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Introduction
The First Gulf Bank (FGB) is publicly owned, its headquarter are in Abu Dhabi, United Arabs Emirates (UAE); this bank is owned by several sons of the late Sheikh Zayed Bin Sultan Al Nahyan (Fgb.ae, 2011). The First Gulf Bank was started in 1979 in Ajman and its main service area is offering of financial services through crossways United Arab Emirates (Fgb.ae, 2011). It has an extensive distribution network of different business and industrial areas, for example, Abu Dhabi, Dubai, Sharjah, Ajman, and AlAnd and is currently it is one of the fastest-growing banks in the region (Fgb.ae, 2011). It is also known as Bank Al Awal in Arabic name within the United Arab Emirates (Fgb.ae, 2011).
The First Gulf Bank provides various financial services in corporate banking, merchant banking, retail banking, and treasury and investments services (Fgb.ae, 2011). Its main focus is to offer financial services and solving of problems to various target groups in the market both in public and private institutions, investors as well as retail customers (Fgb.ae, 2011). In retail banking, the bank offers several services such as transactional accounts and savings, debit cards, mortgages, credit cards, and others (Fgb.ae, 2011). The retail bank consists of accounts, deposits, credit cards, safe deposit lockers, loans and mortgages; the First Gulf Bank is the largest bank in United Arab Emirates with shareholder equity of over AED 20 billion and has a depth experience in the real estate sectors, as such the bank assures its customers to deliver quality service that they deserve (Fgb.ae, 2011). Its innovative range of mortgage solutions has been designed to meet mortgage needs for residential or commercial property; more so, its financial sound solutions are open to United Arab Emirates nationals and residents (Fgb.ae, 2011).
Corporate banking offers, accounts, deposits, contractors finance real estate, trade finance, manufacturing and services, and lending against shares (Fgb.ae, 2011). The bank’s customers are served competently by expert well trained personnel, this enables the bank to provide cost-effective customized solutions which are relevant and essential in improving efficiency and quality. First Gulf Bank provides corporate customers with customized asset and also liability products to fit their daily financial needs (Fgb.ae, 2011). This gives the bank a chance to provide comprehensive and integrated financial solutions that are based on specific needs through superior products delivery and customer service levels (Fgb. ae, 2011).
The treasury and investments offer investments group, structured products, margin trading, local equities, international equities, money market and FX trading and advisory services to customers (Fgb. ae, 2011). In today’s dynamic world with its financial complexities every institution must have access to innovative cutting edge financing and risk management solutions that are tailor-made to fit customer needs and which have an attractive range of diversified investment options backed by world-class expertise and experience. Therefore, the Bank boasts one of the finest treasury and investments departments in the United Arab Emirates market by offering corporate and individual customers the extensive assortment of products ranging from traditional to contemporary financial products. This includes products that meet the demand of liquidity, cash flow management, interest rate fluctuation and risk management that they believe they have what the customer requires (Fgb.ae, 2011).
The First Gulf Bank operates in the banking and financial service industry where there is demand for core competencies and overall banking experience. The First Gulf Bank has increasingly turned to implement best of class solutions, integrating applications and outsourcing their technology and routine business activities. This is a proven model of providing competitive and differentiated value-added expertise services to customers. In addition, the First Gulf Bank’s banking and financial services planning business unit is engaged in offering the customers business solutions to attain operational efficiencies and meet the compliance needs in the wake of ever-increasing regulatory pressures.
First Gulf Bank has won Dubai Quality Award within the Emirates Dubai plus Sheikh Khalifa Excellence Award and has increased its share capital by issuing convertible bonds to four calculated partners in 2004 first gulf bank (Fgb.ae, 2011). This led to the rise of about AED one billion, which enabled the bank to double its equity capital in the year 2005 with the issuance of a right issue for the existing shareholders (Fgb.ae, 2011). All banks in the United Arab Emirates gained an advantage from the prices of the oil increase in the year 2005 but the First Gulf Bank had the highest profit growth rate in the industry (Fgb.ae, 2011). Currently, the bank has come up with 500 million Dirham rights issues for the existing shareholders plus profit for the year 2005 for the first nine months of the year has shot up to an astonishing AED 750 million (Fgb.ae, 2011). The bank has also launched an Islamic Banking window to overhaul the expanding market for Islamic Banking clientele (Fgb.ae, 2011).
