CHAPTER TWO: NATURE OF CREDIT ESTABLISHMENTS AND THEIR ACCOUNTING PROCESS

1) Nature of credit establishments

According to the COBAC terminology, a credit or financial establishment/institution is a financial entity having the
authorisation to carry out banking operations. These operations represent the legal transactions executed by a bank in its
daily business such as the provision of loans, financial services, investments and such others depending on the size of the
institution. Their principal assets are financial assets or claims instead of real assets. A financial asset is an asset that is
either cash or a contractual right to receive cash or a financial instrument.
The legal framework of credit establishments as well as their supervision in the CEMAC region is regulated by specific
texts or legal instruments. There are two sets of legal instruments: those regulating supervisory authorities and those
regulating the activities of financial establishments.

i) Text regulating the functioning of supervisory institutions

Supervisory institutions are those created by central African countries to insure the proper functioning of credit
establishments. They include:
- The central African Banking commission (COBAC)
- The central bank (BEAC)
- The central African economic and monetary authority (CEMAC) and
- Other institution at the level of each member country such as the Ministry of Finance and the National Council for
Credit for the case of Cameroon.
The legal instruments include amongst others:
- The convention of October 16th 1990 carrying the creation of the banking commission for central Africa (COBAC),
- Convention of January 17th 1992 on the harmonisation of banking regulations in central African states,
- The revised treaty of January 30th 2009 on ECCAS (CEMAC),
- The head office agreement between the government of Cameroon and the Bank of Central African States,
- The convention of June 25th 2008 regulating the Monetary Union of Central Africa (UMAC),
- The convention of June 25th 2008 regulating the Economic and Monetary Union of Central Africa (UEAC).

ii) Text regulating the organisation and functioning of credit establishments

The following texts have been put in place as main instruments on the organisation and functioning of credit establishments
in the COBAC region:
 COBAC regulation No R-93/12 of 19th April 1993 on the carrying out of banking activities in the ECCAS region relating
to the harmonisation of banking regulations in central African states.
 COBAC regulation No R-2009/01 of 1st April 2009 on the share capital of credit establishments,
For the particular case of Cameroon, the functioning of credit or financial establishments is regulated by the following text:
- Ordinance No 85/002 of August 31st 1985 on the activities of credit establishments in Cameroon, later modified and
completed by laws No 88/006 of July 15th 1988 and No 90/019 of August 10th 1990.
- Decree No 90/1469 of November 9th 1990 on the minimum capital requirement of credit establishments.
- Decree No 90/1470 of November 9th 1990 bearing the conditions and modalities for approving credit establishments
and their managers.
- Decree No 96/198 of June 24th 1998 on the organisation and functioning of the National Council for Credit.

2. Accounting framework for credit establishments

The accounting framework for credit establishments are regulated by the following main texts (amongst many others):
- COBAC Regulation No R-98/01 of February 15th 1998 carrying the accounting plan of credit establishments,
- COBAC regulation No R-98/02 of May 22nd 1998 carrying the recording of claims and related debts,

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- COBAC regulation No R-98/02 of May 22nd 1998 bearing the procedures for updating the accounting plan of credit
establishments,
- COBAC regulation No R-2003/01 of February 27th 2003 on the organisation of the accounts of credit establishments.
- COBAC Instruction No I-2002/01 of March 20th 2002 carrying modifications on the Accounting Plan of Financial
Establishments.
- COBAC Instruction No I-2003/01 of November 14th 2003 carrying modifications on the Accounting Plan of Financial
Establishments.
- COBAC Instruction No I-2015/01 of July 6th 2015 carrying modifications on the Accounting Plan of Financial
Establishments and Instruction No I-2002/01.
As for the case of Cameroon in particular, these principles were implemented by:
- Decree No 99/673/PM of 1st July 1999 carrying the application of the Accounting Plan and the Statistics and Tax
Declaration of credit establishments.
- Presidential Decree No. 2004/073 of April 5th 2004 on the Statistics and Tax Returns for Banking Institutions.
- Presidential Decree No. 2019/262 of May 28th 2019 carrying the model Statistics and Tax Returns for Banking
Institutions.

2.1) Accounting Principles of the COBAC Accounting Plan

The Generally Accepted Accounting Principles (GAAP) for credit establishments in the CEMAC zone was decided upon
in Douala-Cameroon on the 15th Feb 1998 and put into force as form July 01 1999 for institutions situated in Cameroon and
on January 01 2000 for institutions situated in other CEMAC member countries. These GAAPs are as follows:

i) Accounting principles
The COBAC accounting law carries three accounting principles:
 The prudence principle: This principle carries 2 main articulations:
- An expense should be recognised or accounted for as soon as it is probable while revenues should only be recognised
when they are certain.
- Capital gains should only be recognised when they have been earned while capital losses should be recognised by
providing for losses or constitutions provisions.
 The principle of regularity: It states that the accounting records of any credit establishment should be built up in
conformity with the rules and procedures put in place by the COBAC accounting plan.
 The principle of objectivity: It states that rules and procedures must be applied with good faith during the processing
of accounting information. As such, significant post-balance sheet events must be taken into consideration in order to
present a true and fair image of the financial position of the establishment.

