The Royal Bank of Canada is a financial service multinational with operations in multiple countries. The firm offers products and services in the form of insurance, commercial banking, investor services, and wealth management. This is besides engaging in capital markets products, treasury services and other financial related products. From this portfolio, the firm managed $47.18 billion in revenues and $11.44 billion in net profits in 2020, in addition to $ 1,624 billion in assets. The focus of this report is on the asset side of the statement of financial position of the firm and the income statement.

The accounting policies, estimates and judgments section shows four changes during the accounting period that affected the reporting. The four include the adoption of IFRS 16 lease to replace IAS 17 leases, adoption of the amended IAS 39 and IFRS 9 on interest rate reforms, and the discontinuation of IAS 37 in its reporting and its replacement with IFRIC 23. Moreover, RBC also presents different approaches to the estimation and judgment of the fair value of assets and financial assets derecognition.

For income recognition, RBC acknowledges dividend earnings after establishing the rights to such earnings. Besides using the acquisition method to account for intangibles, RBC recognizes intangible assets separate from goodwill. This is subject to the ability to reliably measure the fair value. RBC records any transaction related to both statements under the scope of this report in its consolidated accounts in Canadian dollars after converting to the prevailing currency exchange rate.

Assets presented in the notes comprise intangible, fixed, and other assets. This is besides the operating assets. To depreciate the fixed assets and amortize the intangible assets, RBC uses the straight-line method. The notes also present a detailed explanation of the insurance income and expenses. Finally, the notes present the key ratios that show the performance of the entity for the 2020 financial year. 

Royal Bank of Canada Financial Statement Notes Analysis

Annually, public firms provide stakeholders with financial reports presenting the performance. Given not all assumptions and accounting policies can fit in the financial statements, these entities present the supplementary information in the notes section. According to Fenyves, Bács, Zéman, Böcskei, and Tarnóczi (2018), besides shareholders’ interest in the performance of an entity, business partners also need to understand the crucial features and performance of a partner firm. In this case, the notes help in informing the corporate decisions of other business partners, such as suppliers and financial institution. The explanation in the notes section of the financial report complements the summarized data on the financial statements, allowing for internalizing of assumptions used in preparing the statements. This report will analyse the notes to the 2021 financial statements of the Royal Bank of Canada (RBC). The report will first give a brief background of the organization and the accounting policies that RBC uses for its reporting. Additionally, the report will present the asset depreciation approach and information related to the statement of financial position and the profit-and-loss statement.

Royal Bank of Canada Background

RBC (2020) is a multinational financial services firm headquartered in Toronto, Canada. The firm provides a value proposition comprising diversified financial services. Among these services include insurance, commercial banking, investor services, and wealth management. Others include capital markets products, treasury services and other financial related products. A schedule 1 bank, RBC trades in the New York Stock Exchange in the U.S. and the Toronto Securities exchange under the ticker symbol RY (RBC, 2020).

In 1864, RBC was founded as the Merchants Bank of Halifax before incorporation in 1869 (RBC, 2020). In 1901, the Merchants Bank of Halifax renamed the Royal Bank of Canada. RBC has over 150 years of experience in the financial sector, making it one of the leading banks in Canada. This has seen consistent profitability and growth in new markets. To become the multinational it is today, RBC has engaged over the years in acquisition drives that have seen it enter new markets. This has ensured it expands its product and service portfolio (RBC, 2020).

According to RBC (2020), at the top leadership is the board of directors, which has 14 members and four committees and Kathleen Taylor as the chairperson. Next is the executive team of 10 members led by Dave McKay as the chief executive officer and the organization's president. With a mission of helping customers thrive and communities advance, the strategic focus of RBC is to develop into a financial powerhouse in the U.S. and Canada, coupled by becoming the global financial services market’s leading partner. This is guided by core values that include accountability, focus on clients, integrity, collaboration, and inclusion and diversity. This leads to a corporate strategy of innovation, attracting, recruiting, and developing talent, and growth acceleration. Moreover, the strategy focuses on capitalizing on technology in developing and providing exceptional customer experiences and connections (RBC, 2020).

