Credit Risk Management notes

CREDIT RISK MANAGEMENT

UNIT DESCRIPTION

This paper is intended to equip the candidate with the knowledge, skills and attitudes toeffectively manage credit risk in an organisation.

LEARNING OUTCOMES

A candidate who passes this paper should be able to:

• Identify credit risks posed different customers’ borrowing proposals
• Assess, analyse and measure risks in borrowing proposals in line with an entity’s risk profile, using appropriate models and methodologies
• Mitigate credit risks posed borrowing proposals, based on their driving factors, and minimise their impact on profitability
• Undertake credit risk monitoring and evaluation and report results, probabilities and impact of risk
• Understand the working of credit risk insurance
• Evaluate the impact of credit risk management on stakeholders

 

CONTENT

1. Overview of Risk Management.

1.1       Definition of risk

1.2       Risks inherent in business organizations

1.3       Risk management process

1.4       Monitoring and evaluating risks

 

2. Fundamentals of credit risk

2.1       Meaning of credit risk

2.2       Need for credit risk analysis/ why manage credit risk/Credit risk management objectives

2.3       Causes of credit risk/Types of transactions that create credit risk

2.4       Who is exposed to credit risk?

2.5       Credit risk and return

2.6       Historical progress of credit risk analysis

2.7       Elements of credit risk analysis

2.8       Challenges of credit risk analysis

 

3. Assessing Credit Worthiness

3.1       The Credit appraisal process

3.2       Sources of information for credit appraisal

3.3       Overview of quantitative and qualitative credit assessment

3.4       Individual and corporate credit risk assessment

3.5       Models used in credit assessment (Five C’s of credit, CAMPARI, CCCPARTS)

3.6       Checklist for credit risk origination; Financial and non-financial firms

 

4. Credit governance overview

4.1       Credit guidelines/policies

4.2       Setting Credit limits

4.3       Skill s and oversight

4.4       Strategic position of credit risk management

4.5       Management context of credit risk management

4.6       Credit risk management structure

4.7       Credit risk culture and credit risk appetite

4.8       Credit management process

 

5. Measurement of credit risk

5.1       The exposure

5.2       Default Probability

5.3       The recovery rate

5.4       Obligation tenure/period

5.5       Direct versus contingent exposure

5.6       The expected loss

 

6. Firm (or Obligor) credit risk

6.1       Business risks or operating risks

6.2       Financial risks

6.3       Risk matrix

6.4       Different risk levels (Low, medium and high)

 

7. External Risks

7.1       Credit risk in the business cycle

7.2       Economic conditions

7.3       Fiscal and monetary policies, balance of payments & exchange rates

7.4       Political risk

7.5       Demographic factors

7.6       Regulatory framework

7.7       International developments

7.8       Others (technology and environment issues)

7.9       Monitoring external risks

 

8. Overview of Industry risks

8.1       Understanding obligor’s industry or market

8.2       Types of industry risks, business cycles and industry life cycle

8.3       Industry and factors of production

8.4       Industry profitability (Existing firms’ competition, threat of new entrants, threat of substitute products and bargaining powers)

8.5       Competitor/peer group analysis

 

9. Entity level risks

9.1       Understanding the activity

9.2       Risk context and management

9.3       Internal risk identification steps

9.4       SWOT Analysis

9.5       Business strategy analysis

9.6       Management analysis

9.7       Other internal risks

10. Integrated view of firm-level risks

10.1     Relevance if integrated view

10.2     Identifying significant credit risks

10.3     Risk Mitigations (Qualitative and quantitative)

10.4     Principles of selecting risk mitigations

10.5     Planning and Monitoring of credit risk

PAPER NO. 5            PRINCIPLES OF ACCOUNTING  

 

UNIT DESCRIPTION

This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to prepare and interpret the financial statements of different non-complex entities.

