1.

THE FINANCIAL INFORMATION

SYSTEM AND ITS BASIC PRINCIPLES:
AN APPLIED OVERVIEW
1.6. Comprehensive Income & Equity:
an example
(Ancient Mariner Bank - business case)

Prof. Alberto Marchesi Advanced Financial Accounting

School of Banking, Finance and Insurance
Graduate program in Banking and Finance/Trading and risk management
Universit Cattolica del Sacro Cuore - Milano - Italy - Year 2013-2014

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1.6 - Comprehensive Income and Equity: an application - Advanced Financial Accounting

Table 1 - POSITION AT T0
Information:
All values are in Currency Units (CU).
The bank is financed only with Share Capital and retained earnings.
Loans & Receivables assets don't change during time.
No tax nor commission on purchases and sales of securities.
No tax on Net Profit nor on Changes in Fair Value.
All operations are regulated in cash or cash equivalents.
Net Profits are charged to reserve from profits.
The Bank has recently bought nr. 10 Overland Bonds at 100 CU each and has classified them
in the Available For Sale securities.

AFS securities valuation at T0

Overland Bonds nr.
10
Purchase price per unit (CU)
100
AFS Fair Value at T0
1.000
Note: since there are no additonal direct purchase costs, Fair Value at inception equals to purchase cost.

Ancient Mariner Bank - Statement ot Financial Position at T0 (CU)

Loans & Receivables
Available For Sale securities
TOTAL ASSETS

10.000 Share Capital

1.000
11.000 TOTAL LIABILITIES & EQUITY

Page 2 of 6

11.000
11.000

1.6 - Comprehensive Income and Equity: an application - Advanced Financial Accounting

Table 2 - PERIOD T0-T1

Information:
Due to changes in market value, at T1 Fair Value of Overland Bond is 97 CU each.
During the period no sales of bonds occur.
AFS securities valuation at T1
Overland Bonds nr.
10
Fair Value per unit at T1 (CU)
97
AFS Fair Value at T1
970
AFS Fair Value at T0
1.000
Decrease in Fair Value T0-T1
(30)
Note: decrease in Fair Value is due to the decrease in market value of bonds.
Valuation reserve
Valuation reserve at T0
0
Changes in period T0-T1
(30)
Valuation reserve at T1
(30)
Note: valuation reserve originates from negative OCI and is therefore negative.

Ancient Mariner Bank - Statement of Income period T0-T1 (CU)

Interest income & other revenues
Gains (Losses) on disposal of AFS securities
Other operating and financial expenses
NET PROFIT

1.000
0
(990)
10

Ancient Mariner Bank - Statement of Comprehensive Income period T0-T1 (CU)

Net Profit
10
Fair Value changes in AFS securities
(30)
Recycling to profit or loss
0
Other Comprehensive Income
(30)
COMPREHENSIVE INCOME
(20)
Note: while Net Profit is positive, Comprehensive Income is negative (algebraic sum of Net Profit and negative OCI).

Ancient Mariner Bank - Statement ot Financial Position at T1 (CU)

Loans & Receivables
Available For Sale securities
Cash & equivalents

10.000 Share Capital

970 Reserve from profits
10 Valuation reserve
Net Profit
10.980 TOTAL LIABILITIES & EQUITY

TOTAL ASSETS
Notes:
Comprehensive Income is charged: to Valuation reserve as for OCI; to Net Profit as for Net Profit;
Cash & equivalents are produced by Net Income, since in this period there are no non-cash operations
in the Statement of Income.

Page 3 of 6

11.000
0
(30)
10
10.980

1.6 - Comprehensive Income and Equity: an application - Advanced Financial Accounting

Table 3 - PERIOD T1-T2

Information
Due to changes in market value, at T2 Fair Value of Overland Bond is 110 CU each.
During the period no sales of bonds occur.
AFS securities valuation at T2
Overland Bonds nr.
10
Fair Value per unit at T2 (CU)
110
AFS Fair Value at T2
1.100
AFS Fair Value at T1
970
Increase in Fair Value T1-T2
130
Note: increase in Fair Value is due to the increase in market value of bonds.
Valuation reserve
Valuation reserve at T1
(30)
Changes in period T1-T2
130
Valuation reserve at T2
100
Note: positive valuation reserve originates from negative Valuation reserve of former period and from positive
period OCI for the period.