As one of the largest financial institution globally based on market capitalization, RBC (2020) has over 86,000 employees in its global operations. This group serves a customer portfolio of 17 million clients spread in 36 countries globally. With a vision of being “among the world’s most trusted and successful financial institutions”, RBC (2020, 16) generated $47.18 billion in revenues in 2020 compared to $46 billion in 2019. From this, the net profits for 2020 were $11.44 billion. This helped the institution to accumulate $ 1,624 billion in assets in 2020 as compared to $ 1,428 in 2019 (RBC, 2020).  

Notes to the Financial Statement

The 2020 annual report presents 33 consolidated financial statements notes of RBC. However, not all these notes address the profit-and-loss statement and the statement of financial position for the reporting period. This section will discuss the elements of the notes section that address information on the asset side of the statement of financial position and the income statement.

Accounting Policies, Estimates and Judgments

The management of public entities can choose from a variety of accounting policy options and adopt the most appropriate to the business case. However, it is critical to disclose the accounting policies adopted for the reporting period in the notes section. Baksaas and Stenheim (2019) argue that the policies are critical to showing the significant approaches employed in preparing all 4 major financial statements presented in an annual report. As consistency in financial reporting is critical, accounting policies present a framework that the management use to recognize income, liabilities, expenditure, and assets. As such, a consistent framework allows for comparability of financial data.

RBC (2020) prepares its consolidated financial statements in compliance with the International Financial Reporting Standards (IFRS). These are the accounting and reporting standards, as Nijam and Jahfer (2016) postulate, issued by the International Accounting Standards Board. Moreover, the statements are reported in accordance with the Canadian Bank Act Subsection 308. The subsection authorizes public entities should prepare the consolidated financial statements guided by IFRS (RBC, 2020). One disclosure in this section is the statement of all the monetary amounts in the form of Canadian dollars.

As guided by IFRS, RBC (2020) reported the period’s estimates and assumptions based on historical experiences and reasonable assumptions. Such estimates include the income taxes, pension, policy benefit liability, and allowance for credit losses. Others include the estimation of the financial instrument's fair value and the intangible asset’s carrying value. Judgement is also informed by RBC’s operating environment during the reporting period. The consolidation of subsidiaries and parent company financial statements is guided by factors that include businesses that RBC has that expose it to risks and the decision-making scope. Others include the access to proprietary rights, the right to variable return, and the right to affect those returns as the entity deems fit. As such, entities that RBC manages on an agency capacity are excluded from the consolidation (RBC, 2020).

There are several changes in the accounting policy that RBC used to generate and report its 2021 financial position. The first change is on leases. According to RBC (2020), the entity adopted IFRS 16 to replace IAS 17 leases. This affected the accounting of the firm's leases from the first quarter of 2020. Yet, RBC did not adjust the comparison periods lease accounts, thus using IAS 17 lease to report the comparative period results. This is as allowed by the IFRS 16 standard. RBC deals in both long-term and short-term leases. For short-term leases, which include low-value asset leasing, the entity records payment as operating expenses. Thus, the lease accounting policy change affected the income statement for the period (RBC, 2020).

According to RBC (2020), another accounting policy change for the period is the interest rate benchmark reforms. This is using the amendments made to IAS 39 financial instruments and IFRS 9 financial instruments. These adoptions came in the form of modifying RBS' certain hedge accounting requirements. The goal was to provide relief from interest rate reforms shocks before transitioning to the alternative rate of the fund interest rate. The contracts offered in fair value hedges help the RBC manage interest rate risk exposure. From the financial report, the firm reported interest rate contracts at $40.68 billion nominal value, which compares to the $6.71 billion recorded in 2019 (RBC, 2020).

RBC (2020) further shows that there was also discontinuation of IAS 37, which RBC replaced with the IFRIC 23. A standard that addresses uncertainty in tax and provides measurement and recognition guidelines on tax assets (International Financial Reporting Standards, 2019), RBC adopted the IFRIC 23 during the 2020 first quarter. However, as the report provides, IFRIC 23 adoption did not affect the presentation and reporting of the consolidated account (RBC, 2020).

