6. Aggregation and Consolidation of Data
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International Monetary Fund. Statistics Dept.
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Print Publication Date:
27 Dec 2019
Keywords:
M&G; capital; loan; foreign currency; holding company; DT subsidiary; DT sector; parent corporation; FSI compiler; regulatory capital; capital range; Financial soundness indicators; Personal income; Loans; Real estate prices; Financial statements; Global; Western Hemisphere; Middle East and Central Asia; Sub-Saharan Africa; Europe; Caribbean; group-consolidation adjustment; non-resident branch; group reporting; parent DT; Business enterprises; Financial stability assessment; Insurance companies; Foreign banks
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Abstract

6.1 The analytical interpretation of financial soundness indicators (FSIs) is affected by (1) the consolidation basis used for their compilation; and (2) the group-consolidation adjustments in the source data. The first aspect determines the reporting population1 for FSIs compilation, whereas the second affects the calculation of the FSI underlying series. The two aspects are interrelated: the consolidation basis defines the perimeter of institutions for which the group-consolidation adjustments are required.

I. Introduction

6.1 The analytical interpretation of financial soundness indicators (FSIs) is affected by (1) the consolidation basis used for their compilation; and (2) the group-consolidation adjustments in the source data. The first aspect determines the reporting population1 for FSIs compilation, whereas the second affects the calculation of the FSI underlying series. The two aspects are interrelated: the consolidation basis defines the perimeter of institutions for which the group-consolidation adjustments are required.

6.2 This chapter presents definitions of corporation ownership and control, approaches for compiling FSIs, as well as recommended consolidation basis for: (1) deposit takers (DTs); (2) OFCs; (3) nonfinancial corporations (NFCs); and (4) households.

II. Aggregation and Consolidation

6.3 Aggregation refers to the summations of position or flow data. For sector-level data, aggregation is the sum of the positions and flows of all individual reporting groups/entities within the sector.2 Thus, the sector and subsector totals equal the sum of their component elements and the data on claims and liabilities among the groups/entities of the sector are preserved; as well as total flows (e.g., all interest payments) between them. The sectoral financial statements described in Chapter 5 are aggregates, where positions and flows are the sums of flows and positions of all the reporting units in the sector.

6.4 Group-consolidation, in contrast, refers to the elimination of positions and flows between units that are part of the same reporting group. If related institutional units are grouped together to form one individual reporting group (e.g., foreign branches of domestic banks are grouped with their parent bank), then all positions and flows within that reporting group are eliminated from the reported information. For FSIs, data are consolidated by reporting group at various levels. For instance, the reporting group for DTs includes their branches, but some levels may include or exclude domestic and foreign controlled banks, DT and non-DT affiliates, or non-resident branches and affiliates. Inclusion or exclusion of these entities define the consolidation basis explained in Section I V.

6.5 The concepts of aggregation and consolidation should be distinguished from the concepts of gross and net recording. Gross recording refers to the presentation of assets and liabilities at their full value, that is, where claims on a particular institutional unit or group of units are not netted against the liabilities to that unit or group.3 Net recording refers to the ofsetting of these assets and liabilities, and is not recommended by the Guide; however, compilation on a net basis may be unavoidable due to lack of source data.

6.6 FSI compilation involves aggregation of group-consolidated data. Reporting entities provide group-consolidated data to the compiling agency, which then aggregates these data to produce sector totals for the financial statements (income and expense statement and balance sheet) and the memorandum series, as described in Chapter 5.

6.7 Before discussing consolidation of data in more detail, some definitions associated with reporting groups are required, as these terms are used throughout the rest of this chapter.

III. Ownership and Control of Corporations

6.8 It is common for corporations to own shares in other corporations, establishing ownership relationships among them. The ownership of a corporation is distributed among the institutional units that own its shares in proportion to the shareholdings.

6.9 Control of a corporation exists when an entity is exposed, or has rights, to variable returns from its involvement with the corporation and has the ability to affect those returns through its power over the corporation.4 This IFRS definition encompasses but is somewhat broader than existing monetary and national statistics definitions of control: the ability to determine its general corporate policy and operations by choosing (or removing) appropriate directors.5 The Guide defers to IFRS6 as in practice compilers will not determine control, but will rely on consolidated financial reporting by parent corporations prepared in accordance with IFRS.7 Control is unambiguously established through ownership of more than half of the voting shares; or otherwise controlling more than half of the shareholders voting power (including indirect ownership, that is, through ownership of a second corporation that in turn has a majority of the voting shares). Exceptionally, control could also be established with ownership of less than half the voting shares,such as through special legislation, decree, regulation, privileged voting rights (“golden share”), or loan arrangements that effectively establish control.8 However, it is not possible to stipulate a minimum shareholding below 50 percent that will guarantee control in all cases. Some of the common forms of relationships between entities are listed further.

