FMGT55 – 1 Deposit Transactions

A. Banking: Depository and Lending Operations Electronic Banking Services

Types of Banking Services: (Categories of Banking Services) A. Direct Deposit
1. Deposit  Saves time, money, and effort, safe
2. Payment Services  Automatic deposit of net pay to an employee’s designated bank account
3. Lending B. Automatic Payments
4. Other Financial Services  With authorization, funds are withdrawn from your account
How to Manage Your Cash:  Make sure there are sufficient funds in your account
A. Financial Services for Short-Term Needs  Check your bank statement to make sure the transfer is correct
•Daily purchases •Living expenses •Emergency C. Automated Teller Machines (ATMs)
Fund  ATMs are used with a debit card
a. Daily Needs b. Savings c. Checking c. Credit Card  A debit card is used with a PIN
- Check cashing - Regular savings - Regular  Financial institutions can charge fees for the convenience of using ATMs
- Automated account checking an Automated Teller Machines (ATMs)
teller machines - Money market account o Computer terminal that allows a withdrawal of Cash from an account.
(ATMs) account - Online Debit card
- Prepaid cards payments o Cash card that allows one to withdraw money or pay for purchases with a
- Automatic checking or savings account.
Preauthorized
Payments D. Plastic Money
- Payment by  Electronic payments
phone  Online payments
- Cashier’s  Stored-value cards
checks  Smart cards
- Money orders s
Evaluating Financial Services
B. Financial Services for Long-Term Needs ❓ Questions to Ask
•Major purchases. •Long-term financial security  Is a higher interest rate on a certificate of deposit worth giving up
a. Savings b. Credit c. Investment d. Other liquidity? (Dormant account/Dormancy – charges P300)
Services Services Services  Would you trade the convenience of getting cash from the ATM near your
- Certificates of - Cash loans for - Mutual funds - Tax preparation office for lower ATM fees?
deposit (CDs) cars, - Financial advice - Insurance  Is it worth opening a checking account that has no fees but does not earn
- US. Savings - Education - Budgeting interest, if you must keep a minimum balance?
Bonds - Home loans
FMGT55 – 1 Deposit Transactions
DEPOSIT INSTITUTIONS o Is the institution PDIC member?
● Commercial Banks o Does the institution have convenient locations?
● Thrift Banks o Does it have online banking services?
● Universal Banks o Does it have any special banking services that you might need?
● Cooperatives
B. Savings Accounts and Payment Methods
1. Commercial bank TYPES OF SAVINGS PLANS
 A for-profit institution that offers a full range of financial services, including Type of Account Benefits Drawbacks
checking, savings, and lending. Regular savings Low minimum Low rate of return
2. Savings and loan association (S&L) accounts balance.
 A financial institutional that traditionally specialized in savings accounts and Ease of withdrawal
mortgage loans, but now offers many of the same services as commercial Insured
banks. Certificates of deposit Guaranteed rate of Possible penalty for
3. Cooperatives (CDs) return for time of CD
early withdrawal
 A nonprofit financial institution that is owned by its members and organized Insured Minimum deposit
for their benefit.
Money market Good rate of return Minimum balance
accounts Some check writing No interest and
NON-DEPOSITORY INSTITUTIONS
Insured possible service charge
● Life Insurance Companies
if below a certain
● Investment Companies
balance
● Finance Companies
U.S. Savings Bonds Low minimum deposit Lower rate of return
Guaranteed by the when cashed in before
government bond reaches maturity
OTHER FINANCIAL BUSINESSES
Free from state and date
● Pawn shops
local taxes
● Check cashing outlets
● Payday loans Three Limitations of a Certificate of Deposit (CD)
● Rent-to-own centers ● Your money must stay in the account for one month to five or more years.
● You must pay a penalty for withdrawing your money early.
COMPARING FINANCIAL INSTITUTIONS ● There is usually a minimum deposit amount.
o Where can you get the highest rate of interest on your savings?
o Where can you obtain a checking account with low (or no) fees?
o Will you be able to borrow money from the institution—with a credit card or Certificate of deposit (CD)
another type of loan—when you need it? o Savings alternative in which money is left on deposit for a stated period of
o Do you need an institution that offers free financial advice? time to earn a specific rate of return
FMGT55 – 1 Deposit Transactions
EVALUATING SAVINGS PLANS Overdraft protection
Factors affecting your selection of a savings plan - an automatic loan made to an account if the balance will not cover checks
● Rate of Return written
○ Compounding
○ Annual percentage rate (APR) Using a Checking Account
● Inflation
● Tax Considerations
● Liquidity
● Safety
● Restrictions and Fees