The current chief executive officer of the bank has designed goals to enlarge the bank’s operations into other Gulf Corporation Councils (GCC countries) and in Asia; in the year 2007 for instance the bank opened a representative office in Singapore to tap the growing Asian market (Fgb.ae, 2011).
SWOT analysis
The SWOT analysis is a tremendously helpful tool for the decision-making process and understanding all sorts of situations in companies and businesses environments as it highlights the strengths, weaknesses, opportunities and threats elements faced by a particular business (Jones, 2010).
Strengths
These are the bank’s resources and capabilities that can be used as the basis for developing a competitive advantage (Jones, 2010). The First Gulf Bank has the following strengths; it has the highest net interest margin securities (NIMs) with the lowest cost Income Ratio which provides it with relatively lofty return on equity (ROEs) (Fgb.ae, 2011). The bank also has a large market share this is because the bank has a low lift-to-drag ratio (LD) which gives the bank the ability to win the market share in UAE (Fgb.ae, 2011).
Weaknesses
These are the attributes that position the bank at a deprivation relative to other banking institutions in UAE (Jones, 2010). The First Gulf Bank has the following weaknesses; the main weakness of the bank is that it is highly exposed to retail loans plus major property exposure worth 62% of common equity (Fgb.ae, 2011).
Opportunity
These are new opportunities for profit and growth of the company created by the external environment analysis (Jones, 2010). The First Gulf Bank’s primary opportunity includes expanding global branch networks and thereby attains geographical diversification. The bank also has an ability to increase leverage from fuel growth.
Threats
These are external constituents in the environment such as changes that may cause trouble for the business (Jones, 2010). A considerable decline in oil prices is a threat to the bank, this is because it will limit the growth rate of the country and geopolitical instability in the country in general. The main competitors for First Gulf Bank include United Arab Bank, United National Bank, Sharjah Islamic Bank, Abu Dhabi Islamic Bank, Arab Emirates Investment Bank, Amlak Financial Institution, Alliance Insurance and Arab Orient Insurance among others that are its threats (Fgb.ae, 2011). All these are competitors of First Gulf Bank because they offer a variety of products and services that address needs of customers ranging from the basic requirements of individuals to the more complex requirements of corporate entities. Therefore it all depends on the quality of services and products the company offers to the customers compared to their competitors which have electronic delivery channels supported by an extensive network of banking centers that are similar to those of First Gulf Bank (Fgb.ae, 2011).
Consolidated Income Statement
Income
Interest income and expense
Firms at times maintain their money for a short period in deposit savings such as deposits that matures in one year or certificates, money market investment or in saving accounts (Fgb.ae, 2011). The cash held in these types of accounts makes interest for the firm, which is reported in the statement of income as interest income. Interest income is meaningless for some firms and significant for other firms such as banks and insurance companies that earn income by investing the cash received from the depositor and creditors (for the bank) and held by the firm for policyholders (in the case of an insurance firm). The banks or insurance firms invest the money received in interest-earning bonds which is a critical element of the firm (Kennon, 2011). Income is the cash or money equivalent that flows into the business from investment in capital (profit, interest, dividends, and capital gains earned), land (rent) and from employment (salaries and wages) (Businessdictionary.com, 2011).
Firms borrow cash to finance their growth such as building offices, plants, acquiring other firms, financing short-term needs, and buying stock (Businessdictionary.com). The borrowed cash is translated to asset on the statement of financial position; an example is when a firm borrows $1.5 million to expand a plant that would increase the firm assets by $1.5 million after the money is used up. The interest paid by the firm to banks, bondholders and depositors is a cost for which no asset is received; as a consequence, the cost of interest expense must be reported on the statement of income (Kennon, 2011).
The First Gulf Bank recognizes the revenue earned to the degree that is possible for financial benefits to flow to the business and the income can be measured reliably. The bank has to follow certain criteria before any amount of income is recognized and entered as explained below;
Interest income and expense
Interest expense and income are reported at the effective rate of interest for the investment presented for sale; effective rate of interest is used to discount approximated future cash flow that is both payments and receipts by use of useful life of the investment or a short time if possible to the remaining amount of financial liability or asset. The computations take care of every contractual term of the investment and take in any incremental cost or fees that are proportionately attributable to investment and are essential elements of effective rate of interest. The carrying quantity of the financial liability and asset is amended if First Gulf Bank adjusts its approximated receipt and payments. The amended carrying figure is determined based on the initial effective rate of interest and the difference is reported as interest expense or income (Fgb.ae, 2011).