6.10 Branches are operating entities that do not have a separate legal status from their parent corporations and are thus integral part of them. They are set up in a location where there is a legal representative of the parent and must meet certain requirements before they can operate. A branch of a nonresident DT is identified for statistical purposes as a separate institutional unit in the economy where it operates. Branches of nonresident DTs are always under foreign control.

6.11 Subsidiaries are entities controlled by another e nt it y. 9 A corporation is said to be a subsidiary of its parent when the parent is exposed, or has rights, to variable returns from its involvement with the corporation and has the ability to affect those returns through its power over the corporation. As the relationship of a parent corporation to a subsidiary is defined in terms of control rather than ownership, the relationship must be transitive; in other words, if a corporation has a majority shareholding in a subsidiary, and this subsidiary has itself a majority shareholding in a third corporation, the former corporation must be able to control the latter through its subsidiary, even if it does not have a majority shareholding.10

6.12 Associates are corporations over which the investor has a significant degree of influence, being the power to participate in the financial and operating policy decision of the investee; but not control or joint control as is the case of subsidiaries. Significant infuence is usually assumed to arise when the investor controls between 10 and 50 percent of the shareholders’ voting power. In this way, the investor has some infuence over the corporate policy and management of the associate. By definition, a corporation is able to exert less influence over an associate than over a subsidiary.

6.13 Equity investment or minority interest refers to the holding of shares in a corporation with the purpose of gains from dividends or stock appreciation, with the threshold being established at less than 10 percent. Equity holders receive voting rights, but not enough to influence the operations of the company where they have invested. Therefore, equity investment is considered solely as a financial investment. If the ownership stake reaches the threshold for classifciation as an associate (10 percent of voting power) but is expected to be of a temporary nature, the investment continues to be classified as non-associate equity investment. However, for FSI compilation purposes, if the equity investment has reached the level to be classified as an associate for two successive periods, the implication is that the investment is not temporary.

6.14 Joint arrangements are entities where two or more parties have joint control. Joint arrangements are classified either as joint operations or joint ventures. In a joint operation, the parties, called joint operators, have joint control and have rights to the assets, and obligations for the liabilities, relating to the arrangement. Joint operators recognize in their financial statements their share of the assets, liabilities, revenues, and expenses attributable to the joint operation. In a joint venture, the parties, called joint venturers, have joint control and have rights to the net assets of the arrangement. Joint venturers recognize their interest in the joint venture as an investment, and account for it using the equity method.11

6.15 Holding companies are units that hold the assets of subsidiary corporations but do not undertake any management activities. Their principal activity is to own and direct the group and they are not directly engaged in deposit taking. The Guide distinguishes between unregulated holding companies, and holding companies subject to prudential regulation, for example the EU Capital Requirement Regulation. In the former case, in line with the Guide’s focus on the health and soundness of DTs as a sector, unregulated holding companies should in principle be excluded from the DT sector, even if the business of the subsidiaries they own is primarily deposit taking. Such holding corporations should be part of the OFC’s sector. In the latter case, such holding companies are the regulated parents and provide the consolidated supervisory data that is the foundation for the FSIs.

Domestic and Foreign Control

6.16 When discussing reporting populations in more detail, definitions of domestic and foreign control are required.

6.17 Units can be controlled by domestic or foreign parent corporations, which may be financial institutions, or regulated or unregulated holding companies. The Guide uses the term “domestically incorporated” to refer to both domestic and foreign controlled entities, reflecting the emphasis on the jurisdiction of incorporation rather than the residency of shareholders.

6.18 Deposit-taking entities are defined in the Guide as foreign controlled if they are subsidiaries or branches of a foreign parent DT, that is, a DT controlled by nonresident institutional units, either directly or indirectly as described in paragraph 6.11. Deposit-taking entities and their subsidiaries and branches are defined as domestically controlled if they are directly or indirectly controlled by resident shareholders.

