International Accounting at HDFC Bank - Example

International Accounting HDFC Bank- India (NSE) Case Study Identification of registered company The company chosen for the study of the financial data and analysis if HDFC Bank. The bank is also known as the Housing Development Financial Corporation Bank. The annual report of financial year ending 2011-2012 is considered for this study which was issued on 18th April, 2012. The bank started its initial operation with lending of housing loans and has currently expanded its business in all types of banking operations like lending of loans for personal, educational and commercial purposes. It also facilitates services like savings, current and recurring account, etc. It has extended its operations in the investment market by introducing its own mutual funds and even markets mutual funds of other organization through the bank. Of late the Bank is operating in treasury, wholesale business and retail business. The head office of HDFC bank is at Mumbai, in India from where it controls the operations of the other 2544 branches in other states of the country. HDFC bank is a listed company in the NSE popularly known as the National Stock Exchange. Company details The HDFC Bank deals in Rupees which is the currency of India. As per the financial statement of the bank, around 31.6% increase has occurred in 2011 as compared to the previous year. The balance sheet size has come to Rs. 337,909.00crore as at 31st March, 2012. However the capital adequacy ratio is the come was 16.5% with a minimum regulatory requirement of 9%. The subsidiaries of HDFC Bank like the HDFC securities and the HDB Financial services has also grown considerably at a healthy pace by the year ending 31st March, 2012. Deloitte Haskins and Sells’ a chartered firm has been chosen for the auditing of the financials of the HDFC Bank. As per the report of the auditor the three main financial statements of the organization are in tandem with the legal requirements followed by the audit rules in India (HDFC Bank Ltd., 2012). Economic description of selected country During the late 1970’s the government of Morarji Desai eased out the restrictions posed by the government which helped them in the promotion of the small scale industries. On the other hand, the economic liberation of India was jointly led by the then Prime Minister of India Mr. Narsimha Rao and the finance minister Dr. Manmohan Singh in the year 1991. Through this reform foreign direct investment was brought in many sectors. By the 20th century India headed towards a free market economy which reduced the state control of the economy with increased financial liberalization (Datt & Sundharam, 2009, p. 976). The Indian economy is the eleventh largest in the world by the nominal GDP and the third largest in terms of the PPP (Purchasing Power Parity). In 2010-2011 India maintained a GDP growth rate of around 8% thus bringing down the fiscal deposit of the country to 4.8% of GDP by maintaining a current account deficit to 2.6%. However, the fiscal year 2001-2012 has been a challenging for the Indian economy. With the progressing year monetary tightening was witnessed in response to the untamed inflationary pressures. The gradual increase in inflation of the Indian economy resulted in slowing down the growth rate of India. In spite of the economic turmoil in the country India still is goring at a rapid pace in comparison to other developing countries. This in turn is enhancing the opportunity of India to push through further reforms, generate economic opportunities and create infrastructure for the country (“Current State of Indian Economy”, 2012, pp.1-7). The Indian financial market has progressed over the years especially in the banking sector with 14 nationalized banks to provide 40% of their net credit to priority sectors so as to fulfill the developmental and social goals of the country. Company’s Business HDFC bank mainly provides service in wholesale banking, retail banking and treasury services undertaken by the company. In the whole sale banking the target customers of the bank are the blue chip companies, small-mid sixed companies and the business related to agriculture. The kinds of services provided to these customers are trade services, working capital management, cash management and transactional services, etc. However, in the retail banking services of HDFC bank are provided to customers a full range of banking services and financial products giving the customer a one-stop window for all his/her banking requirements. Under the treasury service provided by the bank the main products of business are Derivatives and Foreign Exchange, Debt Securities and Local Currency Money Market and Equities. For this the bank adopts sophisticated risk management information and various other product structures. Thus, the treasury business of the bank is responsible for managing the market risk and returns on a particular investment portfolio. Source and reliability/reasonableness of data The data of the following table has been gathered