Income from Islamic financing and Islamic Financing Expense
Income from Islamic financing is revenue earned by the bank from investment, trade and advance related Islamic financing modes (Fgb.ae, 2011). The Investment-related techniques are based on standards of sharing profit and consist of Musharakah and Mudarabah (Ahmad, 1993). Musharakah, also known as a joint venture is a contract of at least two partners, where each partner supplies funds to the business to facilitate implementation of a common business idea (Ahmad, 1993); profit earned is shared by the partners based on the invested capital.
Mudarabah is a distinctive type of partnership where a partner provides cash to another partner who owns the business idea for spending in the business. The first partner who provides funds is known as “Rabb-ul-mal” while the second manages the funds and is known as “mudarib” (Ahmad, 1993). Therefore, the First Gulf Bank (FGB) is a company with shareholders and is therefore known as Mudarabah in Islamic banking (Ahmad, 1993). A bank can be financed through trade based on markup in which the bank sells and buys goods and services by trading them on marked-up prices, leases and practice hire purchase (Ahmad, 1993). The advanced-based techniques include the use of good credit with charges for services (Ahmad, 1993). This Revenue is recorded by the bank based on the primary amount outstanding on a time-percentage basis.
For the last five years the bank had been progressively increasing its interest income and income from Islamic financing, in 2007 for instance the income increased by 24.92% from $785,196 to $980901 (Fgb.ae, 2011). While in 2008, the income increased by 37.59% to $1,349,628 and in 2009 and 2010, the income increased by 30.92% and 1.37% respectively (Fgb.ae, 2011). In 2010 the income did not increase by a big margin as a result of the stabilization of the global financial crisis 2010. Interest and Islamic financing expenses were at $427,855 in 2006, this amount increased by 56% in 2007; in 2008 the expenses increased by 37%, while in 2009 and 2010 it decreased by 46.42% and 12.59% respectively (Fgb.ae, 2011). This shows that the bank management was effective in controlling the interest and Islamic financing expenses (Fgb.ae, 2011).
Net interest income and income from Islamic financing
Net interest income and income from Islamic financing is the net after taking away the interest and Islamic financing expenses (Investrwords.com, 2011). Net interest income is the surplus of income that is earned from the FGB’s assets over charges related to the settlement of liabilities. The bank’s assets consist of commercial and private loans, securities, and mortgages while liabilities are the customer deposits (Investrwords.com, 2011).
Share of profit/losses of associates
An associate is a firm that the bank has considerable control of and which is not a joint venture or a subsidiary (Investrwords.com, 2011). The FGB venture in the associate is reported using the accounting equity method; in the Equity method, the venture in the associate is reported on the statement of financial position at cost plus allocation of the banks after purchase changes in the net assets (Investrwords.com, 2011). Loss surplus on the cost of venture is recognized when the FGB incurs debt on its behalf and the associate goodwill is included in the figure of the investment and it is not amortized or impaired. The FGB’s share of the profit is reported on the statement of income; the unrealized losses or profit from the operations involving the associate and the bank are done away with to the level of FGB’s control of the associates (Investrwords.com, 2011). The accounting policies and reporting dates applied by the associates are similar to those applied by the bank.
At the end of each financial year the bank makes a decision if there are some objective facts on the impairment of the associate. Therefore, the FGB works out the impairment figure as the variation in the carrying cost and recoverable quantity of associates and reports the figure on the statement of income as “share of profit or losses of associates” (Fgb.ae, 2011). The FGB bank invests in First Gulf Financial Services LLC, Aseel Finance PISC and Green Emirates Properties PJSC at the proportional holding of 45%, 40% and 40% respectively (Fgb.ae, 2011). This means that the bank gets a share of profit or losses in the same shareholding proportion.
Other income
Fee and commission
FGB gets commission and fee incomes from various arrays of services that it supplies to the market; fee revenue can be grouped as shown below;
Fee revenue made from services supplied for a specific time period – these fees are accumulated over that specific period and consist of asset management, income from commission, advisory fees and other management and custodial fees (Fgb.ae, 2011).
