- Market participants and supervisors need information about the financial position of an institution. Information about the financial position of a bank is useful in predicting the ability of the enterprise to meet its liabilities and financial commitments as they fall due. Information about the nature and amount of assets, liabilities, commitments, contingent liabilities, and shareholders' funds, both at points in time and averages over periods, including their maturity and repricing structure, is useful for assessing a bank's liquidity and solvency, and ultimately its financial strength, and the trends therein. Information about institutions' provisions and allowances for losses and how these provisions and allowances are determined is important in assessing an institution's ability to withstand losses.
- To assess an institution's financial position, it is essential to have a breakdown of assets and liabilities, and equity capital by type. Information on financial position typically includes a balance sheet that distinguishes different types of assets, liabilities and sources of equity capital. The balance sheet usually includes separate items for loans, trading securities, investment securities, tangible fixed assets (e.g., real estate), intangible fixed assets (e.g., goodwill), short-term debt and long-term debt. Disclosure of off-balance-sheet items may include information about notional amounts and fair values or replacement values of off-balance-sheet transactions, and about commitments and contingent liabilities. In notes to the balance sheet, additional information about the items in the balance sheet which is relevant to the needs of users may also be provided, e.g., fair value (trading account, loans, deposits, others).
- Moreover, information about regulatory capital and its components is important in analysing the financial position of a bank (tier 1, tier 2, tier 3 - if applicable, risk-weighted assets, risk-based capital ratio), as well as information about equity capital (e.g., debt-to-equity ratio, restrictions on distributions). Information about the changes in the amount and types of capital, including the impact of earnings, dividends and capital issuances, is important in assessing the cushion available to absorb future potential losses and for the bank's ability to sustain growth over the near term. Management's discussion and analysis of a bank's financial position and changes therein, help the market better understand and form expectations based on them.
- Information about the nature and amount of assets pledged as collateral, e.g., to support deposits, other liabilities and commitments, and the amount of secured liabilities is useful in assessing the financial position of a bank and, in particular, the collectibility of claims on the bank in case of its liquidation.
- As with guidance on presentation and disclosure of financial performance, comprehensive accounting guidance on the presentation and disclosure of information about financial position is available in many countries. Authoritative guidance has been issued by legislators, regulators, and national and international accounting standard-setters.
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