from the annual report of all the respective companies. According to the comparison we can observe that ICICI Banks performance is better than rest of the listed banks in NSE. However, the earning per share of Axis Bank is the highest at Rs. 102.94. But as far as the net profit yield of the banks are concerned HDFC bank tops the list (ICICI Bank Ltd. Annual Report, 2012, pp.80-82) (Yes Bank Ltd., 2012, pp.65-100) (Kotak Mahindra Bank Ltd., 2012, pp.128-130) (Axis Bank Ltd., 2012, pp.112-114) (Dhanlaxmi Bank Ltd., 2012, pp.67-69). Table 1: Comparison of Banks under NSE Banks (2011-2012) HDFC Bank Ltd. (Rs. In lakhs except no. of employees & EPS) ICICI Bank Ltd. (Rs. In lakhs except no. of employees& EPS) Yes Bank Ltd. (Rs. In lakhs except no. of employees & EPS) Kotak Mahindra Bank Ltd. (Rs. In lakhs except no. of employees & EPS) Axis Bank Ltd. (Rs. In lakhs except no. of employees & EPS) Dhanlaxmi Bank Ltd. (Rs. In lakhs except no. of employees & EPS) Net Assets 2,992,437 6,040,286 467,664 1,290,105 2,280,854 84,464 Net Income 3,253,005 4,104,541 716,448 1,301,382 2,741,486 105,319 Net Profit 1,134,133 1,148,344 209,206 679,485 921,198 2,606 EPS 22.11 56.11 21.12 21.6 102.94 3.31 No. of employees 66,076 56,969 12,750 22,000 20,624 4,260 Financial Statements of company As per the financial statement of the HDFC bank the company has progressed over the year in terms of its revenue and profit. The total revenue of HDFC as at 31st March, 2012 is Rs. 325,300,466 while the profit earned by the company is Rs. 113,413,323. However, the total deposits and the total advances of the company have also risen by 18.3% and 22.2% respectively, over the year. The company has also been successful in achieving 11.6% under Tier 1 capital ratio. The rise in the earning per share over the year shows that the company is growing at an increasing pace. Thus the financials of the company goes on to prove that the company’s performance has been remarkable over the year (Appendix: 1.1) (HDFC Bank Annual Report, 2012, pp.1-164). Basis of preparation of financial statements The financial statements of HDFC bank have been presented and prepared under the conventional historical cost and accrual basis of accounting which has been in tandem with the generally accepted accounting principles (GAAP in India). This confirms that the bank is maintaining its books of accounts in tandem with the guidelines issued, circulars and statutory requirements by the RBI which may change from time to time, which leave an impact on the financial statements of the bank. However, the HDFC bank’s financial statements comply with all materials in respect to the Accounting Standards (AS) notifies under the rules of the company related to the provisions of the Companies Act, 1956 (HDFC Bank Securities Annual Report, 2012, p.18). Comparison of the financial statements with IFRS The main difference between the Indian GAAP and IFRS is that under IFRS system generally items are valued at the historical cost but the intangible assets like PPE (Property, Plant and Equipment) and other investible property are measured at fair value whereas under Indian GAAP though the items may be valued at the historical cost but the Fixed assets of the company tend to be revalued. On the other hand, in IFRS derivative and other financial instruments along with biological assets have to be revalued whereas in case of Indian GAAP derivative are valued at fair value with certainly no guidance on biological assets and derivatives (“Key Differences: Indian GAAP Vs IFRS”, 2012, p.4). Earnings of the company The basic earning per share of HDFC bank is Rs. 22.11 whereas diluted earning per share is Rs. 21.91 as on 31st March, 2012. The basic and diluted earnings of the shares have been computed based on the net profit after taxation of Rs. 516,709 lakhs compared to the previous year when the net profit after tax was Rs. 392,640 lakhs. The weighted average number of shares outstanding during the year was 2,336,704,062 in comparison to the previous year comprising of 2,309,034,888 shares. Thus the variation that is witnessed between listed share price and net asset backing is that the net backing per issue of 465,225,684 shares is Rs.10 each (Appendix: 1.2). Variability of past net profits and current share prices The variability that can be observed from the annual reports of HDFC bank ltd. is that net profits attributable to the company is Rs. 113, 413, 323, 000 against which the earning per share of the company is Rs. 22.11 which has increased over the year. This is almost a rise by 30% of the amount in the previous year. Financial Notes The financial statement of HDFC bank has been prepared in conformity with GAAP (Generally Accepted Accounting Principles). According to which the assumptions are made with respect to the liabilities and assets of the company (including the contingencies) as on the date of recording the financial statements and the reported expenses and income for the period of reporting. The accounting of the company has been made on the estimation that