6.19 In the rare instances that the parent is located in both the domestic and foreign economies, such subsidiaries are classified as domestically controlled. A conceptual difficulty related to branches is that they are not actually “controlled” by a parent company, since they are an organizational part of the parent company and not an independent legal unit. For the sake of simplifcation, the Guide assumes that a branch is “owned” or “controlled” by its “parent company,” although they both may belong to the same legal unit. When the branch is located and operating in a different economy than its parent, it is a foreign controlled branch.

6.20 Foreign controlled DTs, in addition to supervision by the host supervisory authority, are typically subject to supervision by their parent supervisory authority, as recommended in the BCBS minimum standards for the supervision of international banking groups and their cross-border establishments.12 This criterion should be taken into account if there is uncertainty as to whether a DT is domestically or foreign controlled. If a resident DT is controlled by a non-resident bank holding company that is subject to banking supervision in that foreign economy, then it should be classified as foreign controlled.

IV. Consolidation Basis

6.21 Depending on different analytical needs and source data availability, various consolidation basis may be used for compiling FSIs. The consolidation basis determines the reporting population for FSI compilation. Which units are included under a specific consolidation basis depends, among other factors, on ownership and control, including whether a unit is a branch, subsidiary or associate, and whether it is domestic or foreign controlled.

6.22 Accounting, financial supervisory standards, and macroeconomic statistical frameworks operate with related, but different, understandings of consolidation and consolidation basis.

6.23 Accounting standards take a conglomerate view of a group and require that a group encompasses a parent company and all its subsidiaries, regardless of whether these entities belong to the financial sector or the nonfinancial sectors.

6.24 Financial supervisory standards take a prudential view of a group financial position, which is often narrower than the accounting approach. In banking regulation, for instance, the supervisory scope prescribed by the BCBS13 for internationally active banks includes “on a fully consolidated basis, any holding company that is the parent entity within a banking group to ensure that it captures the risk of the whole banking group.” Under this functional approach, an individual reporting bank of a given nationality must consolidate all its positions independently of the residency of the institutional units that are part of the banking group.

6.25 The macroeconomic statistical frameworks take an economic activity view at the level of the institutional unit and not at the corporate group level, and generally do not consolidate beyond the institutional unit level.

6.26 This Guide uses different consolidation standards depending on the institutional sector to which the particular FSI refers to. Broadly speaking, for DTs and OFCs FSIs, the standard is closer to the financial supervisory approach. For nonfinancial corporations and households, the standard follows the macroeconomic statistics approach. The following sections provide detailed explanations on the recommended consolidation basis by institutional sector, starting with DTs.

Consolidation Basis for Deposit Takers

6.27 This Guide recommends that DT’s data be compiled on a consolidated group basis. Consolidated group reporting by a resident DT includes coverage of its own activities and those of its branches and financial subsidiaries (except insurance corporations),14 with any transactions and positions among these entities eliminated on consolidation. Consolidation is based on the concept of control by a parent of other operating units. Such an approach is an essential element of banking supervision15 and is adopted to preserve the integrity of capital in DTs by eliminating double counting of capital (double gearing), and to avoid the double counting of income and assets arising from the intra-group activity of DTs. It is for this reason that the Guide recommends that DTs’ data be compiled on a consolidated group basis. For FSIs, a consolidation basis for DTs has two fundamental dimensions: cross-sector and cross-border consolidation.

6.28 Cross-sector consolidation involves a parent DT and its financial subsidiaries (DT and non-DT). If such non-DT subsidiaries (e.g., a leasing company or a money market fund) are included in the group data of its parent DT, the data are referred to as cross-sector data. The cross-sector dimension highlights financial strengths and weaknesses of groups considering their full range of financial activities: weak non-DTs financial subsidiaries might generate stress for the DT parents.

6.29 Cross-border consolidation involves a parent DT and its nonresident financial subsidiaries and branches, in addition to the resident ones. A branch or subsidiary may be resident in another economy than its parent. When such units are included in the group reporting, the data are referred to as cross-border data.

