.9
P&L	NONE — a distribution, never an expense
Equity	−892.5
Cash flow	Financing: Dividends paid −892.5
Distributable profit	−892.5 carried forward

Ratio effects:

CET1  ▼  → CAR ▼        NLA  ▼        Book value per share  ▼
EPS   —  (profit unaffected)

Transaction 12 — Bonus share issue (5% stock dividend)

17,850,000,000 × 5% = NPR 892,500,000

Dr  Retained earnings                       892,500,000
    Cr  Share capital                                   892,500,000

Statement	Effect
Balance sheet	Retained earnings −892.5; Share capital +892.5
P&L	None
Equity	UNCHANGED — total is identical
Cash flow	ABSENT — non-cash, correctly excluded (NAS 7)
Distributable profit	−892.5, permanently

Ratio effects:

Total equity    —          CET1  —          CAR  —
Shares          178.5m → 187.425m
EPS             ▼ and ALL PRIOR PERIODS MUST BE RESTATED (NAS 33)
Net worth/share ▼ (same equity, more shares)
Distributable profit per share  ▼

Transaction 13 — Issue of a NPR 3,000,000,000 subordinated debenture, 10 years, 9%

Issue costs NPR 30,000,000

Dr  Cash                                  2,970,000,000
    Cr  Debt securities issued                        2,970,000,000

Semi-annual coupon: 3,000,000,000 × 9% × 6/12 = 135,000,000
Dr  Interest expense                        135,000,000
    Cr  Cash                                            135,000,000

Annual appropriation to redemption reserve (SoCE, not P&L):
Dr  Retained earnings                       300,000,000
    Cr  Capital (Debenture) Redemption Reserve          300,000,000

Statement	Effect
Balance sheet	Cash +2,970,000; Debt securities +2,970,000
P&L	Interest expense −270,000 p.a.
Equity	Composition shifts: retained earnings −300,000, reserve +300,000; total unchanged
Cash flow	Financing: Receipt from issue of debt securities +2,970,000

Ratio effects:

Tier 2          ▲ 3,000,000 (if qualifying [R])  → CAR ▲
CET1            — (subordinated debt is NOT CET1)
Cost of funds   ▲ (9% is above deposit rates)
NLA             ▲
Distributable profit  ▼ 300,000 p.a. via the redemption reserve

! FORWARD: Tier 2 recognition AMORTISES in the final years
  before maturity [R] — capital falls before any cash moves.

Transaction 14 — Foreign currency transaction and revaluation

(a) Bank buys USD 1,000,000 at NPR 141.00 for a customer,
    sells at NPR 142.00

Trading gain = (142.00 − 141.00) × 1,000,000 = NPR 1,000,000
Dr  Cash / Nostro                          1,000,000
    Cr  Net trading income                              1,000,000

(b) At year end, a USD 5,000,000 nostro balance is retranslated
    from NPR 140.00 to NPR 142.50

Revaluation gain = 2.50 × 5,000,000 = NPR 12,500,000
Dr  Cash and cash equivalent              12,500,000
    Cr  Other operating income                         12,500,000

(c) NRB-prescribed appropriation of the revaluation gain [R], say 25%:
Dr  Retained earnings                       3,125,000
    Cr  Exchange Fluctuation Fund                       3,125,000

Statement	Effect
Balance sheet	Cash +13,500
P&L	Net trading income +1,000; Other operating income +12,500
Cash flow	Trading gain in operating; revaluation of cash → the separate FX reconciling line (NAS 7), not an operating flow
Equity	Composition shifts to the Exchange Fluctuation Fund; total unchanged
Distributable profit	−3,125 via the appropriation

Transaction 15 — Lease of a branch under NFRS 16, and a business combination

(a) Branch lease — 5 years, NPR 3,000,000 per year, discount rate 10%

PV of 5 payments of 3,000,000 at 10% = NPR 11,372,000

AT COMMENCEMENT:
Dr  Property and equipment (ROU asset)     11,372,000
    Cr  Other liabilities (Lease liability)            11,372,000

YEAR 1:
Dr  Depreciation & Amortisation             2,274,400   (11,372,000 ÷ 5)
    Cr  Accumulated depreciation                         2,274,400

Dr  Interest expense                        1,137,200   (11,372,000 × 10%)
Dr  Other liabilities (Lease liability)     1,862,800
    Cr  Cash                                             3,000,000

Statement	Effect
Balance sheet	PPE +11,372; Other liabilities +11,372 — both sides grow
P&L	Year 1: depreciation 2,274 + interest 1,137 = 3,411 vs a NPR 3,000 rent expense before NFRS 16 → front-loaded
Cash flow	Operating: Other expense paid −3,000