the financial statements are reasonable and prudent. However it has clearly been mentioned that the estimates may differ in the future. The revisions of the accounting estimates are prospectively recognized both in current as well as future periods. The impairment of the assets is usually assessed in the balance sheet of the company. The occurrence of the impairment loss, if any is forecasted in the profit and loss statement of the company. This generally arises when the carrying cost of the assets exceeds the estimated recoverable amount. Both basic and diluted EPS on the each equity share is maintained according to AS-20 issued by ICAI. The basic EPS computation is done by dividing the net profit for the attributable to equity shares by the weighted outstanding number of shares. The diluted EPS is practiced when other securities or contracts to issue equity shares were converted or exercised during the year. Conclusion According to the study of HDFC bank we can conclude that the company is performing very well even ender the turmoil economic situation of the country. The evidence of which is their increased net profit which has amounted to Rs.113, 413, 323, 000. But the cost of revenue of the company has increased over the year which is cause of concern for the bank. The company is listed in National Stock Exchange in India. The bank has made some investment decision which has resulted in negative returns for the company. This has reduced the cash and cash equivalents of the company to Rs. 209, 377, 263, 000. The accounting principles that is adopted in India is a little different from that of IFRS which is usually applied in developed countries like America, Europe, etc. Thus the item under consideration is usually a little different from that of a manufacturing company and so is their process of accounting. Hence, the bank under consideration has been successful in generating an income of Rs. 325,300,466,000. Bibliography “Annual Report”. HDFC Bank Ltd. Last modified April 18 2012. http://www.hdfcbank.com/htdocs/common/pdf/corporate/Annual_Report11_12.pdf “Securities Annual Report”. HDFC Bank Ltd. Last modified April 12 2012. http://www.hdfcbank.com/htdocs/common/pdf/corporate/Securities_Annual_Report11-12.pdf Datt R. & Sundharam K.P.M. Indian Economy. New Delhi: S. Chand Group, 2009. “Current State of Indian Economy”. Deloitte Touché Tohmatsu India Private Limited. Last modified March 2012. http://www.deloitte.com/assets/Dcom-India/Local%20Assets/Documents/Thoughtware/State%20of%20economy.pdf “Businesses”. HDFC Bank Ltd. Last modified 2012. http://www.hdfcbank.com/aboutus/general/Businesses.htm “Annual Report”. ICICI Bank Ltd. Last modified May 7 2012. http://www.icicibank.com/aboutus/annual-11.html “Annual Report”. Yes Bank Ltd. Last modified March 2012. http://www.yesbank.in/ShowPropertyServlet;jsessionid=lNG0Qkjd9nJvsGkwMym109Pd45hGtL2fDpywrz8Y2xRdTcJBq4y4!1681961303?nodePath=%2FYES+Bank+Repository%2Fen%2FInvestor+Relations “Annual Report”. Kotak Mahindra Bank Ltd. Last modified May 8 2012. http://www.kotak.com/annualreport2011-12/pdf/Kotak%20AR%202012.pdf “Annual Report”. Axis Bank Ltd. Last modified April 27 2012. http://www.axisbank.com/download/Annual-Report-2012.pdf “Annual Report”. Dhanlaxmi Bank Ltd. Last modified April 23 2012. http://www.dhanbank.com/pdf/financials/AR-2010-11.pdf “Key Differences: Indian GAAP Vs IFRS”. Global Knowledge Service BDO India. Accessed August 10 2012. http://www.bdoindia.co.in/images/ifrs/Key%20differences.pdf Appendices Appendix 1.1: Income Summary Company: HDFC Bank Ltd. Currency: Rupees Period: 2011-2012 thousands (‘000) Income Summary   (Rupees in 000)   As at 31st March,2012 As at 31st March,2011 Total Income 325,300,466 242,633,649 Less: Cost of goods sold (61,742,416) (45,327,948) Gross Profit 263,558,050 197,305,701 Less: Expenses 273,629,559 203,369,640 Net Profit / (loss) 113,413,323 84,591,957   Stock exchange price/share: at near balance sheet date: 2526 : a current date: 602.15 Note: All expenses adjusted Appendix 1.2: Balance sheet Company: HDFC Bank Ltd. Currency: Rupees Period: 2011-2012 thousands (‘000)   Balance Sheet (Rupees in 000)     As at 31st March,2012 As at 31st March,2011 Assets       Non-Current         Property, plant and equipment N/A N/A   Investment 974,829,094 709,293,656   Fixed assets 23,471,940 21,706,480   Investment accounted for using equity method N/A N/A   Biological assets N/A N/A   Financial assets 149,910,945 251,008,158         Current         Financial assets held for sale N/A N/A   Inventories N/A N/A   Advances 1,954,200,292 1,599,826,654   Balances with Banks 59,466,318 45,680,191   Other assets (note1) 217,216,401 146,010,773 Total assets   3,379,094,990 2,773,525,912 Less: total liabilities   3,079,848,255 2,519,762,364 Equity   299,246,735 253,763,548   Equity shares issued: 2346688270 (31st March,2011: 465225684 of Rs.10 each) Equity shares of Rs. 2 each Note 1: Other assets are more than 2% of the total assets because it comprises of the deferred tax amount of Rs. 144,889 lakhs. Read More