Canara Bank :: Annual Reports

CANARA BANK
(A Govt of India Undertaking)
[Head Office: Bangalore

SIGNIFICANT ACCOUNTING POLICIES ADOPTED IN PREPARING FINANCIAL STATEMENTS

[1] Accounting Convention

The accounts are prepared under the historical cost convention and conform to the statutory provisions and prevailing practices, except as otherwise stated.

[2] Foreign Currency Translation/Conversion of Foreign Currencies

2.1. In respect of Foreign branches and Offshore Banking Unit (OBU), Assets and Liabilities are translated at the last closing spot rate of exchange announced by FEDAI and Income and Expenditure items of the foreign branches and OBU are translated at the quarterly average closing rate published by FEDAI in accordance with Accounting Standard 11 (Revised 2003) of the Institute of Chartered Accountants of India and as per the guidelines of Reserve Bank of India. The resultant exchange gains, if any, is taken to Foreign Currency Translation Reserve and loss, if any, net of reserves, is taken to revenue.

2.2. In respect of domestic branches, Assets and Liabilities in foreign currency including Forward Exchange Contracts, Guarantees, Acceptances, Endorsements and Obligations are evaluated at the closing spot rate/forward rate for the residual maturity of the contract in accordance with Accounting Standard 11 (Revised 2003) of the Institute of Chartered Accountants of India and as per the guidelines of Reserve Bank of India.

Income and Expenditure items are accounted for at the exchange rates prevailing on the date of transactions.

2.3. The gain or loss on evaluation of outstanding Forward Exchange Contracts is taken to revenue.

[3] Investments

3.1. Classification of investments is made as per the guidelines of the Reserve Bank of India . The entire investment portfolio of the bank is classified under three categories viz. ‘Held to Maturity', ‘Available for sale' and ‘Held for Trading', which is decided at the time of acquisition of securities. Transfer of scrips, if any, from one category to another is done at the lowest of acquisition cost/ book value/ market value on the date of transfer and the depreciation, if any, on such transfer is fully provided for.

Investments are disclosed in the Balance Sheet under six classifications viz: (a) Government securities, (b) Other approved securities, (c) Shares, (d) Debentures & Bonds, (e) Subsidiaries / Joint Ventures and (f) Others.

3.2. The valuation of investments is done in accordance with the guidelines issued by the Reserve Bank of India as under:

a) HELD TO MATURITY

Investments under Held to Maturity category are carried at acquisition cost. The excess of acquisition cost, if any, over the face value is amortized over the remaining period of maturity.

Investments in Subsidiaries and Joint Ventures are valued at carrying cost. Any permanent diminution in the value is fully provided for.

Investment in RRBs and other Trustee Shares are carried at cost.

Profit on sale/redemption of Investments in this category is first taken to the Profit and Loss Account and thereafter appropriated to the Capital Reserve Account. Loss on sale is recognized in the Profit and Loss Account.

b) AVAILABLE FOR SALE

The individual securities under this category are marked to market.

Central Government Securities are valued at market prices, or prices declared by Primary Dealers Association of India jointly with Fixed Income Money Market and Derivatives Association of India (FIMMDA).

State Government securities and other approved securities are valued by applying the YTM method by marking it up by 25 basis points above the yields of Central Government securities of equivalent maturity put out by FIMMDA.

Non SLR securities such as Debentures/Bonds (other than Debentures / Bonds which are in the nature of advance) are valued at market prices, if available, and if not, are valued applying YTM method by marking it up by additional basis points based on credit rating above the yields of Central Government Securities of equivalent maturity as put out by FIMMDA and the methodology suggested by FIMMDA.

Preference Shares are valued at YTM rates/redemption values, whichever is lower.

Quoted Shares are valued at market prices.

Unquoted Shares are valued at breakup value ascertained from the latest Balance Sheet not earlier than one year or otherwise at Re 1 per Company.