Credit obligation fees are for credits that are expected to be drained downwards and other advances linked fees are delayed and recorded as an amendment to the effective rate of interest on the credit (Fgb.ae, 2011).
Fee revenue from supplying transaction services; these are fees from negotiating activities for a third person such as acquisition arrangement for securities, shares, or sale and purchase of a business and are recorded after the end of the transaction (Fgb.ae, 2011).
Dividend income
Dividend income is the income earned by the bank for its shareholding in other companies; income is recorded after establishing the FGB’s right to take delivery of the return (Fgb.ae, 2011).
Net trading income
This is income received from trading actions such as losses and gains accruing from financial liabilities and assets changes in their fair value and associated interest expense or income and dividends and includes any incompetence of transaction reported in hedging (Fgb.ae, 2011).
Rent income
This is revenue from property investment; it is reported by the bank on a straight-line method based on the lease conditions of the leases that are in progress and are reported on the statement of income as classification of “other operating income” (Fgb.ae, 2011).
Derivatives
The bank uses derivatives to manage its risk in the international market, the derivative instruments include; Forward Rate Agreement (FRAs), Futures, Swaps, and options (Fgb.ae, 2011). These derivatives are traded in the capital and foreign exchange market and are reported at fair value, this value is equal to unrealized losses or gains from in-house pricing models (Fgb.ae, 2011). The above make up the total operating income of the bank and are calculated as shown below;
= (Interest income – interest expense) + (income from Islamic financing – expenses from Islamic financing) + other income
In 2007 the operating income increased by 36.64% while in 2008 the operating income increased by 66.27% (Fgb.ae, 2011). Consequently, in 2009 the income increased by 31.19% to $1,678,196,000 while in 2010 the income increased by 2.29% (Fgb.ae, 2011). The increase in operating income over the five years indicates that the bank was efficient in controlling its interest and Islamic financing expenses.
General and administrative expenses
These are known as the non-production costs that are incurred by the business; they are actual expenses that a company must pay the provider for them to be able to run the business and normally include salaries, wages, rent, depreciation and selling expenses among others (Fgb.ae, 2011). The First Gulf Bank’s general and administrative expenses consist of staff salary, depreciation and other general and administrative expenses (Fgb.ae, 2011). The total numbers of employees covered by the staff salary in 2010 were 956,000 employees which is a reduction of 1.34% compared to 2009 (Fgb.ae, 2011). After this reduction of the employee’s the total cost of the salary was reduced by 4.04%; this was good management of the non-production expenses (Fgb.ae, 2011).
Impaired Asset Charges
The FGB treats equity investment available for sale as impaired when the fair value decreases beyond its costs; the resolution on what is important involves the management judgment (Fgb.ae, 2011). The bank reviews the loans and advances problems quarterly to see if impairment losses can be provided for and this provision is recorded in the statement of income (Fgb.ae, 2011). In regard to particular provisions against independently important advances and loans, the FGB makes combined impairment provision on the loans and advances; this amount is based on UAE Central Bank guidelines (Fgb.ae, 2011). In 2010 the bank recovered AED 17,572,000 from the provided impairment for loans and advances while in 2009 AED 21,572,000 was recovered; these amounts were removed from the total provisions of loans and advances to yield the end of year balance (Fgb.ae, 2011).
Profit for the year
This is the difference in profit for the year before impairments and provision for impairments (Investorwords.com, 2011). In 2010, the year profit was at $964,974 which was an increase of 6.98% and in the last five years, the bank’s profit had a favorable trend because every year the bank added extra profit thereby recording a higher amount as the year’s progressed (Investorwords.com, 2011).This profit is then dividend into the controlling interest and non-controlling interest in the ratio of 99.92:0.08 or 99.92% and 0.08% to controlling and non-controlling interest respectively (Investorwords.com, 2011).
The shareholders take the share of the controlling interest and are recorded in the statement of income as the “attributable to equity holders of the bank” while the non-controlling interest takes the same name or the minority interest (Fgb.ae, 2011).
Earnings per share
This is the firm’s profit attributable to the shareholders of the holding company divided by the weighted number of shares (Investorwords.com, 2011). The diluted earnings per share are calculated by adding the extra shares added by conversion of debentures and outstanding at end of the period (Investrwords.com, 2011).
