I. Introduction
4.1 A consistent set of accounting principles is required for compiling position and flow data for calculating financial soundness indicators (FSIs) and is a precondition for aggregating data from differ-ent institutional units within a sector of an economy. Consistent accounting principles ensure the methodological soundness of the calculated indicators and facilitate cross-country comparability, even when different accounting standards are applied in different economies. This chapter provides guidance on accounting principles to be followed when compiling FSIs for deposit takers (DTs) and OFCs drawing on the existing International Financial Reporting Standards (IFRS) issued by the International Accounting Standard Board (IASB). The accounting principles underlying the FSI compilation for nonfinancial corporations (NFCs) and households are typically sourced from national accounts statistics, discussed in Chapter 10.1
4.2 Although there is still no full-fledged adherence to internationally agreed financial reporting standards, countries are converging toward IFRS as the accounting principles to be used for preparing financial statements. The Guide defers to IFRS as the overarching framework for compiling FSIs for DTs and OFCs but recognizes that not all countries adhere to them, and some follow generally accepted national accounting practices instead. The Guide further defers to supervisory standards, particularly with respect to allowance for losses. Reporters are encouraged to provide metadata indicating the statistical and financial reporting standards used, including any critical assumptions and significant differences from IFRS.
II. Flows and Positions
4.3 Flow data refer to economic actions and effects of events within a period of time. Flows include transactions in goods, services, income, transfers, and nonfinancial and financial assets; holding gains and losses arising from price or exchange rate movements; and other changes in the volume of assets and liabilities, such as losses from extraordinary events. Under certain circumstances, potential costs can also be included.2
4.4 Position data are the value of outstanding stocks, which refers to holdings of nonfinancial and financial assets, and liabilities at a specific point in time.
III. Time of Recognition of Flows and Positions
Recognition and Derecognition of Financial Assets and Liabilities
4.5 Assets are resources controlled by an entity as a result of past events, and from which future economic benefits are expected to flow to the entity or institutional unit. Financial assets are a subset of economic assets that consist of financial claims. Most financial assets are financial claims arising from contractual relationships entered into when one institutional unit provides funds or other resources to another. These contracts are the basis of creditor/debtor relationships through which asset owners acquire unconditional claims on economic resources of other institutional units.
4.6 Each claim represented by a financial asset has a corresponding liability. A liability is a present obligation of an entity arising from past events, the settlement of which is expected to result in an outflow of resources from the entity. A liability is established when one unit (the debtor) is obliged, under specific circumstances, to provide funds or other resources to another unit (the creditor). Usually, a liability is established through a legally binding contract that specifies the terms and conditions of the payment(s) to be made, and the payment is unconditional.
4.7 Whether assets and liabilities exist and are outstanding is determined at any moment in time by the concept of ownership. Two types of ownership can be distinguished: legal and economic ownership.3 The legal owner of nonfinancial and financial assets and liabilities is the institutional unit entitled by law and sustainable under the law to claim title to the instrument. The economic owner of nonfinancial and financial assets and liabilities is the institutional unit entitled to claim the benefits associated with their use by virtue of accepting the associated risks. Every nonfinancial and financial asset and liability has both a legal and an economic owner. In most cases, the economic owner and the legal owner are the same. Where they are not, the legal owner has passed to the economic owner the risk involved in using the resource in an economic activity, as well as the associated benefits.4
4.8 An entity shall recognize financial assets or liabilities in its financial statements when the entity becomes party to the contractual provisions of the instruments. IFRS 10 requires an entity to consolidate entities, which it controls.5 Thus, the consolidated financial statements of the parent entity would recognize financial assets and liabilities when entities it controls become party to the contractual provisions of the instruments. While the Guide generally defers to IFRS on consolidation, in the case of the DT sector, it recommends supervisory consolidation (Chapter 6). Purchase or sale of financial assets shall be recognized and derecognized using the trade date (i.e., the date of the transaction) or, if not feasible, the settlement date (i.e., the time of delivery of the financial assets and payment of consideration).6 Trade date accounting presupposes that the purchaser of the instrument assumes the risks and rewards to the instrument on the day of the transaction, not the day of delivery of the instrument.