Treasury Bills and Commercial Papers are valued at carrying cost.

Units of Mutual Funds are valued at market rate or repurchase price or net asset value in that order depending on their availability.

Securities are valued scrip wise, and depreciation/appreciation under each sub category is aggregated.

Based on the above valuation, net appreciation if any in each sub category is ignored while the net depreciation is fully provided.

c) HELD FOR TRADING

The individual securities are valued periodically as per RBI guidelines, at market prices as available from the trades/quotes or as per prices declared by FIMMDA. In respect of each category under this classification, depreciation, if any, is provided and net appreciation, if any, is ignored.

3.3. Costs such as brokerage, commission etc., relating to securities at the time of purchase are charged to revenue.

3.4. Broken period interest on debt instruments up to the date of acquisition / disposal is treated as revenue item.

3.5. Security Receipts issued by Securitisation / Reconstruction Company (SC/RC) in respect of financial assets sold by the Bank to the SC/RC are valued at the lower of the redemption value of the Security Receipt and the Net Book Value of the financial asset. The Investment is carried in the books at the price determined as above and the sale/realization if any, is reduced from investment and the net book value is shown.

The valuation, classification and other norms applicable to investment in Non-SLR securities prescribed by RBI is applied to Bank's investment in Security Receipts issued by SC/RC.

3.6 . Non-Performing Investments (NPI) are identified as stated below, as per the guidelines issued by Reserve Bank of India .

a) Securities/Preference Shares where interest / fixed dividend / instalment (including maturity proceeds) is due and remains unpaid for more than 90 days.

b) Equity Shares, in the event it is valued at Re.1 per company.

c) If any credit facility availed by the issuer from the Bank is a non-performing advance, investment in any of the securities issued by the same issuer is also treated as NPI.

[4] Advances

4.1. Advances are classified as performing and non-performing assets and provisions are made in accordance with the prudential norms prescribed by Reserve Bank of India .

4.2. Advances are stated net of write off, provisions for non-performing assets, claims received from credit guarantee institutions and re-discount.

4.3. In case of financial assets sold to the Asset Reconstruction Company ( India ) Limited (ARCIL), if the sale is at a price below the Net Book Value (NBV), the shortfall is debited to the Profit & Loss Account. If the sale is for a value higher than the NBV, the excess provision, if any held in the account, is not reversed but held till redemption of the Security Receipt, wherever applicable.

[5] Fixed Assets

5.1. The premises of the Bank include freehold and leasehold properties. Land and Buildings are capitalised based on conveyance / letters of allotment / agreement to lease, deposits made on long term leasehold properties and / or physical possession of the property.Advances made for acquisition of assets and deposits made on leased properties are included under “Other Assets", pending capitalization.

5.2. Premises and other Fixed Assets are stated at historical cost except wherever revalued. The appreciation on revaluation, if any, is credited to the ‘Revaluation Reserve' Account. Depreciation / Amortisation attributable to the enhanced value is transferred from Revaluation Reserve to the credit of Depreciation in the Profit and Loss Account.

[6] Derivative contracts

The Bank deals in Interest Rate Swaps and Currency Derivatives. The Interest Rate Derivatives dealt by the Bank are Rupee Interest Rate Swaps, Cross Currency Interest Rate Swaps and Forward Rate Agreements. Currency Derivatives dealt by the Bank are Options and Currency Swaps.

Based on Reserve Bank of India guidelines

Derivatives used for trading are marked to Market and net appreciation / depreciation is recognized.
Derivatives used for hedging are
1. Marked to Market in case where the underlying Assets / Liabilities are marked to Market. The resultant gain / loss is recognised in the Profit & Loss Account.
2. Accounted on accrual basis in case where the underlying Assets / Liabilities are not marked to Market.

[7] Depreciation

7.1. Fixed Assets excluding Computers are depreciated under Written Down Value Method at the rates determined by the management on the basis of estimated useful life of the respective assets. As per the guidelines of Reserve Bank of India , depreciation on Computers is charged at 33.33% on Straight-Line Method.