In 2010 the total number of shares issued was 1,461,201,000 and 1,482,148,000 in 2009 (Fgb.ae, 2011). These figures were used to calculate the EPS of the company, in 2010 the bank’s EPS of AED 2.15, was higher than in 2009 of AED 2.06; this means that investors expected to earn AED 2.15 and 2.06 in 2010 and 2009 respectively for every share invested in the bank (Fgb.ae, 2011).
Balance Sheet
Assets
An asset is a thing of economic or finance value held by a firm particularly which can be translated into cash (Investorwords.com, 2011). On the statement of financial position, assets equate to liabilities and equity which is (common and preferred share capital and retained earnings- retained earnings are the profit that remains after paying out dividend and is accumulated over the years. Assets are classified according to current and non-current assets (Investorwords.com, 2011). The FGB’s assets are as shown below;
Cash and Balances with UAE Central Bank
This is the bank’s most liquid asset and is held by bank on hand or as deposit in the UAE central bank (Investorwords.com, 2011). In 2010 the bank total cash on hands and balances with central bank was AED 8.526,300,000 compared to AED 5,546,970,000 in 2009 (Fgb.ae, 2011). Compared to the previous five years the financial year 2010 handed more cash this means that the bank had more liquid assets in 2010 (Fgb.ae, 2011).
Dues from banks and financial institutions
These are amounts yet to be paid by other banks and financial institutions (bank’s asset held by other institutions), they are actually classified as cash and cash equivalent in the cash flow statement meaning that they can be easily converted to cash (Fgb.ae, 2011). In 2006 more assets were yet to be paid by other assets compared to 2008, 2009, and 2010; in 2010 the assets from banks and financial institutions increased by 121.93% compared to 2009 (Fgb.ae, 2011).
Loans and advances
Loans and credit advances lent to the economic sectors are included in this category in the balance sheet; the loans and advances to customers are reported net of impairment provisions (Investorwords.com, 2011). At the end of the year, impaired provision for loans and advances consist of AED 82 million compared to nil in 2009 in respect of advances and loans to Dubai World Group of AED 880 million which is being processed (Fgb.ae, 2011). In the year 2010 the National Housing Loans was increased by AED 3,370,549,000; this increase was to a certain extent counterbalanced by the waiver of AED 1,442,726,000 which represented a 25% discount given to about 3,000 customers on the finishing point of their houses (Fgb.ae, 2011).
Non-trading investments
Non-trading investment involves investment in funds such as hedge funds and unit trust, derivatives and debt securities to earn better returns; to diversify risk the firm must invest in a portfolio (Investorwords.com, 2011). The bank invested in equity by an amount of AED 43,817,000 in 2010 and AED 41,660,000 in 2009 which are held under the third parties’ name with the valuable interest allocated to the bank (Fgb.ae, 2011). Debt securities stand for bonds with a maximum maturity period of ten years from the time they are dated; at the end of the year 2010 and 2009, 85% and 79% respectively consisted of bonds assured by the government and government-owned entities (Fgb.ae, 2011). In 2010, 69% of debt securities were issued by one issuer, while in 2009 this accounted for 62% (Fgb.ae, 2011).
Investment in associates
In the equity method, as described earlier, the venture in an associate is reported in the statement of financial position at bank’s share of post-acquisition net assets of the venture plus cost. In 2010 the net asset of ventures was $ 516,757 which was a decrease of 7.96% compared to 2009 (Fgb.ae, 2011).
Investment in properties
The bank’s properties for investment are reported at fair value which signifies the exchange price of the asset, by a willing seller and a buyer in an arms-length deal on the valuation date. At the end of the year 2009 all properties were re-valued by an independent valuer; in 2009 the investment properties were at $6,000,383,000 this amount increased in 2010 by additions investment, gains from adjustment fair value, disposal and transfers to $7,049,254,000 in 2010 an increase of 17.48% (Fgb.ae, 2011).
Other assets
This classification of assets covers all receivables, prepayments, and positive derivative fair value (Investorwords.com, 2011). In the year 2009, expansion properties held-for-sale with a value of AED 154,512,000 were regrouped from Property and Equipment to the “other assets” (Fgb.ae, 2011).