Rate of return
- Percentage of increase in the value of savings from earned interest
Compounding
- The process in which interest is earned on both the principal and on any
previously earned interest.
Annual percentage yield (APY)
- Amount of interest that a Php100 deposit would earn, after compounding, for
one year

Types of Checking Accounts

Checking Accounts Stop-payment order
● Regular Checking Accounts  Request made to a bank or other financial institution to not cash a particular
● Checking Account with ADA check.
● Interest-Earning Accounts * If a check is lost or stolen, you can ask the bank to issue a stop-payment order.

Evaluating Checking Accounts Endorsement - Signature of the payee.

Restrictions Fees and Charges Interest Special Services Types of Endorsements
• Minimum • Monthly fee • Rates • ATM ● Blank
balance • Printing, • Compounding • Telephone ● Restrictive
• Number of overdraft, banking ● Special
Transactions • Stop-payment • Online banking
fees • Overdraft Information on Your Bank Statement
protection ● Deposits
● Checks You Have Written
FMGT55 – 1 Deposit Transactions
● ATM Withdrawals Lending Activities
● Debit Withdrawals Section 1: What Is Lending Activities?
What is a creditor?
● Interest Earned and Fees - The creditor is an entity that lends money.

Bank reconciliation Using Lending Activities Wisely

 Report that accounts for the differences between a bank statement and a  Using credit increases the amount of money you can spend now, but the cost of
credit decreases the amount of money you will have in the future.
checkbook balance.
* Use a bank reconciliation form to determine your true balance. Factors to Consider Before Using Credit
 What should you know before using credit?
Other Payment Methods  Do you have the cash you need for the down payment?
 Do you want to use your savings instead of credit?
● Certified Check
 Can you afford the item?
● Cashier’s Check  Could you use the credit in some better way?
● Money Order  Could you put off buying the item for a while?
● Travelers Check  What are the opportunity costs of postponing the purchase?
● Prepaid Travelers Cards  What are the costs of using credit?

Advantages of Credit Disadvantages of Credit

Checking Accounts  You enjoy goods and services  Credit costs money
 Restrictions now instead of later.  Failure to pay your bills can ruin
 Interests  Combining several purchases a good credit reputation
 Fees and Charges while making one monthly  Failure to pay your bills can
payment lead to a loss of income and
 Special Services  A credit card is needed for property
transactions such as renting a  Using credit does not increase
Banking Institutions and Your Money car. your total purchasing power
Banks make money by making loans. The amount of money a bank can lend  Traveling with a credit card is
safer than cash
is affected by the reserve requirement set by the Bangko Sentral.
 Good credit results in other
lenders viewing you as a
responsible person.
B. Lending Transactions Types of Credit:
1. Line of credit
Banking - Maximum amount of money a creditor will allow a credit user to borrow
Personal Banking Corporate Banking *When you have a credit card, you should know the grace period and the finance charge.
Deposits Lending Deposits Lending 2. Grace period
Saving Account Credit Cards Corporate Cash Business Loan - Time period during which no finance charges will be added to an account
Checking Account Housing Loan Management 3. Finance charge
Time Deposit Auto or Car Loan - Total dollar amount paid to use credit.
Investment
FMGT55 – 1 Deposit Transactions
Can You Afford a Loan or Credit Card? b. Protecting Your Credit on the Internet
a. Add up all your basic monthly expenses and then subtract the total from - Use a secure browser.
your take-home pay. - Keep records of online transactions.
b. Consider what you might give up to make a monthly loan payment. - Review monthly bank and credit card statements.
- Read privacy and security policies of Web sites.
The Cost of Credit - Keep your personal information private.
When shopping for credit, you should know the finance charges and annual - Never give your password to anyone online.
percentage rates (APR) of the credit sources you are considering. - Do not download files sent to you by strangers.

