Accounting Theory For Housing Development Finance – Analysis And Compliance

Background and History of the banking business of the HDFC

This assignment intends to make a critical analysis of the  accounting theory concepts and how these are to be applied by the corporation in the preparartion of their general purpose financial statement. Keeping this purpose  in mind a comprehensive report of the HDFC Bank detailing a critical analysis of the financial reporting framework along with its effectiveness to meet the requirements set by such framework has been discussed hereunder (Abdullah & Said, 2017).

HDFC stands for the Housing development finance corporation that was amongst the first recipient of the RBI’s nod to establish the private sector Bank in the year 1994 now being the publicly held banking company evidencing the liberalization in the Indian Banking Industry. Its Headquarter is situated in Mumbai with the total permanent staff strength of 88253 as on 31stday of March 2018 having the multinational presence in the Bahrain, Hong Kong and Dubai. It is engaged in providing the banking and financial services in mainly the three key business segments as Wholesale and retail banking together with the treasury operation. It is regulated by the banking regulation Act, 1949 and Companies Act, 2013.

HDFC’s shares are listed with the NSE and the BSE with the simultaneous reputation earned through the listing of its ADR’s with the NY Stock Exchange and Global depository receipts with the Luxemburg stock exchange.

The amalgamation of the Centurion Bank of Punjab with the HDFC on May 23, 2008 with the RBI approval made it possible for the merged entity to hold he net advances of 89000 crore with the strong base of deposit of 122000 crore resulting from the benefit emerged in the form of increased geographical reach, customer base and Skilled set of manpower. Similarly, the year 2000 evidenced one such milestone merger of two private sector banks naming Times Bank limited with HDFC.

As per the Annual report of the Financial year 2018, the net revenue increased by the 21.7% in comparison to the previous year 2017, whereas the Net for the same period showed n increase of 20.2%. Similarly the balancesheet growth as per the Annual report for the same period was 23.2% along with the total deposits growth of 22.5%, Total advance growth being 18.7% with the capital adequacy ratio being maintained at 14.8%, Gross Non-performing assets for the year ending 2017-18 was 1.30% of Gross Advances.This year showed the increased digitisation,stepping up its social commitment activities with more focus on fund raising activities.

Similarly the Annual report for the Financial year 2016-17 showed the Net profit growth rate percentage of 18.3% in comparison to the financial year 2015-16,Balance sheet gr owth percentage was 16.6%, total deposits growth percentage of 17.8%,total advances growth percentage of 19.4% during the same period when compared with the previous year 2015-16.During this period the capital adequacy ratio of 14.6% was maintained by the bank and the gross non performing assets were 1.05% of the gross advances.As per the Director’s report the major reasons of its outstanding performance for this year were improving the customer experience through digitisation, unique use of Artificial intelligence and data analytics for sharpening the product odfferings etc.

Brief Summary on the Annual Report

As per the latest news published dated 18^th day of December,2018 when the Nifty was expected to test 10941, HDFC was said to be the top picks.It was further suggested that the stock of the Bank canbe bought at current price level of Rs.2130 per share with the stop los below Rs.2050, irrespective of the fact that the stock witnessed the breakout from the consolidation pattern in the late November. Thus it is expected to provide the good returns in the future. 

The following summarized key findings can be noticed from the comparison of the financial statement of the HDFC Bank for the year 2016-17 and 2017-18.

1. In terms of investment valuation ratio, its dividend per share in 2018 increased by R. 2 per share which was Rs.11 per share in 2017.
2. In terms of the Profitability ratios its net profit margin was 21.79% in 2018 that was only 20.99% in 2017; similarly, the Return on Net worth was 16.45% in 2018 that was 16.26% in 2017(Belton, 2017).
3. In terms of the Management efficiency ratio the total assets turnover ratio came down to .08 times in 2018 that was .09 in the year 2017.
4. Similarly, its capital adequacy ratio increased to 14.82 times in 2018, that was only 14.55 times in the year 2017, whereas in terms of its Debt coverage ratio the total debt to owner’s fund reached to 8.58 times in 2018 that was only 8.02 times in 2017.
5. In term of the leverage ratios, it is being seen that the current ratio came down to .04 times in 2018 that was .06 times in the year 2017 though the quick ratio showed a huge jump to 17.48 times in 2018 but was only 11.19 times in the year 2017.
6. Though in terms of cash flow indicator ratio it could be seen that both year 2017 and 2018 showed 100% earnings retention ratio(Boghossian, 2017). 

Accounting conceptual framework provided the underlying principles based on which the accounting standards and guidelines are developed .in India it was July 2000 when ICAI provided the fundamental frameworks for assisting  the development of the new accounting standards. The areas for which the need of such framework was felt were as follows: 

1. Principles to be followed to measure the elements of the financial statement
2. Elements to be included in the Financial statements
3. Concept of capital and Capital maintenance
4. Objectives of Financial statements
5. Components of Financial statements
6. Distinctive characteristics of Financial Statements
7. Recognition  criteria of the elements of the financial statements
8. Assumptions to be made in the preparation and presentation of the  financial statements  

The major purposes for which this accounting framework works are as follows: 

1. Aiding accounting standard board in the development and review of the Accounting standards.
2. Providing users, the necessary assistance so that to cotrrectly Interpret the Financial statements.
3. To act as a guide while preparing  the financial statements in compliance with the Accounting standard and further guidance on such issues on which no accounting standard has not been framed yet.
4. Assisting the opinion formulation process of the Auditors regarding the preparation of the  the financial statements in compliance with th Accounting standard(Borit & Olsen, 2012). 

