ACCT405 SEU Accounting Question

College of Administration and Finance SciencesAssignment (1)
Deadline: Saturday 30/04/2023 @ 23:59
For Instructor’s Use only
Instructor’s Name: Khaled Almuaqel
Students’ Grade:
/15
Level of Marks: High/Middle/Low
Instructions – PLEASE READ THEM CAREFULLY
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The Assignment must be submitted on Blackboard (WORD format only) via allocated folder.
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Assignments submitted through email will not be accepted.
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Students are advised to make their work clear and well presented, marks may be reduced for
poor presentation. This includes filling your information on the cover page.
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Students must mention question number clearly in their answer.
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Late submission will NOT be accepted.
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Avoid plagiarism, the work should be in your own words, copying from students or other
resources without proper referencing will result in ZERO marks. No exceptions.
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All answers must be typed using Times New Roman (size 12, double-spaced) font. No
pictures containing text will be accepted and will be considered plagiarism.
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Submissions without this cover page will NOT be accepted.
Assignment Question(s):
(Marks 15)
1) Alternative to fair value accounting, amortized cost accounting, uses expectations of cash flows and
prices risks determined at initiation to account for financial instruments throughout their life. Discuss
the three undesirable features of amortized cost accounting as compared to fair value accounting.
(Marks 5)
Answer:
(Week 2, Chapter 1)
College of Administration and Finance Sciences
2) Users of financial reports must assess banks’ current and expected future reserve and capital levels,
because these levels affect the ability of banks to grow. Both thrifts and commercial banks can be
either state or federally chartered, in what is referred to as the dual banking system. Explain the dual
banking system along with the role of Comptroller of the Currency (COC), Office of Thrift Supervision
(OTS) and Federal Deposits Insurance Corporation (FDIC).
(Marks 5)
Answer:
(Week 3, Chapter 2)
3) Define Thrifts Bank in Details and Explain Financial statement structure of Thrifts Bank.
(5 Marks )
Answer:
(Week 4, Chapter 3)
Chapter 3
Thrifts
Thrifts
• According to the text, there are three types of financial
analysis for thrifts and other financial institutions.
These are:
➢ Analysis of disclosures of interest rate risk and net
interest earnings
➢ Analysis of disclosures of credit risk and losses
➢ Analysis of fair value accounting and disclosures
for financial instruments
Thrifts
Financial Statement Structure
• Balance sheet
➢ Unclassified – no distinction between current and
noncurrent accounts
➢ Reflects liquid nature of financial assets and
liabilities
• Income statement
➢ Reflects the historical primacy of net interest
income
➢ Diminished over time because of thrifts shift of
focus to loan origination and servicing
Thrifts
Financial Statement Structure
• Cash flow statement
➢ “Principal cash flows on the loans it intends to
retain are classified as investing while the principal
cash flows on the loans it intends to resell are
classified as operating.”
Thrifts
Main Risk-Return Trade-Offs and Financial Analysis
Issues
• Main risk-return trade-offs
➢ Interest rate risk
❖ “Thrifts bear interest rate risk when their financial assets
and liabilities are imperfectly matched on duration.”
❖ Thrifts are exposed to interest rate risk for the following
reasons
▪ “Thrifts still find the interest rate spread associated
with speculating on an upward-sloping yield curve to
be worth the risk.”
▪ It is often difficult or costly for thrifts to eliminate all
interest rate risk.”
Thrifts
Main Risk-Return Trade-Offs and Financial Analysis
Issues
➢ Liquidity risk
❖ “Bears liquidity risk as the cash inflows on their
assets may come more slowly or less certainly
than the withdrawals.”
❖ “Interest rate and liquidity risks tend to go
together for imperfectly marketable fixed-rate
assets; both risks rise with the maturity of the
assets.”
Thrifts
Main Risk-Return Trade-Offs and Financial Analysis
Issues
➢ Credit risk
❖ Bears credit risk because their loans and
securities may not be repaid.
❖ Exacerbated because they are not often well
diversified.
❖ “SEC requires extensive disclosures useful for
the assessment of loan credit quality.”
Thrifts
Main Risk-Return Trade-Offs and Financial Analysis
Issues
➢ Persistence of noninterest income
❖ Thrifts profitability depends on noninterest
income.
❖ Types of noninterest income includes:
▪
▪
▪
▪
▪
Account fees
Mortgage origination
Servicing fees
Gains on the sale or securitization of mortgages
Impairment of mortgage servicing rights
Thrifts
Main Risk-Return Trade-Offs and Financial Analysis
Issues
➢ Operating efficiency and operational risk
❖ “Thrifts typically operate retail branch networks
that involve large fixed costs in order to raise
low-interest-rate core deposits.”
❖ “High fixed cost nature of branch networks
leads to operating leverage that magnifies the
effects of thrifts’ other risks.”
Thrifts
Main Risk-Return Trade-Offs and Financial Analysis Issues
➢ Core deposit intangibles
❖ Core deposits pay lower than wholesale market interest
rates.
❖ Very likely when interest rates have risen recently.
❖ Core deposits are “sticky” which means that depositors do
not withdraw their funds from nonterm deposits immediately
when interest rates rise.
❖ “In valuing a thrift, it is necessary to value its core deposit
intangible.”
❖ “This is an inherently difficult task, because the value of the
intangible depends on the behavior of both the thrift and its
depositors.”
Thrifts
Main Risk-Return Trade-Offs and Financial Analysis Issues
➢ Other financial analysis issues
❖ Intense competition from larger financial
institutions
❖ “Thrifts may derive economic rents from their
superior knowledge of or a presence in local loan
and deposit markets.”
❖ Rents are hard to maintain because of
competitive markets.
❖ Growth can be restricted by capital and reserve
requirements.