6.30 When compiling FSIs for DTs the Guide recommends cross-border, cross-sector, domestically incorporated consolidation (CBCSDI). This is consistent with BCBS guidance requiring application of the same supervisory standards to domestic and foreign-owned banks, and for effective consolidated supervision of all domestic and foreign operations of a banking group. In addition, the Guide recognizes a second option, domestic location (DL),16 for countries with DTs that have (i) very few or no foreign branches or subsidiaries, and (ii) very few or no cross-sector subsidiaries. Compiling on both a CBCSDI and DL basis would be consistent with BCBS guidance and the common supervisory practice of requiring reporting on both a consolidated basis (CBCSDI) and bank solo basis (DL). Comparison of the FSIs from these two consolidations can help to identify the potential resilience of the parent banks (DL) and potential vulnerabilities arising in activities outside of the parent banks (CBCSDI). However, for IMF reporting purposes, all relevant FSIs should be compiled using the recommended CBCSDI consolidation basis. Reporting different FSIs using different consolidation basis may impact the analysis of the DT sector’s soundness and should be avoided. In the instances when a different consolidation basis must be used, this should be clearly indicated in the metadata.

6.31 A third alternative is cross-border, cross-sector, domestically controlled (CBCSDC). This approach is only appropriate for financial sectors with no material foreign-controlled DTs. The exclusion of foreign controlled domestically incorporated DTs means that potentially significant risks are not captured in the FSIs if these are a material part of the financial system.

6.32 CBCSDI and DL are the focus of the Guide, but the option of other consolidation basis remains available for compilers, not least because due to legal constraints some countries have no alternative but to report on an “other” consolidation basis. Nevertheless, the Guide strongly emphasizes the need to promote cross-country convergence, and any deviation from the recommended CBCSDI consolidation basis should be in exceptional cases only.

Cross-border, Cross-sector, domestically incorporated consolidation basis (CBCSDI)

6.33 For financial stability analysis, it is often relevant to look at domestically incorporated DTs and their resident and non-resident branches and subsidiaries in the financial sector as one economic group that reports consolidated data. This approach focuses on domestically incorporated entities and provides an indication of their financial soundness regardless of where their business is undertaken and the kind of financial activities of the subsidiaries. Banking supervisory data frequently rely on this form of consolidation, as it is consistent with BCBS requirements for effective consolidated supervision.17

CBCSDI comprises:

  • Domestically incorporated, domestically controlled DTs, including domestic branches and DT subsidiaries (D1), domestic financial non-DTs subsidiaries, excluding insurance companies (D2); and their foreign branches (F1), foreign DT subsidiaries (F2), and foreign financial non-DT subsidiaries, excluding insurance companies (F3).

  • Domestically incorporated foreign controlled DTs, including domestic branches and DT subsidiaries (D3), domestic financial non-DTs subsidiaries, excluding insurance companies (D4); and their foreign branches (F4), foreign DT subsidiaries (F5), and foreign financial non-DT subsidiaries, excluding insurance companies (F6).

Figure 6.1 presents a schematic presentation of the CBCSDI consolidation basis.

Figure 6.1
Figure 6.1

Cross-Border, Cross-Sector, Domestically Incorporated Consolidation Basis (CBCSDI)1

Source: IMF staff.Note: DT = deposit taker.1 Domestically incorporated = domestically controlled + foreign controlled.

Cross-border, cross-sector, domestically controlled consolidation basis (CBCSDC)

6.34 A relevant alternative consolidation basis for DTs, the CBCSDC, is more narrowly focused on the financial soundness of domestically controlled DTs and their ownership related entities, whether domestic or abroad. For financial stability analysis, CBCSDC may be particularly relevant when domestic controlled DTs have large branches and subsidiaries abroad, while there are few and irrelevant foreign controlled DTs in the domestic economy. In these cases, the risks associated with failure of foreign entities of the domestically controlled DTs could pose a systemic risk to the domestic financial sector, where the domestic authorities ultimately might need to provide financial support to the group. If foreign controlled DTs are few and small, their potential impact on financial stability would be minimal.

CBCSDC comprises:

  • Domestically controlled DTs, including domestic branches and DT subsidiaries (D1), domestic financial Non-DTs subsidiaries, excluding insurance companies (D2); and their foreign branches (F1), foreign DT subsidiaries, (F2), and foreign financial Non-DT subsidiaries, excluding insurance companies (F3).

Figure 6.2 shows a schematic presentation of the CBCSDC consolidation basis.

Figure 6.2
Figure 6.2

Cross-Border, Cross-Sector, Domestically Controlled Consolidation Basis (CBCSDC)

Source: IMF staff.Note: DT = deposit taker.Note: Entities in italics are excluded from this consolidation basis.

Domestic location consolidation basis (DL)

6.35 Another relevant consolidation basis for DTs, DL consolidation basis, has no cross-sector or no cross-border dimensions. DL includes both domestically incorporated DTs and branches of foreign banks.18 Specially, it includes both domesticand foreign-controlled, domestically incorporated DTs and domestic foreign bank branches.