7.2.1 Premium paid on leasehold land is charged over the lease period on Straight Line Method provided the lease period or the remaining period of lease is less than 40 years. However, in case lease period is more than 40 years, the same is charged on Written Down Value method over the period of 40 years.

7.2.2 Premium paid on leasehold premises is charged off over the lease period.

7.3. Depreciation on Assets given on Lease is charged on Written Down Value Method as per Schedule XIV to the Companies Act, 1956 after adjusting Capital recovery.

7.4. Depreciation on additions to fixed/leased assets is charged for the full year irrespective of the date of acquisition. No depreciation is provided in the year of sale/disposal.

[8] Revenue Recognition

8.1. Income and expenditure are generally accounted on accrual basis.

8.2. In the case of Non-Performing Assets including investments, income is recognised to the extent of realization, in accordance with the prudential norms prescribed by Reserve Bank of India . In respect of “Loans Past Due” accounts, recoveries are appropriated towards principal.

8.3. Commission, Exchange, Brokerage, Dividends and Locker Rent are accounted for as income on receipt basis.

8.4. Interest Income on Direct Taxes is accounted based on the assessment orders passed.

[9] Retirement Benefits

9.1. Provision for Pension Fund is made based on actuarial valuation at the year-end, in respect of employees who have opted for Pension scheme.

9.2. Contribution to the Gratuity Fund and provision for encashment of accumulated leave is made based on actuarial valuation at the year-end.

[10] Taxation

Provision for Income Tax is made after due consideration of the judicial pronouncements and legal opinion. Disputed taxes, not provided for are included under “Contingent Liabilities”.

Tax expenses for the year comprise of current tax and deferred tax which recognizes, subject to the consideration of prudence in respect of Deferred Tax Assets, timing differences being the difference between taxable income and accounting income that originate in one period and are capable of reversal in one or more subsequent periods.

[11] Net Profit

Net Profit is arrived at after accounting for the following "Provisions and Contingencies":

Depreciation on Investments.
Provision for Income Tax, Wealth Tax and Fringe Benefit Tax
Provision for loan losses.
Write off of certain Non-Performing Advances / Investments.
Provision for Standard Assets
Other usual and necessary provisions.
Transfer to contingencies.

N SELVARAJAN SENIOR MANAGER	D S CHAKRAVARTHI ASSISTANT GENERAL MANAGER	T R EKANATHAN GENERAL MANAGER
ALOK KUMAR MISRA EXECUTIVE DIRECTOR	M B N RAO CHAIRMAN AND MANAGING DIRECTOR
G C CHATURVEDI DIRECTOR	G SRINIVASAN DIRECTOR	A N BALASUBRAMANIAN DIRECTOR
R K AVASTHI DIRECTOR	S SHABBEER PASHA DIRECTOR	PANKAJ GOPALJI THAKKER DIRECTOR
DR.SONE LAL DIRECTOR	M P MEHROTRA DIRECTOR	S C GUPTA DIRECTOR
U N KAPUR DIRECTOR

AS PER OUR REPORT OF EVEN DATE

For Nataraja Iyer & Co. Chartered Accountants	For K Venkatachalam Aiyer & Co. Chartered Accountants	For Mehra Goel & Co. Chartered Accountants
E S Ranganath Partner	K L Kulathu Partner	R K Mehra Partner
For S N Mukherji & Co. Chartered Accountants	For De Chakraborty & Sen Chartered Accountants	For Satyanarayana & Co. Chartered Accountants
Sudip Mukherji Partner	R K Chattopadhyay Partner	Ch. Seshagiri Rao Partner

Bangalore
April 24, 2006

CANARA BANK
(A Govt of India Undertaking)
[Head Office: Bangalore

SIGNIFICANT ACCOUNTING POLICIES ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST MARCH 2006

1. Basis of Preparation of Accounts

The accounts are prepared under the historical cost convention and conform in all material respects to the related statutory/regulatory requirements, Accounting Standards and generally accepted accounting principles and practices, except as otherwise stated.

