This lesson establishes the foundational differences between accounting for financial institutions and accounting for industrial or commercial companies.

1.1 Why Financial Institutions Are Different
Financial institutions, particularly banks, have unique business models that are reflected in their financial statements . Unlike manufacturing firms, banks’ primary business is managing financial risk—credit risk, market risk, liquidity risk, and interest rate risk . The financial statements of banks are designed to communicate these risks, not just their profitability. The purpose of the course is to examine questions of the main business areas of a modern full-service bank and how does it make profit in each area, the main risks that they face and how do they manage those risks and how can the public assess the risks a bank faces and measure its performance and the regulation governing banking .

1.2 Key Differences in Financial Reporting

• Balance Sheet Composition: A bank’s balance sheet is dominated by financial assets (loans, securities) and financial liabilities (deposits, borrowings), rather than property, plant, and equipment .

• Revenue Recognition: A bank’s primary revenue is net interest income, not revenue from the sale of goods or services.

• Asset Quality Focus: The quality of a bank’s loan portfolio is its most critical asset quality indicator .

• Regulatory Capital: Banks are required to maintain minimum levels of regulatory capital, which is a key focus of financial analysis .

1.3 Fair Value Accounting and Risk Disclosures
The financial statements of financial institutions are increasingly based on fair value accounting and their financial reports include increasingly extensive risk and estimation sensitivity disclosures . Both fair value accounting and risk and estimation sensitivity disclosures are necessary ingredients for financial reports to convey financial institutions’ risk and performance in today’s world of complex, structured, value and risk-partitioning financial instruments and transactions .

1.4 The Role of Accounting Standards
Accounting for financial institutions is governed by both local GAAP and international standards (IFRS) . Students should understand:

• The specifics of double-entry accounting in the conditions of financial institutions 

• The impact of differing accounting standards and policies (e.g. provisioning, asset valuation, securitisation etc.) on the financial statements 

• The orientation in the financial statements of financial institutions