DL comprises:

  • Domestically controlled DTs, including domestic branches and DT subsidiaries (D1).

  • Foreign controlled DTs, including domestic branches, DT subsidiaries, and branches of foreign DTs (D3).

Figure 6.3 shows a schematic presentation of the DL.

Figure 6.3
Figure 6.3

Domestic Location Consolidation Basis (DL)

Source: IMF staff.Note: DT = deposit taker.Note: Entities in italics are excluded from this consolidation basis.

6.36 DL data generally aligns with the supervisory reporting framework in jurisdictions that have not introduced consolidated reporting. It excludes crossborder and cross-sector entities and is relevant for financial stability analysis when the non-DT domestic subsidiaries and foreign operations of domestic DTs are few and small. DL data only covers cross-border and cross-sectoral risks in an indirect and limited way: through the net profit/loss from the unconsolidated operations, while the direct risks and benefits to DTs are not identified. If DL data involves intra-group consolidation adjustments between parent DTs and their domestic DT subsidiaries, these should be noted in the metadata.

Other consolidation basis

6.37 Sometimes, countries may choose a consolidation basis that is not recommended in the Guide. For instance, a country may choose a cross-border, domestically incorporated (CBDI) consolidation basis for compiling FSIs for its DT sector. CBDI covers domestically incorporated DTs (both domestic and foreign controlled), and their branches and deposit-taking subsidiaries (both residents and nonresidents). In such cases, the Guide recommends that for cross-country comparability purposes, an explanation on the differences from the recommended consolidation basis be included in the associated metadata.

6.38 Adopting different consolidation basis has important implications as they would lead to different reporting populations (institutional coverage), and thus to different sectoral data for calculating FSIs. Therefore, FSIs compiled on different consolidation basis may complicate cross-country comparisons of data. In countries where the applied consolidation basis differs substantially from the recommended basis, the difference should be clearly explained in the metadata and the data should be characterized as using other consolidation basis.

Other Financial Corporations

6.39 The FSIs that measure the relative importance of the OFC sector and some of its subsectors (money market funds [MMFs], insurance corporations, pension funds) are calculated on a residency and institutional basis. Therefore, flows and positions within a group are not consolidated, and data can be presented on an aggregated resident-based approach. However, for countries with OFC with significant cross-border activities, cross-border consolidation may be relevant. In this case, it is recommended to use CBDI or, in jurisdictions where foreign-owned corporations are few and small, cross-border, domestically controlled consolidation basis (CBDC).19

6.40 Under an aggregated resident-based approach, the headquarters office consolidates its transactions and positions only with resident branch offices (i.e., without subsidiaries, associates, and nonresident branches). Under this approach, data are reported at the level of institutional-unit resident in the economy and aggregated by the compiling agency to provide totals of the sectors. This is the approach adopted in the 2008 SNA, the sectoral balance sheets in monetary statistics, and related national accounts methodologies.

6.41 MMFs generally do not have controlling interests in other MMFs; therefore, the Guide recommends compiling FSIs for MMFs on an aggregated resident-based approach. Similarly, it is not expected that pension funds have other pension funds as subsidiaries, so FSIs for them should also be compiled on an aggregated resident-based approach.

6.42 For the insurance company’s subsector, the Guide recommends using a CBDI consolidation basis. Data under a CBDI consolidation basis for the insurance companies consist of the consolidated data for the following units: domestically incorporated, domestic and foreign controlled insurance companies, and their resident and nonresident subsidiaries in the insurance sector.

Nonfinancial Corporations and Households

6.43 Both for the NFC and the household sectors the FSIs are compiled using the aggregated resident-based approach. The activities and positions of these resident entities in the domestic economy are captured by macroeconomic statistics, which are residency based, and data for these sectors are typically readily available from national accounts statistics.

6.44 The residency-based approach differs from DL consolidation. For instance, under the residency-based approach, all transactions and positions between headquarters and resident subsidiaries are not consolidated because these are separate institutional units, while under DL these subsidiaries are part of the reporting group of the parent deposit taker.