Annual percentage rate (APR)

 cost of credit on a yearly basis, expressed as a percentage C Foreign and International Banking
International Banking Services
Applying for Credit (5C’s)
1) Character  International banks can be characterized by the types of services they provide
2) Capacity that distinguish them from domestic banks:
3) Capital
 Facilitate the imports and exports of their clients by arranging trade financing
4) Collateral
5) Conditions  Serve their clients by arranging for foreign exchange necessary to conduct
cross-border transactions and make foreign investments
Credit rating - A measure of a person’s ability and willingness to make credit payments  Assist their clients in hedging exchange rate risk in through forward and
on time.
options contracts
Factors that Determine Credit Rating  Trade foreign exchange products for their own account
- Income  Major features that distinguish international banks from domestic banks are
- Current Debt
- Information About Character the types of deposits they accept and the loans and investments they make
- Debt Payment History – Large international banks both borrow and lend in the Eurocurrency market
 Banks are frequently structured as bank holding companies so that they can
Credit Report perform both traditional commercial banking functions and engage in
(Contents of Your Credit File)
- Employer, Position, Income investment banking activities
- Previous Address Reasons for International Banking
- Previous Employer 1) Low marginal costs
- Spouse’s Information
- Managerial and marketing knowledge developed at home can be used abroad
- Homeowner or Renter Status
- Checks Returned or Insufficient Funds with low marginal costs
2) Knowledge advantage
Protecting Your Credit - Foreign bank subsidiary can draw on parent bank’s knowledge of personal
 Protecting Your Credit From Theft or Loss
contacts and credit investigations for use in that foreign market
a. Avoid Having Your Credit Card Being Stolen or Lost
- Always retrieve your card after a purchase.
- Keep a record of your credit card numbers.
- Notify the credit card company immediately if your card is lost or stolen.
FMGT55 – 1 Deposit Transactions
3) Home nation information services
- Local firms in a foreign market may be able to obtain more complete
information on trade and financial markets in the multinational bank’s home
nation than is obtainable from foreign domestic banks
4) Prestige
- Very large multinational banks have high perceived prestige, which can be
attractive to new clients
5) Regulation advantage
- Multinational banks are often not subject to the same regulations as domestic
banks.
6) Wholesale defensive strategy
- Banks follow their multinational customers abroad to avoid losing their
business at home and abroad
7) Retail defensive strategy
- Multinational banking operations help a bank prevent the erosion of its
traveler’s check, tourist, and foreign business markets from foreign bank
competition
8) Transactions costs
- Multinational banks may be able to circumvent government currency controls
9) Growth
- Foreign markets may offer opportunities for growth not found domestically
10) Risk reduction
- Greater stability of earnings with diversification
Types of International Banking Offices
 Correspondent bank
 A correspondent bank relationship is established when two banks
maintain a correspondent bank account with one another
o Beneficial because a bank can service its MNC clients at a
low cost, without the need of having bank personnel
physically located in many countries
o Disadvantage is that the bank’s clients may not receive the
same level of service
 Correspondent banking allows a bank’s MNC client to conduct
business worldwide through his local bank or its contacts
 Representative offices
 A representative office is a small service facility staffed by parent
bank personnel that is designed to assist MNC clients of the parent
bank in dealings with the bank’s correspondents
o Serves as a way for the parent bank to provide its MNC
clients with a level of service greater than that provided
through a correspondent relationship
 Representative offices also assist MNC clients with information
about local business practices, economic information, and credit
evaluation of the MNC’s foreign customers
 Foreign branches
 A foreign branch bank operates like a local bank but is legally a part