Ancient Mariner Bank - Statement of Income period T1-T2 (CU)

Interest income & other revenues
Gains (Losses) on disposal of AFS securities
Other operating and financial expenses
NET PROFIT

1.001
0
(990)
11

Ancient Mariner Bank - Statement of Comprehensive Income period T1-T2 (CU)

Net Profit
Fair Value changes in AFS securities
Recycling to profit or loss
Other Comprehensive Income
COMPREHENSIVE INCOME
Note: positive Comprehensive Income value is mainly due to positive relevant OCI.

11
130
0
130
141

Ancient Mariner Bank - Statement ot Financial Position at T2 (CU)

Loans & Receivables
Available For Sale securities
Cash & equivalents

10.000 Share Capital

1.100 Reserve from profits
21 Valuation reserve
Net Profit
11.121 TOTAL LIABILITIES & EQUITY

TOTAL ASSETS
Notes:
former period Net Profit has been charged to Reserve from profits;
Cash & equivalents increase because of Net Income, since in this period there are no non-cash operations
in the Statement of Income.

Page 4 of 6

11.000
10
100
11
11.121

1.6 - Comprehensive Income and Equity: an application - Advanced Financial Accounting

Table 4 - PERIOD T2-T3

Information:
Due to changes in market value, at T3 Fair Value of Overland Bond is 111 CU each.
During the period the bank has sold nr. 4 bonds at 115 CU each.
Gains (Losses) on disposal of AFS
Nr. of bonds sold
4
Fair Value at inception per unit (CU)
100
Total original Fair Value
400
Nr. of bonds sold
4
Sale price per unit (CU)
115
Total value of sale
460
Gain on disposal
60
Note: gain is calculated comparing Fair Value at inception and cash generated by sale.
AFS securities valuation at T3
Overland Bonds nr.
6
Fair Value per unit at T3 (CU)
111
AFS Fair Value at T3
666
Overland Bonds nr.
6
Fair Value per unit at T2 (CU)
110
Fair Value at T2 (CU)
660
Increase in Fair Value T2-T3
6
Note: at the end of the period valuation is, of course, only for bonds remaining after the sale.
Valuation reserve
Valuation reserve at T2
Changes in period T2-T3
Valuation reserve at T3

100
(34)
66

Cash & equivalents

Cash & equivalents at T2
21
Cash inflow from sale of bonds
460
Cash inflow from other operations
12
Cash & equivalents at T3
493
Note: Cash & equivalents increase because of cash inflows from: sale of bonds; result from all other
operations in the Statement of Income.
Reclassification adjustements (Recycling) to profit or loss
Valuation reserve at T2 (CU)
100
Nr. of bonds relating to Valuation reserve at T2
10
Valuation reserve per unit at T2 (CU)
10
Nr. of bonds sold during period T2-T3
4
Amount of Valuation reserve to recycle period T2-T3 to profit or loss
40
Notes:
Valuation reserve per unit at T2 = Valuation reserve / Nr. of bonds relating;
Amount of Valuation reserve to recycle during period T2-T3 =
= Valuation reserve per unit at T2 * Nr. of bonds sold during T2-T3

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1.6 - Comprehensive Income and Equity: an application - Advanced Financial Accounting

Table 4 - PERIOD T2-T3

(contd.)

Ancient Mariner Bank - Statement of Income period T2-T3 (CU)

Interest income & other revenues
Gains (Losses) on disposal of AFS securities
Other operating and financial expenses
NET PROFIT
Note: Net Profit is increased by negotiated Gain on sale of bonds.

1.002
60
(990)
72

Ancient Mariner Bank - Statement of Comprehensive Income period T2-T3 (CU)

Net Profit
Fair Value changes in AFS securities
6
Recycling to profit or loss
(40)
Other Comprehensive Income
COMPREHENSIVE INCOME
Notes:
Positive Comprehensive Income comes from the sum of positive Net Profit and negative OCI;
Since a part of the bonds have been sold, negative OCI comes from the sum of: increase in Fair Value
of remaining bonds; negative reclassification adjustment related to bonds sold.

72

(34)
38

Ancient Mariner Bank - Statement ot Financial Position at T3 (CU)

Loans & Receivables
Available For Sale securities
Cash & equivalents

10.000 Share Capital

666 Reserve from profits
493 Valuation reserve
Net Profit
TOTAL ASSETS
11.159 TOTAL LIABILITIES & EQUITY
Note: former period Net Profit has been charged to Reserve from profits.

Page 6 of 6

11.000
21
66
72
11.159