In 2010, “other assets” consisted of property held-for-sale with an amount of nil compared to 2009 of AED 53,952,000; in 2009, the balance of expansion properties was sold at a profit of AED 178,570,000 compared to 2009 amount of AED 459,978,000 (Fgb.ae, 2011).
Property and equipment
Property and equipment are a classification of assets that consist of land, buildings, motor vehicles, furniture, fixtures and equipment, capital work-in-progress and computer software and hardware (Investorwords.com, 2011). In the year 2009, the FGB re-valued land for its use, the revaluation amount was reassigned to the revaluation reserve (Fgb.ae, 2011).
Liabilities
Liability is an item of monetary nature for which a person is obliged to pay; liabilities can be classified into two current and non-current liabilities (Investorwords.com, 2011). Current are short-term obligations (less than one year) while non-current are long-term obligations (Moneyinstructor.com, 2006). The bank owed another bank some money in terms of un-cleared cheques and this is reported as “due to banks” (Moneyinstructor.com, 2006). Customer’s deposits are deposits made by the customer to their savings or current account, time deposits and call and other deposits; these are the bank’s obligation to the clients and are expected to pay on demand (Moneyinstructor.com, 2006).
In 2010, the bank owed creditors an amount of $ 116,126.856 million compared to 2009 of AED 102,569.775 million an increase of 13.22% (Fgb.ae, 2011). In 2008 the amount was AED 90,902.098 million which increased by 12.84% to AED 102,569.775 million in 2009; this means that the bank was increasing its liabilities year after year (Fgb.ae, 2011).
Shareholders ‘Equity
Shareholders’ equity is a possession interest in the firm in terms of preferred and common stock, it is also known as asset-less liabilities (Investrwords.com, 2011). The bank has an authorized and issued share capital of 1375 million where each share has a par value of AED 1 (Fgb.ae, 2011). In 2008, the bank received an endorsement from the SEA of UAE to purchase back 137.5 million shares, 75 million were purchased in 2010 and 21 million in 2009 (Fgb.ae, 2011). The Extraordinary General Assembly resolved an issue of capital notes of AED 4.0 billion to the Department of Finance; in compliance with UAE (Commercial Companies Law) the bank was to transfer 10% of profit to the “Legal Reserve” until a maximum limit of 50% of the face value share capital paid up (Fgb.ae, 2011). In 2010, the reserve surpassed 50%, and BOD proposed that no more funds will be transferred and will not be accessible for allocation (Fgb.ae, 2011).
According to the Union Law, 10% of year profit shall be allocated to special reserve and the bank can stop to transfers the amount when it equates to 50% of share capital face value (Fgb.ae, 2011). In 2010, the reserve surpassed the limit of 50% of capital and the board proposed no more transfer to this reserve, therefore allocation to the “General Reserve” is made after the proposal of the board (Fgb.ae, 2011). In 2010, the capital attributable to shareholders was AED 24,126.372 million while in 2009 the amount was AED 22,517.827 million, in the same year’s minority interest took AED 504.776 million and AED 384.931 million respectively (Fgb.ae, 2011).
The FGB balance sheet has applied the basic accounting equation, which states that assets equal to liabilities and equity (Fgb.ae, 2011). This can be shown in an equation form; Asset = Liabilities + Equity (Fgb.ae, 2011).
Cash Flow Statement
A Cash flow statement is a report that demonstrates changes in the statement of financial position and normally explains how revenue influences “cash and cash equivalent” (Zionsbank.com, 2009). The statement of cash flow is divided into three sections namely; operating activities, investing activities, and financing activities (Zionsbank.com, 2009). As an analytical technique, cash flow statement can be used in deciding the short-run feasibility of any business specifically the firm’s ability to meet the short-term obligations (Zionsbank.com, 2009).
Operating Activities
This part of the cash flow statement shows cash that comes from a firm’s daily operations such as the sale of goods or services minus any other cash used to produce and sell those goods or services (Zionsbank.com, 2009). Any activity which produces cash into the firm such as client collections, receipts of dividend or interest, and another cash receipt from operations is referred to as operating activity and the main function of the operating activity is to generate cash outflow of payments to creditors, employees, interest, income taxes and any other operating payments (Zionsbank.com, 2009).