of the parent bank
o Subject to both the banking regulations of home country and
the country in which it operates
 May be established for various reasons:
o Can provide a much fuller range of services for its MNC
customers than can be provided through a representative
office
o Books of a foreign branch are part of the parent bank’s books
o Facilitates competition on a local level with banks of the host
country
 Subsidiary and affiliate banks
 Both subsidiary and affiliate banks operate under the banking laws of
the country in which they are incorporated
o A subsidiary bank is a locally incorporated bank that is either
wholly owned or owned in major part by a foreign parent
o An affiliate bank is one that is only partially owned but not
controlled by its foreign parent
 U.S. parent banks find subsidiary and affiliate banking structures
desirable because they can underwrite securities
 Edge Act banks
 Edge Act was a 1919 amendment to Section 25 of the 1914 Federal
Reserve Act
FMGT55 – 1 Deposit Transactions
 Edge Act banks are federally chartered subsidiaries of U.S. banks that
are physically located in the U.S. and can engage in a full range of
international banking activities
o Edge Act banks are typically located in a state different
o from that of its parent to get around the prohibition on
interstate branch banking
o Edge Act banks are not prohibited from owning equity in
business corporations, unlike domestic commercial banks
 Offshore banking centers
 An offshore banking center is a country whose banking system is
organized to permit external accounts beyond the normal economic
activity of the country
o Offshore banks operate as branches or subsidiaries of the
parent bank
 Principal features that make a country attractive for establishing an
offshore banking operation are virtually total freedom from host-
country governmental banking regulations
 International banking facilities
 An international banking facility (IBF) is a separate set of asset and
liability accounts that are segregated on the parent bank’s books,
though it is not a unique physical or legal entity
o Any U.S.-chartered depository institution, a U.S. branch or
subsidiary of a foreign bank, or a U.S. office of an Edge Act
bank may operate an IBF
 Originally established largely as a result of the success of offshore
banking
o Have been successful in capturing a large portion of
Eurodollar business previously handled offshore
Organizational Structure of International Banking Offices from the U.S.
Perspective
Capital Adequacy Standards
 Bank capital adequacy refers to the amount of equity capital and other
securities a bank holds as reserves against risky assets to reduce the
probability of a bank failure
 Three pillars of capital adequacy:
o Minimum capital requirements
o Supervisory review process
o Effective use of market discipline
 Basel III was announced on September 12, 2010
o Designed to substantially strengthen the regulatory capital framework
and increase the quality of bank capital
The Asian Crisis
 Crisis began in mid-1997 when Thailand devalued the baht. Consequently,
other Asian countries devalued their currencies by letting them float.
o Crisis followed a period of economic expansion in the region
financed by record private capital inflows
o Bankers from the G-10 countries actively sought to finance growth
opportunities in Asia by providing businesses with a full range of
products and services, leading to domestic price bubbles in East Asia,
particularly in real estate.
o Close interrelationships common among commercial firms and FIs in
Asia resulted in poor investment decisions
FMGT55 – 1 Deposit Transactions
Global Financial Crisis: Credit Crunch
 Officially announced on December 1, 2008 by NBER D Mergers and Consolidations
 Credit crunch, or inability of borrowers to easily obtain credit, began in the Merger and Consolidation
U.S. in the summer of 2007  Corporations can grow and expand by:
 Origin of credit crunch can be traced back to three key contributing factors: o Mergers.
o Liberalization of banking and securities regulation o Consolidation.
o Global savings glut o Purchase of another corporation’s assets.
o Low interest rate environment created by the Federal Reserve in the o Purchases of a controlling interest in another corporation.
early part of this decade
Merger