Annex 6.1 Intra-Group Consolidation

6.45 CBCSDI, CBCSDC, DL, and CBDI involve intra group consolidation, which allows for presenting statistics for a set of units as if they formed a single encompassing unit. Intra group consolidation needs to be done at a very detailed level to ensure consistency between the consolidated items and units. FSI compilers would usually not conduct the intra group consolidation, but rather rely on the consolidation being carried out by the reporting group. Nevertheless, it is useful for compilers to understand how consolidation adjustments are carried out in broad terms, in particular for the DT sector.

A. Consolidation of the Income Statement

6.46 When producing group consolidated income statements for use in calculating FSIs, the following items are offset between units in the reporting group in order to eliminate intra group transactions and gains and losses from intra group data:

  • Provisions for accrued interest on nonperforming loans and loan (and other claims) loss provisions.

  • Fees and commissions receivable and payable.

  • Gains and losses on financial instruments issued by other entities of the group, including ownership of equity.

  • The investing DT’s prorated share of the earnings of its subsidiaries in the reporting group.

  • Any other intra group income receivable and expense payable.

  • Gross interest income and expense should, in principle, be consolidated. However, because net interest income (i.e., gross interest income less interest expense) is used for calculating the corresponding FSIs, there should be in principle no need for consolidation since the net calculation should produce a zero result, assuming that all units within the group consistently record interest income and expense.

B. Consolidation of the Balance Sheet

6.47 For the purpose of producing a group consolidated balance sheet, the following adjustments are required to eliminate intra group positions, as listed below:

  • Claims on and liabilities to units of the deposit-taking group:

  • Currency and deposits

  • Loans

  • Debt securities

  • Financial derivatives

  • Other claims and liabilities

  • Specific provisions on loans to other units of the deposit-taking group.

  • Equity investment in other units of the deposit taking group.

C. Consolidation of Memorandum Series

6.48 Regarding the memorandum series required for deposit takers, the following adjustments are required for intra group consolidation, offsetting claims on and liabilities to entities of the same group:

  • Regulatory capital, comprising Common Equity Tier 1 (CET1), Additional Tier 1 (AT1), and Tier 2 capital; should be adjusted for the participation of the parent DT in the different tiers of the regulatory capital of its subsidiaries. Although financial non-deposit-taking subsidiaries do not compute regulatory capital, for consolidation purposes their capital should be harmonized to the banking supervisory concepts, and equivalents to CET1, AT1, and Tier 2 should be used to present regulatory capital of the group on a net basis.

  • Financial instrument positions between units of the same group should be risk weighted and deducted from total risk-weighted assets of the group.

  • Nonperforming loans.

  • Foreign currency denominated loans and liabilities.

  • Other memo items, except liquid assets and short-term liabilities, because these represent the potential for liquidity drain in the short term, even if it is between entities in the same reporting group.

D. Specific Issues Arising from Group Consolidation

6.49 While aggregation of data is a simple concept, consolidation is more complex, particularly when the parent owns less than 100 percent of its subsidiary; or when consolidating the activities of the parent with an associate; or in the special case of a deposit-taking parent with insurance subsidiaries.

6.50 Accounting and bank supervisory guidelines generally follow the full consolidation approach for subsidiaries, and a prorated approach for the profit and capital of associates. There is, however, generally a divergence between accounting and supervisory approaches to consolidation of financial conglomerates including both bank and insurance entities. Full consolidation is required by IFRS 10, which exempts only investment entities, commonly called non-operating holdings companies, from preparing consolidated financial statements. Supervisory authorities, however, often require financial reporting that does not consolidate banking and insurance units. As noted earlier, this is because the business are so different that prudential requirements cannot meaningfully be applied to an entity consolidating both insurance and banking. Compilers will rely on supervisory data series, and thus will follow national supervisory guidance which generally will not consolidate the insurance subsidiaries of bank parents.

6.51 When consolidating the activities of less than 100 percent owned subsidiaries, the Guide defers to IFRS 10 Consolidated Financial Statements, except when supervisory treatment differs. In accordance with IFRS 10, full consolidation should be undertaken of any entities controlled by the parent. Non-controlling interests should not be separately identified in earnings or in the balance sheet as a liability item, but rather reported in the consolidated statement of financial position (balance sheet) within equity, separately from the equity of the owners of the parent. For DTs, such full consolidation is consistent with the Basel Capital Accord for the measurement of capital and reflects the focus on the total capital and reserves of the DT as a consolidated group.