4.9 Financial liabilities are removed (derecognized) from the financial statement of an institutional unit when such liabilities are extinguished. In other words, financial liabilities are removed when the obligations specified in the contracts are discharged, cancelled, or expired.
Accrual Accounting
4.10 Accrual accounting is the main method used in the Guide, in IFRS and for the compilation of other macroeconomic statistics. Accrual accounting records flows and changes in the corresponding stocks at the time economic value is created, transformed, exchanged, transferred, or extinguished. Under accrual accounting, flows and positions are recorded when a change in economic ownership takes place. The effects of economic events are thus recorded in the period in which they occur, irrespective of whether payment was made. Existing assets and liabilities are recognized, but contingent positions are not.7
4.11 The change of economic ownership is central to determine the time of recording of transactions in financial assets on an accrual basis. Economic ownership takes account of the risks and rewards of ownership. As already stated, a change in economic ownership means that, in practice, an entity has transferred substantially all the risks and rewards of ownership to another entity. Accrual accounting is adopted because by matching the time of recognition with the time of resource flows and the time of gains and losses in value, the economic consequences of transactions and events on the current condition of the reporting entities is best observed. The simultaneous recognition of the transfer of rights and values between the buyer and seller also results in symmetrical reporting of value, which reduces the possibility of discrepancies in the accounts.
4.12 When a transaction occurs in assets, the entities should record the change in position on the date of the transaction (the trade date). If an existing asset is sold by one entity to another, the first entity derecognizes, and the second entity recognizes the asset on the date of the transaction, which is when the economic risks and rewards associated with the instrument are transferred. The date of recording may actually be specified to ensure matching entries in the books of both parties. If no precise date can be fixed on which the change in ownership occurs, the date on which the creditor receives payment in cash or in some other asset (settlement date) is decisive.
4.13 A financial claim is created and exists until payment is made or forgiven. An asset transaction is recorded when a service is rendered, interest accrues, or an event occurs that creates a transfer claim (i.e., taxation). Similar to interest, service charges can accrue continuously. After dividends are declared payable, they are recorded as liabilities/assets until paid.
Accrual of Interest
4.14 The Guide recommends that interest costs accrue continuously on debt instruments, matching the cost of funds with the provision of funds and increasing the principal amount outstanding until the interest is paid.8 As set forth in IFRS 9, an entity should recognize interest income by applying the effective interest method. For fixed-rate instruments, the effective interest rate is the rate of interest that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liabilities to the gross carrying amount of a financial asset or to the amortized cost of a financial liability.9 For variable-rate instruments, the yield will vary over time in line with the terms of the contract. With the exception of instruments meeting the IFRS 9 criteria for hedge accounting, no adjustment should be made to interest income for any gains or losses arising from financial derivatives contracts, as these are recognized as gains and losses on financial instruments (see paragraph 5.19).
4.15 These recommendations for the accrual of interest are based on IFRS 9.10 However, it is recognized that for data compiled under IFRS when an instrument is traded, interest accrues to the new creditor at the effective yield at the time of acquisition of the instrument and not at the effective yield at the time of issuance. This would open up the possibility that there could be asymmetric reporting of interest income for traded financial instruments by debtor and creditor deposit takers.11
4.16 Interest costs that accrue in a recording period should be recorded as an expense (income) in that period. For position data, there are three possibilities for measuring accrued interest costs:
a. Interest earned is paid within the reporting period, with no impact on end-period positions
b. Interest earned is not paid because it is not yet due, with the consequence that the positions increase by the amount of interest that has accrued during the reporting period
c. Interest earned is not paid when due, with the consequence that the positions increase by the amount of interest costs that has accrued during the period (excluding any specific provisions against such interest, see paragraph 5.15).
The Guide recommends including interest costs that have accrued and are not yet payable as part of the value of the underlying instruments (aforementioned second bullet point).