Global Financial Crisis: Impact and Economic Stimulus  Merger is the legal combination of two or more corporations after which only
 Dramatic changes have taken place in the financial services industry, the auto one corporation remains. A’s articles of incorporation are amended to include
industry, and in financial market worldwide articles of merger.
 The Fed lowering interest rates to such a low level and keeping them there for  After merger, A continues as the surviving corporation with all of B’s rights
such a long period of time was a mistake and obligations.
o Lowering the Fed Funds rate only added additional liquidity to the Consolidation
U.S. economy and exacerbated American’s unsustainable buying  Two or more corporations combine such that both cease to exist and a new
binge corporation emerges which has all the rights and obligations previously held
 New initiatives were made in 2008 to spur U.S. and world economic activity by A and B.
 The articles of consolidation take the place of the original articles of A and B.
Global Financial Crisis: Aftermath
 World economy has slowly recovered from the global economic crisis Reasons for Firms to Combine
 Many lessons should be learned from this crisis, but two important ones are No two business combinations are exactly alike, but they share one or more
as follows: of the following characteristics that potentially enhance profitability in increasingly
o Bankers seem not to scrutinize credit risk as closely when they serve competitive environments:
only as mortgage originators and then pass it on to MBS investors  Vertical integration.
rather than hold the paper themselves  Cost savings.
o Decision to allow the CDS market to operate without supervision of  Quick entry for products into markets.
the CFTC or some other regulatory agency was a serious error in  Economies of scale.
judgement  More attractive financing opportunities.
 Diversification of business risk.
 Business expansion.
FMGT55 – 1 Deposit Transactions
Merger and Consolidation Procedures
 Board of Directors of each corporation involved must approve the merger
plan.
 Next shareholders of each corporation must approve.
 Then, articles filed with Secretary of State and who issues a certificate of
merger to the surviving corporation or a certificate of consolidation to the
newly consolidated corporation.
Short-form Mergers
 For “Parent-Subsidiary” Merger.
 No approval of shareholders needed.
 Parent must own at least 90% of each class of stock of the subsidiary
corporation.
 Board of parent-corporation approves.
 New articles filed.
 Copy of merger sent to each shareholder of subsidiary-corporation.
 When allowed by state statute, a shareholder has the right to dissent and be
bought out” of his/her shares (shareholder’s appraisal right).
 In cases of: merger, consolidation, and sale of most of corporation’s assets
not in the ordinary course of business, adverse amendments to the articles of
incorporation.
 Certain procedures must be followed.
 Dissenting shareholder must give written notice of dissent prior to vote on
proposed transaction. The notice shows what dissenters will cost corporation
if action takes place.
 If approved, shareholder must make a demand for payment of shares at fair
market value (calculated on day prior to the date on which the vote was taken
– or court will determine).
 Corporation must:
 Make written offer to purchase a dissenting shareholder’s stock,
accompanied by current balance sheet and income statement for the
corporation.
 States differ as to whether dissenting shareholder loses his status as a
shareholder during appraisal process.
Consolidated Financial Reporting
 Consolidated financial statements provide more meaningful information than
separate statements.
 Consolidated financial statements more fairly present the activities of the
consolidated companies.
 Consolidated companies may retain their legal identities as separate
corporations.
To explain the process of preparing consolidated financial statements
for a business combination, we address three questions:
1. How is a business combination formed?
2. What constitutes a controlling financial interest?
3. How is the consolidation process carried out?
Business Combinations
A business combination:
 Refers to a transaction or other event in which an acquirer obtains control over
one or more businesses.
 Is formed by a wide variety of transactions or events with various formats.