Also critical in the estimation and judgment is the determination of the fair value of assets. McDonough, Panaretou, and Shakespeare (2020) define fair value as the existing value of a hypothetical deal in an active market. Financial instruments are a critical factor in the asset component of RBC’s statement of financial statement. As such, the price that RBC would receive for one of its financial assets amounts to the fair value. As the report shows, the audit committee provides oversight on the fair value of financial assets recommended by the management (RBC, 2020). Such fair value is subject to the consideration of all the market variables that other players in the financial markets would consider in making such an estimation.

For this consideration, RBC used the IFRS 13 (fair value measurement) to assess a net open risk posture (RBC, 2020). Also considered in the 2020 reporting period is the financial assets derecognition. As note 2 shows, RBC (2020) derecognizes financial assets guided by factors such as the expiry of the cashflows contractual right, transfer of contractual risks and benefits to a third party, and transferring cash flows from the financial assets while holding the rights to retain them to a third party.

Recognition of Expenses and Revenues

Recognition of expenses and income is also guided by IFRS. RBC (2020) recognized interest expense and income subject to the discounted value of cash flows for all the firm’s interest baring instruments over the expected life of such assets. For income recognition, RBC recognizes dividend earnings following the establishment of such rights. On the other hand, the multinational recognizes the compensation expense that arises from offering employees share options over the vesting period. The tax income in the 2020 income statement is payable on profits, and the firm recognized it using the laws of each branch and subsidiaries’ operating jurisdiction (RBC, 2020).

Accounting for Intangible

To account for the 2020 financial year intangible assets and business combination, RBC (2020) used the acquisition method.  The multinational accounted for the non-controlling interests using the fair value of the proportionate share of the assets in question. The firm recognized the intangible assets identifiable separately from goodwill. As such, the goodwill in the statement of financial position amounted to the difference between the net identifiable acquisition’s fair value on the acquisition date and the price RBC paid for such an acquisition. RBC allocated the goodwill for testing for impairment in its cash-generating. This was followed by an annual impairment testing conducted on August 1 (RBC, 2020).

On the other hand, other intangible assets recognition is separate from that of goodwill and so long as the firm can reliably measure the fair value arising thereafter. Also considered are intangible assets with a finite life. RBC (2020) accounted for those with finite life by amortizing them using the straight-line approach. This includes computer software, which has a useful life of between 3 to 10 years, and customer relationships, which are considered to last between 10 to 20 years. From the analysis of the notes, it is evident that RBC does not have intangibles with infinite life.

Reporting Currency 

For consistency of reporting, RBC (2020) converted all the transaction recorded in foreign currency to the prevailing Canadian dollar rates. This also applied to all assets in the foreign balance sheets and expenses and incomes in the income statement of all financial statements recorded in foreign currencies. As the report shows, this was the basis for reporting the foreign exchange gain or loss in the profit-and-loss statement (RBC, 2020).  

Composition of Assets

Besides the trading assets recognized in the statement of financial position, RBC (2020) reported a group of other assets in its 2020 notes. As such, RBC presented its assets as premise and equipment, which included assets such as land, building, computers, fixture, furniture, and any leasehold improvements. This was the composition of the fixed assets. Others included the goodwill and other intangible assets, derivatives, other assets, and customers’ liability under acceptances (RBC, 2020).

The derivatives fall under two categories: the non-financial derivatives and the financial. According to Huan and Parbonetti (2019), financial derivatives include any contract that is pegged on factors such as foreign exchange rates, interest rate, and credit risk. These derivatives come in the form of foreign exchange derivatives, interest rate derivatives, and credit risk derivatives. In contrast, the nonfinancial derivatives, as RBC (2020) shows, includes any contract tied to precious metals, index, or commodity instrument. Among the financial derivatives that the firm presented in its notes in 2020 included the forwards and futures, swaps, options, and credit derivatives. Its 2020 non-financial derivatives included commodity derivative contracts and precious metal (RBC, 2020).

Other assets in RBC’s 2020 financial statement included prepayments, debtors, policy loans, deferred income tax, and cash collateral. Others were the accrued interest receivable, commodity trading receivables, and employee benefit assets (RBC, 2020). Finally, the other assets section of the statement of financial position as stated in the 2020 notes to financial statements include insurance assets, precious metals, joint venture investments, dues from brokers and deals, margin deposits, and receivable taxes (RBC, 2020).