 

LEARNING OUTCOMES

A candidate who passes this paper should be able to:

• Prepare books of original entry and basic ledger accounts under the double entry system
• Prepare basic financial statements of sole traders, partnerships, companies, manufacturing entities and not for profit organizations
• Comply with the regulatory framework in the accounting field
• Analyse financial statements use of ratios and statement of cash flows.
• Detect and correct accounting errors in financial records

 

CONTENT

1. Introduction to Accounting

1.1       The nature and purpose of accounting

1.2       Users of accounting information and their respective needs

1.3       Accounting Standards and their purposes (IFRS, IASs, IPSAS)

1.4       Elements of accounting statements

1.5       The qualitative characteristics of accounting information

1.6       Principles; concepts and conventions underlying the preparation of accounting statements

1.7       Regulatory framework (ICPAK, IASB, IAESB, IPSASB)

1.8       Professional ethics

1.9       Description of Social and environmental accounting

 

2. Accounting procedures and techniques

2.1       Source documents, the accounting cycle, the accounting equation

2.2       Double entry book-keeping

2.3       The ledger and their role in recording and summarising, classifying accounting data

2.4       Books of original entry

2.5       Petty cash book

2.6       Balancing accounts and preparing the trial balance

2.7       Introduction to simple statements of financial performance

2.8       Statements of financial position

 

3. Computerised accounting

3.1       Electronic data processing

3.2       Different accounting packages

3.3       Rationale for computerised accounting systems

3.4       Comparison between manual recording and computerised system

3.5       Components of a computerised accounting system

3.6       Challenges of a computerised accounting system

3.7       Current trends in computerised accounting software

 

 

4. Preparation of financial statements and year-end adjustments

4.1       Depreciation of non-current assets including their disposal (part exchange; ordinary sale; accident)

4.2       Methods and reasons of providing for depreciation

4.3       Preparation of movement of property, plant equipment (as per International   Financial   Reporting Standards)

4.4       Trade receivables, bad debts write-offs and provision for bad and doubtful debts

4.5       Accruals, prepayments, reserves and provisions

4.6       Necessary adjustments in statements of financial performance to record increase and decrease in provision for bad and doubtful debts

4.7       Bad debts recovered

4.8       Accruals, deferrals, estimations and error correction adjustments and the cut off -procedure

4.9       The adjusted trial balance

 

5. Confirming and correcting mechanism

5.1       The cash book; two and three column including cash journal

5.2       Bank reconciliation statements

5.3       Control accounts

 

6. Errors and correction of errors

6.1       Errors revealed the trial balance and the use of suspense account

6.2       Errors not revealed the trial balance

6.3       The role of Internal control systems in controlling errors and frauds

 

7. Sole traders accounts

7.1       Income statements

7.2       Statements of financial position

 

8. Partnership accounts

8.1       Basic contents of a partnership agreement

8.2       Provisions of the Partnership Act

8.3       Partnership statement of financial performance and appropriation   account

8.4       Partners current account and statement of financial position

8.5       Financial statements to reflect elementary changes in partnership such as             admission, retirement and dissolution

 

9. Introduction to simple company accounts

9.1       Share capital and reserve

9.2       Issue of shares at par; premium; discount

9.3       Over and under subscriptions

9.4       Allotment and calls on shares, forfeiture of shares

9.5       Preparation of statements of financial performance and appropriation         account and the statement of financial position

9.6       Published accounts: Components of a complete set of published financial statements only

 

10. Manufacturing accounts

10.1     Elements of cost and cost behaviour

10.2     Preparation of manufacturing accounts, statement of financial performance and statement of financial position

10.3     Accounting treatment of manufacturing profit or loss and unrealised profit on closing stock

 

11. Financial statements of a not-for-profit organisation

11.1     Characteristics of not-for-profit organisations

11.2     Receipts and payments accounts

11.3     Income and expenditure accounts and statement of financial position

 

12. Incomplete records and single entry book keeping

12.1     Preparation of statement of affairs

12.2     Preparation of income statement

12.3     Preparation of statement of financial position

 

13. Analysis of financial statements

13.1     Role of analysis in providing information for decision making

13.2     Cross sectional and common size analysis

13.3     Trend analysis

13.4     Financial ratio analysis: liquidity ratios, return ratios, margin ratios, coverage ratios, leverage ratios, capital structure ratios, turnover ratios, activity ratios, efficiency ratios, market evaluation (valuation) ratios, cost ratios etc

13.5     Working capital and cash operating cycle

13.6       Preparation of statement of cash flows (International Accounting Standard 7) using the direct and indirect methods

 

14. Public sector accounting

14.1     Features of public sector entities (as compared to private sector)

14.2     Structure of the public sector and examples of entities in public sector

14.3     Objectives of public sector financial statements

14.4     Users of public sector financial statements and officers (treasury, accounting officers, public accounts committee, auditor general)

14.5     IPSAS on inventory, property, plant and equipment and intangible assets (the ledger accounts of central and county governments are not examinable)

14.6     Accounting techniques in public sector (budgeting, cash, accrual, commitment and fund)