ii) Accounting concepts (norms)

In addition to the three adopted principles, certain concepts or norms were brought out to be respected in presenting
accounting and recording transactions. The six concepts adopted by COBAC are:
- The going concern concept: This concept states that financial statements are prepared with the assumption that the
financial establishment will continue to operate for the foreseeable future; meaning that the profit and loss account and
balance sheet assume no intention or necessity to liquidate or curtail significantly the scale of operations.
- Consistency in methods: There is consistency (no change of method) of accounting treatment of like items within
each accounting period and from one period to the next (over the short or medium run). In simpler terms, when a
financial establishment has fixed a method for the accounting treating of an item, it should treat all similar items in
exactly the same way.
- Matching or accruals concepts: That is, revenues and expenses should be linked to their various periods of realisation
and incurrence. This concept may again be interpreted by stated that the net profit should be the difference between the
revenues and the expenses incurred in generating those revenues.
- The historic cost concept: Assets acquired by the establishment should be recorded at their historic cost. This means
that the cost of assets should reflect the total expenses incurred on that asset.

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- The separate determination concept: This concept emphasises that in determining the aggregate amount of each asset
or liability, the amount of each individual asset or liability should be determined separately from all other assets and
liabilities. That is, individual values of items should be determined before deriving the total value for all the items. This
concept is best described in terms of potential gains and potential losses as it prohibits the netting off of potential gains
and potential losses on the same asset.
- The intangibility of the opening balance sheet: This states that the opening balance sheet for an accounting period
should correspond to the closing balance sheet of the previous accounting period. That is, accounting records should
reflect the continuous activity of credit establishments.

2.2) The organisation of accounting procedures

The following rules and regulations are to be respected by credit establishments in building up their accounting records:
- An accounting procedural manual: The COBAC law obliges all credit establishments to keep and update a
procedural manual bringing out the procedures to be respected in keeping accounting records.
- Identification attributes: Attributes were introduced in order to satisfy the various information needs from
stakeholders. An attribute represents a specification that can help to supply additional information on the balance
of main accounts concerning either the type of operations that led to building up this balance or on the economic
agents with whom the operations were carried out.
- The recording of transactions: The information system of establishments should facilitate the identification and
recording of transactions in conformity with COBAC regulation on internal control in credit establishments. There
is further stipulation that transactions should be recorded on the date of their passing into account for payment.
- Legal monetary units: All accounting information (documents and books) are to be established in the Central
African CFA Francs (XAF), with transactions in foreign currencies to be recorded in separate accounting books
with a book reserved for each foreign currency.
- Final accounts: All accounting information must be summarised by the end of each period in the form of final
accounts to be presented to the supervisory authorities.
- Automated processing of accounting date: The procedures to be followed in the automated processing of
accounting data should be laid down in a written document (manual).

2.3) Nature of accounts for Financial Establishments

The COBAC Accounting Plan for Financial Establishments groups together accounts into similar categories known as
classes. It carries nine classes of accounts as follows:
- Class one: Accounts for permanent resources
- Class two: Account for non-current assets
- Class three: Accounts for customers’ operations
- Class four: Personal and adjustment accounts
- Class five: Cash and inter-bank operations account
- Class six: Expense accounts
- Class seven: Revenue accounts
- Class eight: Interim managerial accounts
- Class nine: Post balance sheet accounts

2.4) The codification of accounts in the COBAC Accounting Plan.

The COBAC accounting law based on the requirements of the OHADA uniform act on accounting identifies each account
with a code and a title. The accounts are as follows:
- Each class is subdivided into main accounts.
- Main accounts are further sub-divide into divisional accounts

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 - The divisional accounts are further divided into subsidiary accounts the subdivided into as many sub accounts as
will satisfy the needs of the credit establishment
The adopted codification is as follows
- The first digit represents the code of the class.
- Main accounts carry two digits with the 2nd digits identifying the main accounts of that class.
- Main accounts are further subdivided into divisional accounts or three-digits accounts
- Divisional accounts may be subdivided into subsidiary or four digit accounts.
N.B Classes 1 - 5 represent accounts of financial position; classes 6 and 7 are for expenses and revenues, class 8 is for profit
and loss (different banking margins) while class 9 is for post-balance items.