Arrears
4.17 When principal or interest payments are not made when due (e.g., on a loan) arrears are created. Arrears should continue to be recorded from their creation date,12 until they are extinguished, such as when they are repaid, rescheduled, or forgiven by the creditor. Arrears should continue to be recorded in the underlying instrument, with the exception of interest on nonperforming assets (see paragraph 5.14).13
4.18 If debt payments are guaranteed by a third party (guarantor) and the debtor defaults, the debtor records an arrear until the creditor invokes the guarantee, at which time the debt is attributed to the guarantor. In other words, the arrear of the original debtor is extinguished as though repaid. Depending on the contractual arrangements, in the event of a guarantee being exercised, the debt is not classified as arrears of the guarantor but instead as a short-term debt liability until any grace period for payment ends.
Contingencies
4.19 Many types of contractual financial arrangements between institutional units do not give rise to unconditional requirements, either to make payments or to provide other economic assets.14 In this context, “conditional” means that the claim becomes effective only if a stipulated condition (or conditions) arise. These arrangements, which are often referred to as contingent items (or off-balance-sheet exposures), are not recognized as financial assets or liabilities in the Guide, because they are not actual claims and there are no certain future economic benefits that can be measured reliably.
4.20 Off-balance-sheet exposures represent potential exposures to risks. The types of contingent arrangements for which data should be collected on the basis of the maximum potential exposure are described below.
4.21 Loan and other payment guarantees are commitments to make payments to third parties when another party, such as a client of the guarantor, fails to perform some contractual obligations. These are contingent liabilities because payment is required only if the client fails to perform, and until such time no liability is recorded on the balance sheet of the guarantor. A common type of risk assumed by a deposit-taking guarantor is commercial risk or finan-cial performance risk of the borrower.
4.22 Included under payment guarantees are letters of credit (LoCs). Stand-by LoCs are guarantees to make payment upon nonperformance by the client, provided all the conditions in the letter have been met. LoCs are an important mechanism for international trade whereby a bank makes payment to a supplier on behalf of the bank’s customer upon documentary proof of delivery of the speci-fed items in accordance with the terms of the LoC. Irrevocable LoCs provide certainty of payment if the original terms are met, while revocable LoCs, which are seldom used as they do not provide certainty of payment, allow the terms of the letter to be changed without prior approval of the beneficiary. Also included are performance bonds that normally cover only part of the contract value but in effect guarantee a buyer of goods, such as an importer, that the seller, such as an exporter, will meet the terms of the contract. Performance bonds are also used in construction to protect the owner by providing a bank guarantee of payment for remedial work, to the limit of bond, that may be required if the contractor does not complete a project or completes it with material deficiencies.
4.23 Lines of credit and credit commitments, including undisbursed loan commitments, are contingencies that provide a guarantee that undrawn funds will be available in the future, but no financial liability/ asset exists until such funds are actually advanced.
4.24 Included under credit commitments are unutilized back-up facilities such as note issuance facilities (NIFs) that provide guarantees that parties will be able to sell short-term debt securities (notes) that they issue and that the financial corporations providing the facility will purchase any notes not sold in the market. Other non-guarantee facilities providing contingent credit or back-up purchase facilities are revolving underwriting facilities (RUFs), multiple options facilities, and global note facilities (GNFs). Both banks and nonbank financial institutions provide such back-up purchase facilities.
Provisions for Loan Losses and Other Impaired Assets
4.25 IFRS 9, which came into effect from January 2018, prescribes an expected credit loss (ECL) treatment for establishing a loss allowance for financial assets.15 Previously, accounting standards (i.e. IAS 39) had used an incurred credit loss approach, whereby loss allowances were established only when there was objective evidence of impairment. This evidence would typically be payments in arrears but could also comprise qualitative information such as the bankruptcy of the debtor even if payments were not yet in arrears.
