Ubl Capitalization vs Expensing

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FIXED ASSET

CAPITALIZATION POLICYOF UBL


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AGENDA


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AGENDA

Introduction of United Bank Limited

(UBL)

Technical Terms & Definitions

Objectives & Scope of This Policy

Classification of Fixed Assets

Capitalization Limit Matrix

Initial Recognition of The Asset

Measurement After Initial Recognition

Depreciation

Impairment

Derecognition\Disposal


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INTRODUCTION


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INTRODUCTION

United Bank Limited (UBL) is a bankingcompany, which is engaged in commercial

banking, retail banking and related services

domestically and overseas.

UBL is the second largest private commercial

bank in Pakistan with over 1000 branches and

has an international presence in 10 countries.

It was incorporated in 1959 and is a private

bank in the following shares:

1. Abu Dhabi Group, UAE (25.5%)

2. Best Way Group, UK (25.5%)

3. State Bank (48.69%)

4. Govt. of Pakistan (0.31%)


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TECHNICAL TERMS

&DEFINITIONS


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TECHNICAL TERMS

Fair Value is the amount for which an asset

could be exchanged between knowledgeable,

willing parties in an arms length transaction.

Residual Value is the estimated amount that

an entity would obtain from disposal of an asset,

after deducting the estimated cost of disposal, ifthe asset is already of the age and in the

condition expected at the end of its useful life

Useful Life is the period over which an asset is

expected to be available for use by the bank.

Property, Plant and Equipment are tangibleitems that are:

1. Held for use for administrative purposes or

for rental for others (e.g. Ijarah); and

2. Expected to be used during more than oneperiod.


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OBJECTIVES & SCOPE OF

FIXED ASSETCAPITALIZATION POLICY


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OBJECTIVES & SCOPE

Operating fixed asset policy is being framed to

stream line and bring in consistency in

recording and maintaining tangible and

intangible asset throughout the network.

In formulating this policy, the instruction and

guidelines given in the following standards are

followed by the UBL Bank:

1. International Accounting Standards (IAS),

2. International Financial ReportingStandards (IFRS),

3. Banking Ordinance 1962,

4. Companies Ordinance 1984, and

5. Instructions issued by State Bank of

Pakistan.


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OBJECTIVES & SCOPE

The objective of the policy is to provide a

uniform set of guidelines on the capitalization,

carrying values, depreciation and disposal of

the operating fixed assets of the bank.

The guidelines outlined in this policy manual

will be applicable to all branches, regional

offices and divisions at banks head office in

Pakistan.


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CLASSIFICATION OF FIXED

ASSETS


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CLASSIFICATION OF FIXED ASSETS

CAPITAL EQUIPMENT CATEGORYUSEFUL

LIFE

RESIDUAL

VALUE

DEPRECIATION RATE

Years Percentage

Tangible Immovable Assets

Freehold land - - -

Building on freehold land 20 - 5%

Lease hold land Lease term

Building on leasehold land 20 - 5%

Improvement on leasehold building

10 - 10%Tangible Movable Assets

Furniture and fixtures:

Carpets, curtains & library books 4 - 25%

Others 10 - 10%

Electrical, Office and IT Equipment

Laptops 3 10% 33%

Smart phones 3 - 33%

Telecom and other IT hardware 4 - 25%

Electrical and office equipment 5 - 20%

Vehicles

Own use of the bank 5 10% 20%

Given on lease (Ijarah) Security deposit Period of contract

Intangible Assets

Core banking solution 10 - 10%

All other software 4 - 25%


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CAPITALIZATION LIMIT

MATRIX


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CAPITALIZATION LIMIT MATRIX

Asset Category Rupees

Fixed & fixtures

Chairs 5,000

All other 10,000

Electrical, office and IT

equipment

Printer and scanners 5,000

Cabling (data, power and voice) 20,000

All other 10,000

Vehicles

Own use of bank 15,000

Given on lease (Ijarah) Actual

Software 10,000


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INITIAL RECOGNITION OF A

FIXED ASSET


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INITIAL RECOGNITION OF AN ASSET

An asset will be recognized as an fixed asset

only when it meets the following criteria:

1. If it is held for use in banks operation or for

rental for others e.g. Ijarah etc.,2. Has life of more than one year,

3. Is over the capitalization limit matrix,

4. It is probable that the future economic,

benefits will flow to the entity, and

5. The cost of the asset can be measuredreliability.

Any item falling outside these criteria / limit

will be expense out.