 Can differ widely in legal form.
 Unites two or more enterprises into a single economic entity that requires
consolidated financial statements.
Types of Business Combinations –
Statutory Mergers
Statutory merger: Any business combination in which only one of the original
companies continues to exist.
The two types of statutory mergers are:
1) A business combination in which one company obtains all of the assets, and
often the liabilities, of another company.
2) A business combination in which one company obtains all of the capital stock
of another company. The acquiring company must gain 100 percent control
of all shares of stock before legally dissolving the company.
FMGT55 – 1 Deposit Transactions
Types of Business Combinations — Other Models
Statutory consolidation: A specific type of business combination that unites
two or more companies under the ownership of a newly created company.
Two or more companies transfer either their assets or their capital stock to a
newly formed corporation.
Control without dissolution: When one company achieves legal control over
another by acquiring a majority of voting stock, although control is present,
no dissolution takes place. Each company remains in existence as an
incorporated operation.
Consolidation of Financial Information
When one company gains control over another, a business combination is
created, and a single set of consolidate financial statements must be prepared. How?
a. Parents and subsidiaries financial data are brought together.
b. Financial position, results of operations, and cash flows are reported for the
combined entity.
c. Reciprocal accounts and intra-entity transactions are adjusted or eliminated
to ensure reported balances represent the single entity.
What is to be Consolidated and when?
 If dissolution occurs:
All appropriate account balances are physically consolidated in the financial
records of the survivor. Permanent consolidation occurs at the combination
date.
 If separate incorporation is maintained:
Only the financial statement information (on work papers, not the actual
records) is consolidated. The consolidation process is carried out at regular
intervals whenever financial statements are to be prepared.
How Does Consolidation Affect the Accounting Records?
 If dissolution occurs:
Dissolved company’s records are closed out. Surviving company’s accounts
are adjusted to include appropriate balances of the dissolved company.
 If separate incorporation is maintained:
Each company continues to retain its own records. Worksheets facilitate the
periodic consolidation process without disturbing individual accounting
systems.
The Acquisition Method
The acquisition method is required to account for a business combination. It
embraces the fair value in measuring the acquirer’s interest in the acquired business.
Applying the acquisition method involves using fair value to recognize and
measure:
 The consideration transferred for the acquired business and any non-
controlling interest.
 Separately identified assets acquired and liabilities assumed.
 Goodwill, or a gain from a bargain purchase.
Fair Value
 The fair value of assets acquired and liabilities assumed in a business
combination be determined at the acquisition date.
 Fair value: The price that would be received from selling an asset or paid for
transferring a liability in an orderly transaction between market participants
at the measurement date.
Valuation Techniques
I. The market approach estimates fair values using other market
transactions involving similar assets or liabilities.
II. The income approach relies on multi-period estimates of future cash
flows projected to be generated by an asset.
III. The cost approach estimates fair values by reference to the current cost of
replacing an asset with another of comparable economic utility.
FMGT55 – 1 Deposit Transactions
Goodwill and Gains on Bargain Purchases
What if the consideration transferred does NOT equal the fair value of the assets
acquired?
 If the consideration transferred exceeds the net amount of the assets acquired
and liabilities assumed, the difference is attributed to the asset goodwill by
the acquiring company.
 If the fair value of the assets acquired and liabilities assumed exceeds the
consideration transferred, a “gain on bargain purchase” is recognized by the
acquiring business.