The management should always pay attention to the broadening gap, in the operating cash flow and the earnings reported. In addition to this, if the cash flow is much lower than net profit or income, the firm may possibly be slowing or speeding its charge of costs or income (Zionsbank.com, 2009). The operating activities are as shown in the discussion below.
Depreciation, gains and losses on sale
The reduction in carrying a figure of property like land as an outcome of revaluation (AED 83,558,000) was reported in the statement of income as gain on revaluation and therefore any depreciation of property and equipment is normally reported as depreciation (Zionsbank.com, 2009). Depreciation is a non-cash item in the statement of income and is added back to the profit of the year to attain the operating cash flow while the gain or losses on sale of non-current assets are also non-cash items and should be removed from the operating activity section through subtracting gains on sale and adding back losses on sale (Zionsbank.com, 2009).
The FGB statement of cash flow contains non-cash items such as depreciation, gain on revaluation of land, impairment of investment available sale, loss on sale of assets such as property and equipment at fair value, gain on disposal of properties, and losses from investment (Zionsbank.com, 2009). On the other hand, the depreciation, impairments and losses are added back while gains are subtracted from the profit of the year which is mainly carried out in order to adjust the profit (Fgb.ae, 2011).
Changes in operating
Changes in operating investigate the uses and sources of cash; the cash may be used to pay suppliers, customers when it is a bank and also paying for other expenses (Zionsbank.com, 2009). In the statement of cash flow all positive changes in current liabilities are added back because that signifies cash receipt while all the negative changes in current liabilities are subtracted since this shows that cash has been used to pay creditors. A positive change in current assets should be subtracted because this shows cash out of the business, while a negative change should be added back (Zionsbank.com).
Furthermore, deposits with banks, other assets, deposits with UAE Central bank, loans and advances were either added or subtracted depending on the direction of change; the asset decreased or asset increased and all those assets that increased in value were subtracted while those that decreased in value were added (Fgb.ae, 2011). Additionally, customer deposits, due to banks and UAE Central bank, and other liabilities were subtracted when the liability decreased or added if liability had increased and all these activities always yielded net cash from operating activities (Fgb.ae, 2011).
Investing Activities
This particular part shows cash spent by the firm on non-current assets, which are then used to produce income over their useful life and also consists of the acquisition of businesses and investment in the money market (Zionsbank.com, 2009). Cash produced by these activities consists of disposal of fixed assets, sale of securities, receipt of dividends and interest as well (Zionsbank.com, 2009).
The FGB sold non-trading investments such as debt securities, investment properties, development properties, equipment at AED 20,950.7 million, AED 93 million, AED 232.522 million and AED 68,000 respectively are added to the cash received (Fgb.ae, 2011). In the year 2010 the bank purchased property and equipment investment worth AED 51.159 million and AED 999.494 million respectively; these figures are subtracted since they are cashing out while In the same year, the bank received dividends from associates of AED 6.748 million (Fgb.ae, 2011).
Financing Activities
This section explains the cash associated with external financing activities such as money repayments, money borrowed, issued stocks and dividends paid (Zionsbank.com, 2009). Mostly, the bank acquired treasury shares worth AED 857.499 million, paid dividends amounting to AED 657.095 million, interest amounting to AED 115.082 million and AED 240 million were paid on mandatory convertible bonds and capital notes respectively (Fgb.ae, 2011). Term-loan were drawn down and repaid at an amount of AED 1909.593 million and 5.88 million respectively while in the year 2010, the bank also issued capital notes worth AED 4,000 million (Fgb.ae, 2011).
Lastly, the net cash from operating activities, investing activities and financing activities when added together, usually equal to net increase in cash for the year, and this particular amount are then also added to balance at the beginning of every year that is, from the previous period to generate the end of year cash balance (Fgb.ae, 2011).
References
Ahmad, A. (1993). Contemporary practices of Islamic financing Techniques. Web.
Businessdictionary.com. (2011). Income. Web.
Fgb.ae. (2011). About us. Web.
Investrwords.com (2011). Asset. Web.
Kennon, J. (2011). Interest income and expense. Web.
Marketingteacher.com (2010). Strength, Weaknesses, Opportunity and Threat (SWOT). Web.
Moneyinstructor.com (2006). Basic accounting: what is a Liabilities. Web.
Zionsbank.com. (2009). How to prepare a cash flow statement. Web.
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