Depreciation Method  

Fixed assets, over time, lose value from consistent usage. Based on the accounting policy change initiated by adopting IFRS 16, RBC (2020), starting November 2019, included in the premise and equipment section the right-of-use assets. As such, to get fair value during the accounting period, entities subtract the accumulated depreciation from the cost of the fixed assets (Alexander, 2018). Yet, there has to be a standardized approach for recognizing and recording depreciation for consistency and reliability.

From the evaluation of the 2020 financial notes, RBC (2020) used a straight-line basis to calculate the depreciation. Buildings had a useful life between 25 and 50 years, 5 to 10 years for furniture, equipment, and fixtures, and 3 to 10 years for computer equipment. Leasehold amortization was calculated by considering the renewal period and the lease term with a 10 years maximum consideration. The analysis also shows that following the principle of each financial year revaluation, RBC readjusted 2020 scrap value, useful life, and the depreciation method, with any disposal gain or loss accounted for in the income statement as the non-interest income (RBC, 2020).

Financial Ratios Reporting 

Generally, without having yardsticks for comparison, a firm’s stakeholders cannot reliably and accurately judge the performance of such an entity. This makes it critical to report the ratios in the notes section of the financial report. From the analysis of RBC’s (2020) financial report, the firm recorded several key ratios. One such ratio is the earnings per share (EPS) ratio. The 2020 EPS ratio declined to $7.82 from $8.75 in 2019 and $8.36 in 2018. Another key ratio from the asset side of the balance sheet is the return on risk-weighted assets. The ratio has seen a slight difference over three years of analysis, with 2020 recording a ratio of 2.10%, 2.52% in 2019, and 2.55% in 2018 (RBC, 2020).

The efficiency ratio saw a similar trend, with 52.5% for both 2020 and 2019 and 53.6% for 2018. As a key performance metric, the efficiency ratio is a yardstick that stakeholders use to evaluate how a business utilizes resources such as assets in the generation of profits (Bin Pyeman & Bin Ahmad, 2018). Finally, the analysis presents the net interest margin ratio. A banking institution engages in lending and borrowing. From such activities, these entities charge and pay interest as the price of lending and accessing credit. According to Cruz-García and Fernandez de Guevara (2020), the net interest margin is the accruing difference from the interest charge to banking consumers and the interest a bank pays for its loans and access to other financial facilities. From the analysis of RBC’s notes, the firm had net income margins of 1.55% for 2020, 1.61% for 2019, and 1.64 for 2018. This analysis argues that, based on these major ratios, RBC's performance was consistency, neither on the extreme high nor reducing.

Insurance

As a financial services institution, the level of risks accompanying RBC’s operations is high. This calls for the development of risk minimization and mitigation strategies, among them engagement in insurance and reinsurance. As a business that has a section offering insurance services, there are costs for reinsurance to protect the financial assets of customers. Also, the insurance expense RBC (2020) incurred was significant to its operations. This is to offer relief from large risks, reducing risk profiles, and allowing the business to make growth decisions without having to worry about the uncertainty in the operating environment.

Conclusion

This report has provided analysis and discussion of the key elements presented in RBC’s notes to financial statements for 2020. This analysis has given a background of RBC. The company background has shown that, given its long history, over one and a half-century of operations, and with a competent management and human resources team, RBC has emerged as a financial services powerhouse on the global stage. Moreover, the analysis has shown that RBC has diversified its value proposition, spreading in many regions and serving diverse customers. Additionally, the stability the firm has created around it has allowed for consistency in profitability and turnover growth, with the firm reporting huge profits and increased assets in 2020.

This analysis has also discussed the changes in accounting principles and how they have affected the business’s reporting for 2020. Further, the analysis has evaluated the depreciation approach, all the assets that accrue to the business during the 2020 financial year, all of which are critical information presented in the income statement and the statement of financial position. The report has analysed how RBC recognizes its expenses and revenues, besides accounting for intangibles and the key ratios for guiding decision-makers. From this report, it is evident that the notes to the financial statements have adequately explained the income statement and statement of financial statement assumptions, judgements, and policies, coupled with the ability to relate all this information to the summarized statements.

References

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