Trusteebank report lacks information in some areas

Press, 20 June 1984, Page 34

Trusteebank report lacks information in some areas

By

Alan J. Robb,

a senior lecturer in accounting at the University of Canterbury

The annual report of the Trusteebank Canterbury (formerly the Canterbury Savings Bank) is quite unlike the report of any other entity. For one thing, the bank has no shareholders and is thus unlike any company. It exists to serve the community and in this sense it is like a public-sector entity. But unlike local authorities those entrusted with its direction are appointed rather than elected, it has no assured income, such as from rating powers, and must compete in the marketplace for support. Its annual report becomes an important part of the bank’s public-relations activities. The trustees appear to be very aware of this and for several years have produced reports which in terms of lay-out and presentation can be seen as examples to be followed by all involved in public reporting.

This year’s report is no exception. The photography is striking, the lay-out is easy on the eye, but there are several areas where improvements might be made.

In her report to the trustees, the president, Miss C. J. McGregor, refers to the growth of depositors’ balances to a new total of $587 million. Comparison with previous years’ accounts shows this to have been the highest growth rate since 1981, but this is not readily apparent because there is no trend statement in the report. Most companies today include such a statement in their reports and there seems to be no reason for its omission here.

For a number of years the number of depositors has been shown, originally in a. five-year table but latterly within the president’s report. This year, however, there is no reference to the number of depositors. As the Trusteebank Canterbury has lately been calling on citizens of Canterbury to support their local bank there is equally an obligation on the local bank to report factually the extent of support it receives.

The profit statement for the year shows net profit after tax and extraordinary items increased $1,099,061 to $3,928,186. This includes an extraordinary item of $762,817 capital profit on the sale of land and buildings. Curiously, the president makes no reference to this sale of land and buildings in her report. One would have expected a transaction giving rise to a profit of over three-quarters of a million dollars to have been commented on. The transaction itself must have amounted to well over a million dollars, and as such would have been a significant source of funds. One would therefore expect it to be shown separately in the statement of changes in financial position. It has not been treated this way but has been offset against increases in land and buildings. Only the net increase of $3,398,270 is shown. This is contrary to Statement of Standard Accounting Practice 10, which states that netting masks the significance of individually relevant figures. Another item appearing in the profit statement which invites comment is leasing charges. They have risen from $411,067 m 1983 to $789,144 in 1984. Both the increase and the absolute amount suggest that the bank is now leasing assets worth several millions of dollars, but no details of these are given in the notes or in the president’s report. There has been only one change in accounting policies in the current year. Most land and buildings

owned for more than 12 months, which were previously valued at cost less depreciation to date, have been stated at 90 per cent of current valuation. No reason is given for the change, which is unfortunate, and one can only infer that this is one more example of an entity accepting that market values possess a relevance which historical costs do not. The new policy resulted in land and buildings increasing by $2,979,626. The note to the accounts relating to the revaluation reserve is unusual in that it contains the line, “Reversal of revaluations upon sale of land and buildings.” But oddly no amount is shown, only a dash indicating that there was no such reversal. Neither was there a reversal in the previous year, and one is left wondering whether something was inadvertently omitted when the accounts were being drawn up.

The auditors’ report is also unusual as befits the unusual nature of the bank and the reporting requirements of the act under which it operates. The Trustee Savings Bank Act, 1948, requires the preparation of “a balance sheet and statement of accounts' (including a profit and loss account) showing fully the financial position of the bank at the end of the year and the financial result of the transactions for the year.” Another part of the act requires the auditor to “certify the balance sheet in such form as may be approved by the Minister (of Finance).” It may be argued that this latter requirement does not form a part of the audit report, for the auditors have never included a statement to this effect in their audit report. One would therefore expect the audit report to state that the accounts showed fully the financial position and results for the year (or did not as the case might be). But on reading the report one finds that the accounts give a true and fair view “in conformity with generally accepted accounting principles”. This last phrase is one which is not found in the audit reports of any other commercial entities.