2.5) Structure of accounts in the COBAC chart of accounts for financial establishments.
The structure of the various classes respects the prescriptions of the OHADA Accounting Plan of 2000 from where
inspirations were drawn to come out with the COBAC Accounting Plan for Credit Establishments. The specific aspects to
be highlighted are as follows:

i) Class one: Accounts of Permanent Resources

Permanent or durable resources correspond to the long-term financing resources put at the disposal of the credit
establishment by their owners and third parties (creditors). They constitute the claims or equities over the assets of the credit
establishment. These accounts are used in recording the capital structure of the establishment. That is capital, retained
earnings, investment subventions, loan stock instruments and provisions for risks and expenses.

ii) Class two: Accounts of Non-Current Assets

Non-Current Assets correspond to capital expenditures, or investments, or capital goods. They are properties or values
meant to stay for a very long time and in the same condition in the business. Non-current assets should be distinguished
from expenses in the sense that expenses last only for one year. Fixed assets are grouped into three categories of intangible,
tangible and financial fixed assets in the COBAC Accounting Plan for Credit Establishments. Two other groups of fixed
asset accounts are used in recording their loss in value (accounts 28 and 29).

iii) Class three: Accounts of Customers’ Operations

They record operations carried out with customers based on the collection of savings, the reception of deposits and the
distribution/granting of loans and the depreciation of customer accounts. Longs are classified according to their terms of
repayment by the customers. The specificity of this class is that it carries accounts for assets and liabilities (assets for credits
and loans granted by the financial establishment to her clients and liabilities for accounts opened for customers’ savings and
deposits).

iv) Class four: Personal and Adjustment Accounts

These accounts are used in establishing the relationship of the credit establishment with third parties such as the suppliers
of items of current assets and services, the personnel, the state and international organisations, shareholders, other debtors
and creditors, and accounts to be used in making adjustments at year end for pre-paid and accrued items.

v) Class five: Accounts for Cash and Inter-Bank Operations.

These accounts receive cash, correspondents accounts and short term cash assets such as marketable securities and short-
term financial investments. The COBAC Accounting Plan lays down the following forms of cash and interbank operations
and their accounts for credit establishments:
a) Cash equivalents and their accounts: cash equivalents are assets that can easily be changed into cash. Two forms of
short-term securities are recognised by the COBAC Accounting Law:
- Investment securities: for those to be held for a short period of not more than six months (account 511); and

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 - Marketable securities: for those to be held for a short period of more than six months but at most a year (account
512).
b) Money market (inter-bank) operations and their accounts: Money market operations represent the borrowing and
relending of highly liquid, short-term assets and securities. These operations are conducted between banks (inter-bank
operations) with the most important being overnight market operations (overnight loans granted and overnight credits
offered to other financial institutions), term loans and repurchase (repo) operations.
c) Operations with correspondent financial institutions: A correspondent financial institution is an institution that
provides services on behalf of another financial institution. It can facilitate wire transfers, conduct business transactions,
accept deposits, and gather documents on behalf of another financial institution. Correspondent banks are most likely
to be used by domestic banks to service transactions that either originate or are completed in foreign countries, acting
as a domestic bank's agent abroad.
The accounts held between correspondent banks and the banks to which they are providing services are referred to
as Nostro and Vostro accounts. An account held by one bank for another is referred to by the holding bank as a Nostro
account. The same account is referred to as a Vostro account by the counterparty bank. Generally speaking, both banks
in a correspondent relationship hold accounts for one another for the purpose of tracking debits and credits between the
parties.
d) Cash and their accounts: Cash represents ready money; that is money in hand, petty cash, and balances of cash in
accounts opened in other financial institutions. The COBAC Plan brings out the following forms of cash accounts:
 Current accounts of correspondent institutions (account 56): They correspond to nostro and Vostro
accounts as defined above.
 Cash (account 57): They correspond to notes and currencies, possessions in gold and other precious metals,
traveller’s cheques, values in the form of fiscal and postal stamps.

vi) Class six: Expense Accounts

They are used in recording banking operation charges such as interests and commissions paid by the bank, general operating
expenses, pay roll expenses, taxes, depreciation and provisions for losses on bad debts.

vii) Class seven: Income accounts.

They are used in recording all the revenues generated from the activities of the credit establishment.

viii) Class eight: Accounts for interim managerial balances.

They record the income generating capacity of the financial institution by detailing out the various aggregates of the profit
and loss for the period.

ix) Class nine: Accounts for post-balance sheet items.

These accounts are reserve for post-balance sheet events and records items of contractual obligations and commitments.
Post-balance sheet events are events that occur after the reporting period; but before the financial statements for that period
have to be issued.

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 TUTORIAL EXERCISES ON ACCOUNTING FRAMEWORK FOR BANKING ESTABLISHMENTS

1) List the classes of accounts found in the COBAC Accounting plan for Credit Establishments and their respective titles.
2) Identify five items that fall under each of the following categories in the COBAC Accounting plan for Credit
Establishments (account code and title): (a) Permanent Resources (b) intangible fixed assets (c) Tangible fixed assets
(d) Customer operations (e) Financial fixed assets (f) cash equivalents (g) Banking expenses (h) Banking revenues.
3) Explain what you understand by the following terms: (a) Nostro accounts (b) Vostro accounts (c) Correspondent bank
(d) Term loans (e) overnight loans. (f) repo loans.
4) Which of the classes of accounts are used by banks for the following: (a) Balance Sheet? (b) Profit and Loss account?
(c) Financial Accounting Records?

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