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The cost of an item of property, plant andequipment comprises:

1. Purchase price, including import duties and

applicable taxes after deducting any trade

discounts, rebates and refundable taxes,2. Any cost directly attributable to bring the

asset to the location and condition necessary

for it to be capable of operating in the manner

intended by the banks management,

3. Professional fees on acquisition e.g. architectsand engineers fee,

4. Cost of construction,

5. Cost of site preparation,

6. Installation and assembly cost, and

7. Costs of testing.


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Subsequent Expenditure:

1. Any expense in the nature of repairs and

maintenance does not qualify for

capitalization.

2. Any other expense does not meet the criteria

for capitalization and have an immaterial

amount also does not qualify for

capitalization.


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MEASUREMENT AFTER

INITIAL RECOGNITION


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MEASUREMENT AFTER INITIAL RECOGNITION

According to IFRSs there are two models whichan entity shall use as its accounting policy:

1. Cost Model

2. Revaluation Model

UBL follows Revaluation Model, which statesthat, after recognition of an asset, an item of

property plant and equipment whose fair value

can be measured reliable shall be carried at a

revalued amount.

Fair value at the date of revaluation less (-) any

subsequent accumulated depreciation and

subsequent accumulated impairment losses.


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MEASUREMENT AFTER INITIAL RECOGNITION

UBL revalued there fixed assets once in every three

years or when there are reasons or indications that

the carrying amount differs significantly from the

fair value of the asset, revaluation will be carried

out.

If any category of the operating fixed assets is

revalued, the entire assets falling in that category

will be revalued.

Any increase in the value of the asset as a result of a

revaluation will be recognized and accumulated in

the equity under the heading Revaluation Surplus

Any decrease in the value of the asset as a result of a

revaluation will be recognized in the profit and loss

as an Impairment Loss.


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DEPRECIATION


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DEPRECIATION

UBL depreciate the amount of an asset on

straight line basis over the useful life of an

asset.

Depreciation on addition is to be charged in themonth of addition and no depreciation is

charged on the month of disposal.

Useful life is to be reviewed periodically and, if

the remaining expected life differs significantly

from previous estimate, the depreciation rate

is to be adjusted to account for change in

expectation.


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DEPRECIATION

The depreciation method applied to an asset

shall be reviewed at least at each financial year-

end and, if there has been a significant change in

the expected pattern of consumption of the

future economic benefits embodied in the asset,the method shall be changed to reflect the

changed pattern.


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IMPAIRMENT


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IMPAIRMENT

Impairment Loss is the amount when the

carrying amount (Book Value) of an asset

exceeds its recoverable amount (Market Value).

UBL assess at the end of each reporting periodwhether there is any indication that an asset

may be impaired.

If any such indication exists, the entity shall

estimate the recoverable amount of the asset

and immediately record the impairment loss.


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IMPAIRMENT

In Assessing whether there is any indicationthat an asset may be impaired, UBL consider the

following indication from external sources:

1. Fluctuations in assets market value during

the period.

2. Significant changes with adverse effects on

the bank in the technological, market,

economic or legal environment in which theentity operates.

3. Fluctuations in the market interest rates or

other market rates of return on

investments.


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IMPAIRMENT

In Assessing whether there is any indicationthat an asset may be impaired, UBL consider the

following indication from internal sources:

1. Any obsolescence or damage of an asset

2. Any evidence from the internal reporting

that the economic performance of an asset

will be worse than expected.

3. Significant changes with adverse effects on

the bank, e.g. asset becoming idle, plans to

discontinue as asset, reassessing the useful

life of an asset as finite rather than infinite.


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DERECOGNITION


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DERECOGNITION

The carrying amount of an item of property,plant and equipment shall be derecognized:

1. On disposal\sale; or

2. When no future economic benefits are

expected from its use or disposal.

The gain or loss arising from the derecognition

of an item of fixed asset shall be determined as

the difference between the net disposal

proceeds and the carrying amount of the item.

The gain or loss arising from the derecognition

of an item of property, plant and equipment

shall be included in the profit and loss when the

item is derecognized.


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THANK YOU

Ubl Capitalization vs Expensing

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