6.52 IFRS require use of the equity method to account for associates. Under the equity method, the investment in an associate is initially recognized at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets. The investor’s profit or loss includes its share of the investee’s profit or loss and the investor’s other comprehensive income includes its share of the investee’s other comprehensive income. Thus, if the owner of the investment has a 50 percent stake in a unit, half of the profit should appear as income from the equity investment. There should be similar treatment for any equity investment by an associate in a parent (reverse equity investment).

Annex 6.2 Numerical Example on Intra-Group Consolidation

6.53 This annex provides a numerical example to illustrate the guidance given in Annex 6.1 on intra-group consolidation. The example is based on the CBCSDI consolidation basis. The tables in the example present two steps: (1) compilation of the group consolidated data and (2) calculation of sectoral data by aggregation. (The sectoral data are the source to compile FSIs.)

6.54 For this example, we assume that the population for which FSIs are compiled consists of:

  • Deposit taker 1 (DT1): foreign controlled (having no subsidiaries)

  • Deposit taker 2 (DT2): domestically controlled

  • Deposit taker 3 (DT3): a domestic subsidiary of DT2

  • Deposit taker 4 (DT4): a foreign subsidiary of DT2

  • Non-deposit taker 1 (NonDT1): a domestic subsidiary of DT2

  • Non-deposit taker 2 (NonDT2): a foreign subsidiary of DT2

6.55 CBCSDI includes all these institutions. In contrast, other consolidation basis would exclude some of them. For example, on a CBCSDC basis DT1 would be excluded because it is a foreign controlled entity; also, on a CBDI basis, non-deposit takers will be excluded, that is, Non-DT1 and Non-DT2.

6.56 The example uses three tables for consolidating the following data:

  • Table 6.1: Consolidation of Income and Expense Statements

  • Table 6.2: Consolidation of Balance Sheets

  • Table 6.3: Consolidation of Memorandum Series

6.57 The income and expense, balance sheet and memorandum series data of each financial institution are presented in the columns of Tables 6.1–6.3 as follows:

  • The first five columns are the institutions belonging to the group controlled by DT2, that is DT2 (as parent), DT3, DT4, NonDT1, and NonDT2

  • The sixth column is the DT2 group consolidated data (Step 1). It contains the aggregated data of the group minus the adjustments needed in the consolidation process.20

  • The seventh column contains the data for DT1, a deposit taker with no subsidiaries and, therefore, with no need for consolidation.

  • The last column aggregates columns 6 and 7, resulting in the sectoral data used to compile FSIs

6.58 Adjustments in the income and expense statements (Table 6.1)

6.59 For the purposes of compiling data for use in calculating FSIs, a number of adjustments are required to the income statement to eliminate intragroup transactions and related gains and losses. These adjustments are described below:

  • Provisions for accrued interest on nonperforming assets (among entities in DT2 group);

  • Fees and commissions receivable/payable (among entities in DT2 group);

  • Gains and losses on financial instruments (among entities in DT2 group);

  • Prorated earnings (among entities in DT2 group);

  • Other income (among entities in DT2 group);

  • Noninterest expenses (among entities in DT2 group);

  • Provisions (among entities in DT2 group);

Table 6A.1

Consolidation of Income and Expense Statements

Source: IMF staff estimates. Note: DT = deposit taker.

Neither gross interest income nor interest expense among group members adjusted for consolidation, and thus interest payments by one group member to another is netted out in the calculation of net interest income.

Other expenses also include fees and commissions payable.

Table 6A.2

Consolidation of Balance Sheets

Source: IMF staff estimates. Note: DT = deposit taker.
Table 6A.3

Consolidation of Memorandum Series

Source: IMF staff estimates. Note: DT = deposit taker.

6.60 Once the adjustments are made, the data can be aggregated. The result appears as Step 1 (column 6). As previously said, the last column will aggregate the data from column 6 (DT2 group) and column 7 (DT1) to compile the sectoral data (Step 2).

6.61 Adjustments in the balance sheets (Table 6.2)

6.62 The adjustments required to the balance sheets to eliminate intra-group financial assets and liabilities are:

  • Deposits (among entities in DT2 group);

  • Interbank loans (among entities in DT2 group);

  • Non-interbank loans (among entities in DT2 group);

  • Debt securities (among entities in DT2 group);

  • Equity and investment fund shares (among entities in DT2 group);

  • Financial derivatives and employee stock options (among entities in DT2 group);

  • Other financial assets (among entities in DT2 group);

  • Liability capital and reserves (among entities in DT2 group);

6.63 As in the prevision Section, once the adjustments are made, the data can be aggregated. The result appears as Step 1 (column 6). The last column will aggregate the data from column 6 (DT2 group) and column 7 (DT1) to compile the sectoral data (Step 2).