Procedures for Consolidating Financial Information

Legal and accounting distinctions divide business combinations into separate
categories. Various procedures are utilized in this process according to the following
sequence:
1. Acquisition method when dissolution takes place.
2. Acquisition method when separate incorporation is maintained.

When an acquired firm’s legal status is dissolved in a business combination,

the continuing firm owns the former firm’s net assets.

Acquisition Method When Dissolution Takes Place

The continuing firm prepares a journal entry to record
 Fair value of the consideration transferred to acquire the dissolved firm.
 Identified assets acquired and liabilities assumed at their individual fair
values.
The entry to record the fair value of the combination depends on whether the
consideration transferred is equal to, exceeds, or is less than the fair value of
the net assets of the firm dissolved.
Consideration Transferred Exceeds Fair Values of Net Assets Acquired and
Liabilities Assumed
BigNet transfers to the owners of Smallport consideration of P1, 000,000 in
cash plus 20,000 shares of common stock with a fair value of P100 per share in
exchange for ownership of the company. The P3, 000,000 consideration transferred
from BigNet to Smallport results in an excess amount exchanged over the fair value
of the net assets acquired.
When the consideration transferred in an acquisition exceeds total net fair
value of the identified assets and liabilities, the excess (P450, 000 in this case) is
allocated to an unidentifiable asset known as goodwill.
FMGT55 – 1 Deposit Transactions
Consideration Transferred Is Less Than Net Identified Asset Fair Values
 An exception to the general rule of recording business acquisitions at fair
value of the consideration transferred occurs in the rare circumstance of a
bargain purchase.
 Bargain purchase: The fair value of the consideration transferred by the
acquirer is less than the fair value received in an acquisition, which is
considered more relevant for asset valuation than the consideration
transferred.
Related Costs of Business Combinations
Three additional categories of costs are incurred in business combinations, regardless
of whether dissolution takes place:
1. Attorneys, accountants, investment bankers, and other professionals engaged for
combination-related services. These service fees are expensed in the period incurred.
2. An acquiring firm’s internal costs (secretarial and management time allocated to
the acquisition activity). Such indirect costs are reported as current year expenses, too.
3. Amounts incurred to register and issue securities in connection with a business
combination simply reduce the otherwise determinable fair value of those securities.
The Acquisition Method When Separate Incorporation Is Maintained
Significant differences are evident in combinations in which each company remains a
legally incorporated separate entity.
1. Consolidation of the financial information is only simulated.
2. Acquiring company does not physically record the acquired assets and liabilities.
3. Dissolution does not occur; each company maintains independent record-keeping.
4. To facilitate the preparation of consolidated financial statements, a worksheet and
consolidation entries are employed using data gathered from these separate companies
although neither company ever records consolidation worksheet entries in its journals.
Acquisition Method—Subsidiary Is Not Dissolved
BigNet acquires Smallport Company on December 31 by issuing 26,000
shares of P10 par value common stock valued at P100 per share. BigNet pays fees of
P40, 000 to a third party for its assistance.
BigNet promises to pay an additional P83, 200 to the former owners if
Smallport’s earnings exceed P300, 000 during the next annual period, with an
expected present value of P20, 000 for the contingent liability as shown below.
Fair value of securities issued by BigNet P2, 600,000
Fair value of contingent performance liability 20,000
Total fair value of consideration transferred P2, 620,000
FMGT55 – 1 Deposit Transactions
When the subsidiary remains separate, the parent establishes an investment Questions:
account that initially reflects the acquired firm’s acquisition- date fair value. Because I. Based on the preceding information, what amount of total assets did Prime
Smallport maintains its separate identity, BigNet prepares the following journal report in its separate balance sheet immediately after the acquisition before
entries on its books to record the business combination. any consolidation with Standard Video?

II. Based on the preceding information, what amount of total assets was reported
in the consolidated balance sheet immediately after acquisition?

Consolidation Process
 Combining the financial statements of two or more legally separate
companies.
 Eliminating intercompany transactions and holdings. III. Based on the preceding information, what amount of total liabilities was
 Combining the accounts of separate companies, creating a single set of reported in the consolidated balance sheet immediately after acquisition?
financial statements.