Sometimes, as in the case of public-sector entities, the report states that “the audit was conducted in accordance with accepted auditing standards and practices,” but I know of no other New Zealand report which says that the true and fair view is in conformity with generally accepted accounting principles. It raises the question “do the accounts show fully the financial position as required by the act or do they not?“

In the American environment this phrase would be a normal part of a clean audit report, but as it is used here it raises doubts as to what exactly is meant. Over the years the auditors have changed the wording of their report several times, always giving a “clean” audit report. I understand that the current wording was agreed upon by the auditors of all the trustee banks about 1980. Certainly it has appeared in the Trusteebank Canterbury accounts since 1981, but for the previous decade the auditors were happy to say simply that the accounts showed a true and fair view. Curiously enough in the 1960 s the audit report included the phrase, “in conformity with generally accepted accounting principles.” A new Trustee Banks Act came into force on April 1, 1984. It will require the auditor to certify “whether the accounts are properly

drawn up and give a true and fair view of the financial affairs of the bank as at the end of the financial year and the results of its operations for that financial year.” It makes no mention of “generally accepted accounting principles” and it will be interesting to see if the auditors drop this confusing phrase next year. Grants to the this year increased $50,000 to $400,000. This is 10.2 per cent of the tax-paid profit for the year. The bank is permitted to distribute up to 50 per cent of tax-paid profits to the community and in its early years the bank distributed as much as one-third of its profits. In recent years it has retained an increasing percentage and the current distribution is the lowest for the last seven years. The undistributed profits are required to be credited to a reserve fund, although this now appears in the report entitled retained earnings. It may be questioned whether the bank is an order in adopting this more modern terminology (since there are no specific-

ally ear-marked realisable assets equal to this Reserve Fund) but Statement of Standard Accounting Practice 9 condones the description “fund” where it is used as a result of some statutory requirement. There is an unequivocal requirement in both the 1948 act and in the 1983 act for the bank to establish and maintain a “reserve fund" and this should be the description used in the annual report. As the bank has no paidup capital it is dependent on the retention of profits to finance its buildings. Indeed the act stipulates that the bank’s expenditure on buildings is limited to the difference between the balance of the reserve fund and the value of the bank premises “as appearing in the books of the bank.” The act does not define what is meant by “bank premises”. It could mean simply buildings, or land plus buildings, or even land, buildings and all associated furniture, equipment and plant. Like other trustee banks the Trusteebank Canterbury has interpreted bank premises as being land

and buildings — an interpretation I would support. Based on the present legislation the bank had a reserve fund of $18,829M, land and buildings of $17,929M and so met the restriction with $900,000 to spare. But, increasingly, banks are required to acquire computers, electronic-secur-ity systems, air-condition-ing, and other plant. The draftsmen responsible for the new act have been fully aware that such capital expenditure must also be financed from retained profits, and in the future capital expenditure is restricted to the amount by which the reserve fund exceeds the aggregate of bank’s “premises and other fixed assets.”

At balance date, the Trusteebank Canterbury had total fixed assets of over $28.944M (as well as capital commitments of another $1,215 million. Had the new act applied for the current year the Trusteebank Canterbury would have breached the reserve fund to fixed assets ratio by over $10.114M. In acknowledgement of the impracticality of introducing such a change overnight the new act allows trustees until March 31, 1987, before the new ratio becomes applicable. So where might that $10.114M come from? The bank really has only two sources — operating profits or extrodinary profits. Excluding the capital profit this year the ploughback of profits contributed $2,765M to retained earnings. If profits remain at their 1984 level the ploughback from this source by 1987 would amount to only $8,296M. The bank would, therefore, have to generate over SI,BIBM from the sale of buildings or from other extraordinary sources. This year, extraordinary profits totalled $762,817, so almost the same amount would have to be raised for each of the next three years, either by direct sale or perhaps by sale and leaseback.

It seems unlikely, therefore, that the trustees will be ble to increase donations to the community before 1987.