RATIO EFFECTS
Other operating expenses  ▼ (rent moved out)
Depreciation              ▲
Interest expense          ▲
Total assets              ▲  → ROA ▼
Total liabilities         ▲  → leverage ▲
RWA                       ▲ (ROU asset carries a weight [R]) → CAR ▼
Cost-to-income            ▼ mechanically (some cost moved below the line)

(b) Business combination — HCBL acquires a development bank

Consideration: 8,000,000 shares issued at fair value NPR 300 = NPR 2,400,000,000

Fair value of identifiable net assets acquired:
   Loans and advances (fair value)          NPR  9,000,000,000
   Investment securities                    NPR  1,500,000,000
   Property and equipment                   NPR    400,000,000
   Other assets                             NPR    200,000,000
   Deposits and other liabilities          (NPR  9,000,000,000)
                                            ──────────────────
   Identifiable net assets                  NPR  2,100,000,000

Goodwill = 2,400,000,000 − 2,100,000,000  =  NPR   300,000,000

Dr  Loans and advances                    9,000,000,000
Dr  Investment securities                 1,500,000,000
Dr  Property and equipment                  400,000,000
Dr  Other assets                            200,000,000
Dr  Goodwill                                300,000,000
    Cr  Deposits and other liabilities                9,000,000,000
    Cr  Share capital (8,000,000 × 100)                 800,000,000
    Cr  Share premium (8,000,000 × 200)               1,600,000,000

Statement	Effect
Balance sheet	Assets +11,400,000; Liabilities +9,000,000; Equity +2,400,000
P&L	None on acquisition (unless a bargain purchase gain arises)
Equity	SoCE: Share issued to merged entity +2,400,000
Cash flow	Cash acquired from the merger — the separate NAS 7 line (Part 4.35)

RATIO EFFECTS
Goodwill NPR 300,000  →  DEDUCTED from CET1 [R]
⇒ Equity rises 2,400,000 but CET1 rises only 2,100,000
RWA           ▲ substantially (a whole loan book acquired)
CAR           direction depends on whether capital or RWA rises faster
EPS           ▼ dilution from 8,000,000 new shares
Distributable profit  — goodwill is blocked (Part 7.14)

IF instead net assets had been NPR 2,700,000,000:
   Bargain purchase gain = NPR 300,000,000 → straight to PROFIT
   BUT stripped out of distributable profit (Part 7.15)

One transaction, every statement — the master trace

A single NPR 100 million corporate loan, from origination to write-off.