Illustration
Prime Company acquired 100 percent of the voting common shares of
Standard Video Corporation, its bitter rival, by issuing bonds with a par value and fair
value of P150, 000. Immediately prior to the acquisition, Prime reported total assets
of P500, 000, liabilities of P280, 000, and stockholders' equity of P220, 000. At that
date, Standard Video reported total assets of P400, 000, liabilities of P250, 000, and
stockholders' equity of P150, 000. Included in Standard's liabilities was an account
payable to Prime in the amount of P20, 000, which Prime included in its accounts
receivable.
FMGT55 – 1 Deposit Transactions
The Structure of Non-bank Financial Institutions
E The Market Structure and Profit Strategies of Financial Institutions Refer to NBFI Lesson
The Structure of Commercial Banking Example: The Social Security System.
Commercial Banks (KB). In addition to the general powers incident to It is the policy of the State to establish, develop, promote and perfect a sound
corporations and those provided in other laws, a KB shall have the authority to and viable tax-exempt social security system suitable to the needs of the people
exercise all such powers as may be necessary to carry on the business of commercial throughout the Philippines, which shall promote social justice and provide meaningful
banking, such as accepting drafts and issuing letters of credit; discounting and protection to members and their beneficiaries against the hazards of disability,
negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; sickness, maternity, old age, death and other contingencies resulting in loss of income
accepting or creating demand deposits; receiving other types of deposits and deposit or financial burden.
substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring
marketable bonds and other debt securities; and extending credit, subject to such rules Money are Created and Destructed
as the Monetary Board may promulgate. These rules may include the determination  When banks grant loans it creates money
of bonds and other debt securities eligible for investment, the maturities and aggregate  Repayment of loans destroys money
amount of such investment.  https://www.youtube.com/watch?v=3zAvyTKj5-0&t=151s
 https://www.youtube.com/watch?v=BB4BKLvH3l8
It may also exercise or perform any or all of the following:
(a) invest in the equities of allied enterprises as provided in Sections 31 and 32 Investment Strategies
of R.A. No. 8791; Different Investment opportunities
(b) purchase, hold and convey real estate as specified under Sections 51 and 52  Investment in Debt Equity Securities
of R.A. No. 8791;  Investment in Securities Held for Trading
(c) receive in custody funds, documents and valuable objects;  Investment in Securities Not Held for Maturity
(d) act as financial agent and buy and sell, by order of and for the account of their  Investment in Subsidiaries
customers, shares, evidences of indebtedness and all types of securities;  Investment Properties
(e) make collections and payments for the account of others and perform such  Investment in money market securities
other services for their customers as are not incompatible with banking
business;
(f) upon prior approval of the Monetary Board, act as managing agent, adviser,
consultant or administrator of investment management/advisory/consultancy
F The Market Structure and Profit Strategies of Financial Institutions
Structure of Commercial Banks
accounts;
A commercial bank is a financial institution that provides services, such as
(g) rent out safety deposit boxes; and
accepting deposits, giving business loans and auto loans, mortgage lending, and basic
(h) Engage in quasi-banking functions.
investment products like savings accounts and certificates of deposit (CDs). The
traditional commercial bank is a brick and mortar institution with tellers, safe deposit
*pictures, ‘di ko na sinama. Hindi naman diniscuss huhuhuuh
boxes, ATMs and vaults.
FMGT55 – 1 Deposit Transactions
Commercial Banks Asset Liability Management
Powers of commercial banks:  A practice used by financial institutions to mitigate financial risks resulting
 buy and sell foreign exchange and bullion (gold, silver etc) from a mismatch of assets and liabilities.
 Receive in custody funds, documents and valuable objects  ALM strategies employ a combination of risk management and financial
 Act as a broker or agent to buy and sell securities for customers planning and often used by organizations to manage long-term risks that can
 Act as an advisor or administrator of investment management accounts arise due to changing circumstances.
 Rent out safety deposit boxes  The most common risks addressed by ALM are interest rate risk and liquidity
 Engage in quasi-banking functions risk
*insert pic*
Asset and Liability Management
Structure of Non-Bank Financial Institution  Mitigating Risks Associated with a Mismatch of Assets and Liabilities
Board of Trustee – the governing and policy-making body of the GSIS.
Members of the Board – are appointed by the President of the Philippines. Risk Mitigated Through ALM
*pic ulit, yoko ilagay*  Liquidity Risk
 Interest Rate Risk
Regulation of Financial Institutions  Currency Risk
Purpose of Regulating Banking Industry  Capital Markets Risk
 Financial instability of banking industry will significantly affect the economy - Capital market risk, which are risks associated with changing equity process
 Consumer protection that can be mitigated through futures, options, or derivatives.
 Promote healthy competition
 Protect the PDIC

Asset and Liability Management

The assets include:
 currency reserves in gold and foreign currency
 claims on banks from refinancing operations and
 Depending on national law also general government debt claims.

The liabilities include:

 the domestic cash in circulation within and outside the currency area,
 deposits of commercial banks as minimum reserve and deposit facility and
 Deposits of government and foreign institutions.