This framework demands its  application while preparing the General purpose financial statement prepared by the any commercial, business or industrial entity which is meant for the external users in general and in the case when there is any conflict arises between the framework and the accounting standard then it is the accounting standard that shall prevail (Charles H, et al., 2015).

This framework prescribes the detailed set of a complete financial statement in form of, income statement, Balance sheet and cash flow statement along with the explanatory statements and explanatory notes if any.

This accounting standard further prescribes that the fundamental accounting assumptions  of going concern, accrual and consistency are to be followedin the  preparation of the its financial statement . (Coate & Mitschow, 2017).

This financial reporting framework prescribes the following five qualitative characteristics to be a useful source of financial information.

1. Ability of true and fair view presentation.
2. Reliable
3. Comparable
4. Understandability
5. Relevance 

As per the framework there are basically five major elements of the financial statement which are Assets, liabilities, equity, expenses and losses and income or gains. 

This framework also prescribes the process how  the monetary value of the various elements of the financial statements is to be determined. The various measures prescribed by it are present value, historical cost, current cost and realizable value (Egelund-Mu¨ller, et al., 2017). 

Finally, it prescribes the need to maintain the adequate amount of the capital to continue the business which is nothing but the net assets of the business as the fall in the net assets level shall result in the fall in the operation.

Analysis of the Application of the Accounting reporting frame working the context of the preparation of the Financial statement of the HDFC 

The extent of the compliance of the financial statements of the HDFC with the Accounting framework can be made clear from the following, as it is evident from the declarations provided in the schedules regarding the significant accounting policies forming the part of these financial statements. 

1. While making declaration as to the basis on which the financial statements of these financial years have been prepared it was clearly mentioned that they comply with the  Generally Accepted Accounting principles in India, Accounting standards as applicable from time to time along with the convention of historical cost and accrual basis assumption.(Iggers, 2018).
2. Fixed Assets like PPE have been stated at Historical cost less the accumulated depreciation along with the loss on impairment if any. This historical cost consists of costs of installation, profession fees, costs of site preparation which are incurred before putting them in use. 

Depreciation on this PPE (including all fixed assets) are charged on straight line basis over its useful life.

1. It further clearly specifies that the income of interest is recognized by it in its income statement on the accrual basis other than the interest on the NON-performing assets and loans approved by the RBI under the SDR Scheme in case of which it recognizes the same as per the RBI guidelines(Johan, 2018).
2. Similarly, it makes clear calculation of its capital adequacy ratio as per the regulations prescribed by the RBI under the Basel III records in both above financial year.
3. All the elements of the financial statements as prescribed by the accounting framework has been clearly incorporated in the financial statements of the HDFC for both Financial years.
4. Based on the audit conducted by the Audit firm Deloitte Haskins and Sells in its independent auditor’s report it was clearly mentioned that the financial statement of the HDFC it provides a true and fair view of its state of affairs.
5. The major assumptions lying in the financial statement of both above years have been clearly declared in its financial statement(Kaufmann, 2017).
6. All the major elements of the financial statements as prescribed by the relevant accounting framework has been incorporated in its financial statement of the above years.
7. It assists the external users of the financial statement of both years to interpret the same.
8. It satisfies all the requisite qualities of the financial statement as have been prescribed by the financial reporting framework(Webster, 2017).  

Conclusion

From the above analysis it is quite evident that the Financial statement of the HDFC Bank for the Financial years 2017 and 2018 have fully complied with the requirements of the Accounting framework as has been prescribed by the Institute of Chartered Accountant of India. Further not only from the view point of the compliance but also in terms of the adequate disclosure of the underlying assumptions and various measurements used in the preparation of the financial statement have been complied with by it. As a recommendation for the further scope of improvement it is suggested to keep in view the financial reporting framework prescribed by the respective countries in which it has its foreign branch too. This shall strengthen its position in terms of global recognition of being compliant especially when the Banking industry in the global world is facing the huge pressure because of the Nonperforming Assets.  

References

Abdullah, W. & Said, R., 2017. Religious, Educational Background and Corporate Crime Tolerance by Accounting Professionals. State-of-the-Art Theories and Empirical Evidence, pp. 129-149.

Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic responsibility. Educational Philosophy and Theory, 50(3), pp. 244-253.

Borit, M. & Olsen, P., 2012. Evaluation framework for regulatory requirements related to data recording and traceability designed to prevent illegal, unreported and unregulated fishing. Marine Policy, 36(1), pp. 96-102.

Charles H, C., Giovanna, M., Dennis M, P. & Robin W, R., 2015. CSR disclosure: the more things change…?. Accounting, Auditing & Accountability Journal, 28(1), pp. 14-35.

Coate, C. & Mitschow, M., 2017. Luca Pacioli and the Role of Accounting and Business: Early Lessons in Social Responsibility. s.l.:s.n.

Egelund-Mu¨ller, B., Elsman, M., Henglein, F. & Ross, O., 2017. Automated Execution of Financial Contracts on Blockchains. Bus Inf Syst Eng, 59(6), pp. 457-467.

Iggers, J., 2018. Good News, Bad News: Journalism Ethics And The Public Interest. s.l.:s.n.

Johan, S., 2018. The Relationship Between Economic Value Added, Market Value Added And Return On Cost Of Capital In Measuring Corporate Performance. Jurnal Manajemen Bisnis dan Kewirausahaan, 3(1).

Kaufmann, W., 2017. The Problem of Regulatory Unreasonableness. First ed. New York: Routledge.

Webster, T., 2017. Successful Ethical Decision-Making Practices from the Professional Accountants’ Perspective. ProQuest Dissertations Publishing.