2. Consolidation procedure

2.1. Consolidated financial statements of Canara Bank, its Subsidiaries, Joint Venture and Associates ( the Bank ) have been prepared on the basis of their financial statements and in accordance with Accounting Standard (AS) - 21- “Consolidated Financial Statements” issued by the Institute of Chartered Accountants of India. The financial statements of the bank and its subsidiaries have been combined on a line by line basis by adding together like sums of assets, liabilities, income and expenses, after eliminating intra group transactions and unrealized profit / loss, and making necessary adjustments wherever practicable, to conform to the uniform accounting policies. The financial statements of the subsidiaries are drawn up to the same reporting date as that of the parent.

2.2. The difference between the cost to the Parent of its investment in the subsidiary entities (other than wholly owned) and the parent's portion of the equity in such subsidiaries with reference to the date of acquisition is recognized in the financial statements as Goodwill / Capital Reserve. The parent's share of post acquisition profits/losses of the subsidiaries is adjusted in revenue reserves.

2.3. Minority interests in the net results of operations and the net assets of the subsidiaries, represent that part of the Profit/Loss and the net assets not owned by the parent.

2.4. In respect of Joint Venture Entity, consolidation has been done on proportionate consolidation in accordance with Accounting Standard (AS) – 27 ‘Financial Reporting of Interests in Joint Ventures' issued by the Institute of Chartered Accountants of India.

2.5. Long term investment in Associates, as on the date of consolidation, is valued under the Equity method and the carrying amount of the investment is adjusted thereafter for the post acquisition change in the Canara Bank's (Investor) share of net assets of the Associate in accordance with Accounting Standard (AS) 23 ‘Accounting for Investments in Associates' issued by the Institute of Chartered Accountants of India. The Investor's share of the results of operations of the Associates is reflected separately in the Consolidated statement of Profit & Loss.

3. Foreign Currency Translation / Conversion of Foreign currencies

3.1. In respect of Foreign branches, Off shore Banking Unit and Foreign Subsidiaries, Assets and Liabilities are translated at the last closing spot rate of exchange announced by FEDAI and Income and Expenditure items of these entities are translated at quarterly average closing rate published by FEDAI in accordance with Accounting Standard 11 (Revised 2003) of the Institute of Chartered Accountants of India and as per the guidelines of Reserve Bank of India. The resultant exchange gains, if any, is taken to Foreign Currency Translation Reserve and loss, if any, net of reserves, is taken to revenue.

3.2. In respect of domestic branches, Assets and Liabilities in foreign currency including Forward Exchange Contracts, Guarantees, Acceptances, Endorsements and Obligations are evaluated at the closing spot rate/forward rate for the residual maturity of the contract in accordance with Accounting Standard 11 (Revised 2003) of the Institute of Chartered Accountants of India and as per the guidelines of Reserve Bank of India.

Income and Expenditure items are accounted for at the exchange rates prevailing on the date of transactions.

3.3. The gain or loss on evaluation of outstanding Forward Exchange Contracts is taken to revenue.

4. Derivative Contracts

a) Derivatives used for trading are Marked to Market

b) Derivatives used for hedging are Marked to Market where underlying Assets / Liabilities are marked to market, and

c) Derivatives used for hedging are accounted on accrual basis where underlying Assets / Liabilities are not marked to market.

Net Appreciation / Depreciation and Gain / Loss are accounted for as per regulatory norms.

5. Investments

Investments are classified and valued as per applicable statutory/regulatory norms.

6. Advances

Advances including factored debts are net of provisions made in accordance with the prudential norms prescribed by the regulatory authorities.