6.64 Adjustments in the memorandum series (Table 6.3)

6.65 Regarding the memorandum series, the following adjustments are made in the DT2 group, offsetting claims on and liabilities to entities of the group:

  • Regulatory capital, comprising Common Equity Tier 1 (CET1), Additional Tier 1 (AT1), Tier 2 capital, and Tier 3 capital; for the participation of the parent DT in the different tiers of the regulatory capital of its subsidiaries. (In the example, it is assumed that no claims/liabilities exit at the level of Tier 2 Capital)

  • Risk-weighted assets comprising intra-group claims deducted from total riskweighted assets of the group; memorandum series assets and liabilities (loans, debt securities, equity and investment fund shares, financial derivatives and employee stock options) deducted from the group totals.

6.66 As in the prevision Section, once the adjustments are made, the data can be aggregated. The result appears as Step 1 (column 6). The last column will aggregate the data from column 6 (DT2 group) and column 7 (DT1) to compile the sectoral data (Step 2).
1

The term “reporting population” refers to all entities included in the sector information. The reporting population can vary depending on the institutional coverage of the sector.

2

In some instances, data on an economic sector can be compiled using information reported by a sample of reporters, together with estimates for those units in the sector that do not report. Statistically, the more representative the sample is of the total population, the greater the likelihood of estimating reliable information for the nonreporters.

3

This is the approach followed by the 2008 System of National Accounts (2008 SNA) and other statistical manuals, such as the Monetary and Financial Statistics Manual and Compilation Guide (MFSMCG).

4

IFRS 10, paragraph 6.

5

See MFSMCG, paragraph 3.21.

6

Or national standards if these have different definitions of control.

7

Similarly, when supervisory requirements exclude some entities such as insurance companies from the consolidated reporting of deposit-takers, compilers will rely on the supervisory series for the DT sector, thus ensuring consistent compilation of FSIs for the jurisdictions’ DT sector.

8

For exceptional cases where control of a corporation can be achieved with less than half of the voting power, see 2008 SNA, paragraphs 4.69–4.71.

9

IFRS 10, Appendix A.

10

See 2008 SNA, paragraph 4.74.

11

For additional detail, refer to IFRS 11.

12

See BCBS, Minimum standards for the supervision of international banking groups and their cross-border establishments, Basel, 1992.

13

See BCBS, International convergence of capital measurement and capital standards, June 2006, paragraph 21.

14

The exclusion of insurance companies follows supervisory practices whereby banks’ insurance subsidiaries are not consolidated for supervisory reporting. The reason is that banking and insurance are two very different activities with different prudential standards. This means that key FSIs such as those based on regulatory standards calculated using data consolidating banking and insurance would be meaningless from the supervisory and macroprudential perspective because of the very different capital and liquidity requirements for the two types of business. For this reason, the Guide follows supervisory practice in recommending that the banking and insurance elements of a group be reported as separate units.

15

See BCBS, Core Principles for Effective Banking Supervision, Principle 12, (2012).

16

This approach was called “domestically consolidated data” in the 2006 Guide.

17

Under the BCBS framework, insurance activities are not included within “financial activities,” and “financial entities” do not include insurance entities; as a result, insurance corporations are treated separately from deposit takers, sometimes even if they are subsidiaries of a deposit taker. See BCBS, International Convergence of Capital Measurement and Capital Standards—A Revised Framework, Basel, 2004, footnote 5, paragraph 24.

18

The data source will be supervisory series, as supervisory authorities generally require branches of foreign banks to submit regular prudential returns.

19

No cross-sector consolidation is recommended in this case.

20

In reality, this step will be repeated for every deposit-taking group resident in the economy for which FSIs are compiled.

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Cover Financial Soundness Indicators Compilation Guide 2019
Financial Soundness Indicators Compilation Guide 2019
ISBN:
9781484396209
ISSN:
2663-3744
Publication Date:
27 Dec 2019
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781484396209.069
Pages:
218
Figure 6.1

Cross-Border, Cross-Sector, Domestically Incorporated Consolidation Basis (CBCSDI)1
Figure 6.2

Cross-Border, Cross-Sector, Domestically Controlled Consolidation Basis (CBCSDC)
Figure 6.3

Domestic Location Consolidation Basis (DL)

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