┌────────────────────────────────────────────────────────────────────────┐
│ YEAR 1 — ORIGINATION                                                   │
├────────────────────────────────────────────────────────────────────────┤
│ BALANCE SHEET   Loans +100,000  ·  Cash −100,000  ·  Allowance +1,200  │
│ P&L             Impairment −1,200  ·  Interest income +11,000          │
│ OCI             —                                                      │
│ EQUITY          Retained earnings +6,860 (after 30% tax)               │
│ CASH FLOW       Operating: loans −100,000 ; interest received +9,500   │
│ RATIOS          CD ▲ · RWA ▲ · CAR ▼ · NPL — · ROA ▲                   │
│ DISTRIBUTABLE   −1,500 (uncollected interest stripped out)             │
├────────────────────────────────────────────────────────────────────────┤
│ YEAR 2 — SIGNIFICANT INCREASE IN CREDIT RISK → STAGE 2                 │
├────────────────────────────────────────────────────────────────────────┤
│ BALANCE SHEET   Allowance 1,200 → 8,000 (lifetime ECL)                 │
│ P&L             Impairment −6,800  ·  Interest income +11,000 (still   │
│                 accrued — Stage 2 accrues on gross)                    │
│ EQUITY          Retained earnings +2,940                               │
│ CASH FLOW       Interest received +7,000 (borrower slowing)            │
│ RATIOS          Coverage ▲ · Credit cost ▲ · CAR ▼                     │
│ ! NPL ratio still shows NOTHING — Stage 2 is not NPL                   │
├────────────────────────────────────────────────────────────────────────┤
│ YEAR 3 — DEFAULT → SUBSTANDARD → STAGE 3                               │
├────────────────────────────────────────────────────────────────────────┤
│ BALANCE SHEET   Allowance 8,000 → 35,000                               │
│ P&L             Impairment −27,000  ·  Interest income 0 (ACCRUAL      │
│                 STOPS — the double hit)                                │
│ EQUITY          Retained earnings −18,900                              │
│ CASH FLOW       Interest received +1,000 (cash basis only)             │
│ RATIOS          NPL ▲▲ · Net NPL ▲ · Coverage ▲ · RWA ▲ · CAR ▼▼       │
│                 ROA ▼ · ROE ▼ · EPS ▼                                  │
├────────────────────────────────────────────────────────────────────────┤
│ YEAR 4 — COLLATERAL TAKEN OVER (land, fair value 60,000)               │
├────────────────────────────────────────────────────────────────────────┤
│ BALANCE SHEET   Loans −100,000 · Allowance −35,000 ·                   │
│                 Investment property (NBA) +60,000                      │
│ P&L             Impairment REVERSAL +5,000 ! FLATTERS PROFIT           │
│ CASH FLOW       Investing: purchase of investment properties −(costs)  │
│ RATIOS          NPL ▼▼ ! THE BAD LOAN VANISHES FROM NPL                │
│ DISTRIBUTABLE   NBA short provision stripped out (Part 7.12) [R]        │
│                 ← THIS is why NRB blocks it                            │
├────────────────────────────────────────────────────────────────────────┤
│ YEAR 5 — NBA SOLD FOR 55,000                                           │
├────────────────────────────────────────────────────────────────────────┤
│ BALANCE SHEET   Cash +55,000 · Investment property −60,000             │
│ P&L             Loss on disposal −5,000                                │
│ CASH FLOW       Investing: receipt from sale of investment properties  │
│                 +55,000                                                │
│ ────────────────────────────────────────────────────────────────────── │
│ TOTAL ECONOMIC OUTCOME on a NPR 100,000 loan:                          │
│    Interest collected over 5 years        + 17,500                     │
│    Principal recovered via collateral     + 55,000                     │
│                                           ─────────                    │
│    Total recovered                          72,500                     │
│    Amount lent                             (100,000)                   │
│                                           ─────────                    │
│    NET LOSS                                (27,500)                    │
│                                                                        │
│  ! But reported PROFIT across those years was distorted by:            │
│      • a day-one ECL charge before any problem                         │
│      • a Stage-2 charge with no default                                │
│      • an interest accrual that stopped at Stage 3                     │
│      • an impairment REVERSAL in Year 4 that flattered profit          │
│        while NPL improved                                              │
│                                                                        │
│  ⇒ NO SINGLE YEAR'S P&L TELLS YOU THIS STORY.                          │
│    Only the five-year trace does.                                      │
└────────────────────────────────────────────────────────────────────────┘

The fourteen consistency checks — use these on any real bank

OK  1. Total liabilities + Total equity = Total assets
OK  2. Effective tax rate ≈ statutory rate [R], or explain the difference
OK  3. OCI pre-tax ± tax = OCI net of tax
OK  4. EPS = Profit attributable to ordinary holders ÷ weighted average
       ordinary shares, with prior periods restated for bonus issues
OK  5. Cash flow CLOSING cash = balance sheet cash
OK  6. Cash flow OPENING cash = prior-year balance sheet cash
OK  7. Operating cash flow subtotal re-derives arithmetically
OK  8. SoCE "Transfer to reserves" row NETS TO ZERO in the total column
OK  9. SoCE "Bonus shares" row NETS TO ZERO in the total column
OK 10. SoCE closing equity = balance sheet total equity
OK 11. SoCE OCI row = OCI statement net-of-tax figure
OK 12. Distributable profit regulatory adjustments = SoCE regulatory
       reserve transfer
OK 13. Distributable profit appropriations = SoCE reserve transfers
OK 14. Segment PBT total = P&L profit before tax;
       segment assets total = total assets;
       intersegment row nets to zero

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Statement	Effect
Balance sheet	Loans (or Other assets) +917
P&L	Interest income +917 → profit +642 after 30% tax
Cash flow	NONE — no cash received
Distributable profit	! If uncollected at year end, it is stripped out via Interest receivable (Part 7.9)

Statement	Effect
Balance sheet	Cash +55,500; Loans −50,000; Receivable −5,500
P&L	Impairment reversal +600 → profit +600 (interest was recognised earlier)
Cash flow	Operating: Interest received +5,500; Loans and advances +50,000 (inflow)

Statement	Effect
Balance sheet	Allowance +16,900 → net loans −16,900
P&L	Impairment −16,900; plus interest income forgone ~5,500/yr
Cash flow	NONE — impairment is non-cash
Equity	Retained earnings −11,830 (after 30% tax relief)

Statement	Effect
Balance sheet	Gross loans −20,000; Allowance −20,000; net loans UNCHANGED
P&L	NONE — the cost was recognised when the allowance was built
Cash flow	None
Equity	None

Statement	Effect
Balance sheet	Investment securities +4,925,000; Cash −4,925,000
P&L	Interest income +75,000 over the tenor
Cash flow	Investing: Purchase of investment securities −4,925,000