7. Fixed Assets

Premises and other Fixed Assets are stated at historical cost except wherever revalued. Fixed assets include assets given on lease.

8. Depreciation

8.1. Fixed Assets of the Parent excluding computer are depreciated under Written Down Value method as per the rates determined by the management on the basis of estimated useful life of the respective assets. As per the guidelines of Reserve Bank of India , depreciation is charged on computer at 33.33% on straight-line method. Depreciation on Assets given on Lease is charged on Written Down Value method as per Schedule XIV of the Companies Act, 1956 after adjusting Capital recovery. Depreciation on addition to fixed/leased assets is charged for the full year irrespective of the date of acquisition. No depreciation is provided in the year of sale/disposal.

8.2. Fixed assets of the domestic subsidiaries are depreciated as per the method and rates prescribed under the Companies Act, 1956. In respect of leased assets depreciation is charged either as per the method and rates prescribed under the Companies Act, 1956 or in the ratio of lease rentals accrued during the year to lease rentals for the entire primary/secondary period of the lease, as per agreements, whichever is higher.

8.3. Depreciation on Fixed assets of the foreign subsidiary is charged as per the local laws.

9. Revenue Recognition

9.1. Income and expenditure are generally accounted on accrual basis. In the case of Non-performing assets including investments, income is recognized to the extent of realization in accordance with norms prescribed by regulatory authorities.

9.2. Commission, Exchange, Brokerage, Dividends, locker rents, processing charges, other service charges are accounted for as income on receipt basis.

10. Retirement Benefits

In respect of liability for encashment of accumulated leave, gratuity and pension benefits to staff, provisions are made on actuarial/accrual valuation basis. Some of the associates have followed Cash basis of accounting in respect of such retirement benefits. Provident fund is provided for as per statutory requirements on accrual basis.

11. Taxation

Provision for Income tax is made after due consideration of the judicial pronouncements and legal opinion. Disputed taxes, not provided for are included under “Contingent Liabilities”.

N SELVARAJAN SENIOR MANAGER	D S CHAKRAVARTHI ASSISTANT GENERAL MANAGER	T R EKANATHAN GENERAL MANAGER
ALOK KUMAR MISRA EXECUTIVE DIRECTOR	M B N RAO CHAIRMAN AND MANAGING DIRECTOR
G C CHATURVEDI DIRECTOR	G SRINIVASAN DIRECTOR	A N BALASUBRAMANIAN DIRECTOR
R K AVASTHI DIRECTOR	S SHABBEER PASHA DIRECTOR	PANKAJ GOPALJI THAKKER DIRECTOR
DR.SONE LAL DIRECTOR	M P MEHROTRA DIRECTOR	S C GUPTA DIRECTOR
U N KAPUR DIRECTOR

AS PER OUR REPORT OF EVEN DATE

For Nataraja Iyer & Co. Chartered Accountants	For K Venkatachalam Aiyer & Co. Chartered Accountants	For Mehra Goel & Co. Chartered Accountants
G PRASAD Partner	A GOPALAKRISHNAN Partner	R K Mehra Partner
For S N Mukherji & Co. Chartered Accountants	For De Chakraborty & Sen Chartered Accountants	For Satyanarayana & Co. Chartered Accountants
Sudip Mukherji Partner	M K MUKHOPADHAYA Partner	G VENKATA RATNAM Partner

Bangalore
May 13, 2006

DISCLAIMER CLAUSE:
“ The information furnished above is certified by Canara Bank to be true, fair and accurate[except in respect of errors in or omissions from documents filed electronically that result solely from electronic transmission errors beyond our control and in respect of which we take corrective action as soon as it is reasonably practicable after becoming aware of the error or the omission]. SEBI, The Stock Exchanges or the NIC do not take any responsibility for the accuracy, validity, consistency and integrity of the data entered and updated by it.”

Name of the Compliance Officer : S R KRISHNAN

COMPANY SECRETARY
CANARA BANK