4.26 Supervisory treatment of provisions for loan losses has long taken an expected loss approach. This reflects the certain knowledge from experience in banking that losses will be incurred on some assets even if there is currently no evidence of impairment of those assets. The divergence between the expected loss approach favored by supervisors, and the incurred loss approach mandated by IAS 39, resulted in differences in the provision amounts determined in accordance with supervisory standards, and allowance for loss amounts determined in accordance with accounting standards.
4.27 Supervisory requirements, which often include minimum provisioning amounts for loans over a specified number of days in arrears, may result in higher specific provisions than the allowance for loss determined in accordance with the accounting requirements. This may occur, for example, because a bank might expect to recover through the sale of collateral an amount sufficient to repay the entire loan, thus requiring no allowance for loss under accounting standards, yet under supervisory requirements, minimum provisions may be required in accordance with the number of days payment is in arrears.
4.28 Supervisory requirements also frequently require a general provision amount, for example, 1 percent of the total portfolio. This recognizes that there will be losses in a portfolio even if individually impaired loans have not yet been identified, which is conceptually similar to, but differing in practice from, the expected loss approach of IFRS 9.
4.29 The combination of prescribed minimum provisions and requirement for general provisions may result in higher levels of provisions determined in accordance with supervisory requirements than the allowance for loss amounts determined in accordance with IAS 39 and IFRS 9 accounting principles. Under Basel I, any excess of provisions above the allowance for loss calculated in accordance with accounting principles was treated as a general provision. This amount, to a maximum of 1.25 percent of risk-weighted assets, was included as an element of Tier 2 capital for regulatory purposes.
4.30 Basel II introduced a divergent treatment between the Standardized Approach and the Internal Ratings-Based Approach with respect to specific and general provisions. Basel I treatment was retained for institutions using the Standardized Approach. For institutions on the advanced approaches, the difference between provisions (e.g., specific provisions, portfolio-specific general provisions such as country risk provisions or general provisions) and expected losses may be included in or must be deducted from regulatory capital. The excess, to a maximum of 0.6 percent of risk-weighted assets, is included in Tier 2 capital. Any shortfall in provisions relative to expected loss would be deducted from capital, 50 percent from Tier 1, and 50 percent from Tier 2. Banks using the advanced approaches for a portion of their portfolio and the standardized approach for the balance should attribute total general provisions on a pro rata basis to the advanced and standardized portfolios. There are options and elements of national discretion, and the Guide defers to supervisory requirements for the treatment of provisions and expected loss.16 Basel III retained the Basel II approach, with the difference that any shortfall in provisions is to be deducted from CET1.
4.31 Under IFRS 9, the loss allowance is a cumulative account, with increases or decreases in loss allowance recognized in profit and loss. There are differing accounting treatments depending on the type of financial instrument.
4.32 For financial assets measured at amortized cost—typically loans and leases as well as securities held for the intention of collecting the cash flows—the loss allowance is netted against the carrying amount of the assets. Thus, under IFRS 9, the net amount is reported on the statement of financial position (balance sheet). However, for compiling FSIs, the Guide recommends that loans be reported without any deduction for loss allowance—that is, they should be reported at a gross value. The loss allowance for off-balance-sheet items such as loan commitments or guarantees is recognized as a provision (liability). For securities measured at fair value through other comprehensive income (FVOCI)—typically debt instruments—provision expense is recognized in profit or loss using the same credit impairment methodology as for financial assets measured at amortized cost. Other changes in the carrying amount due to fair value measurement are recognized in OCI; the cumulative fair value gain or loss recognized in OCI is recycled from OCI to profit or loss when the related financial asset is derecognized.
4.33 Adoption of the ECL approach in IFRS bridges some of the conceptual differences between the accounting and supervisory approaches to loss allowance (provisioning), but there continues to be a wide gulf in specific application. This is compounded by the diversity across jurisdictions in the application of accounting and supervisory standards.17
4.34 At the time of writing, the BCBS has prescribed an interim approach continuing the existing Basel I, II, and III determinations described earlier, recommending that national authorities issue guidance on the allocation of IFRS 9 ECL to general and specific provisions.18 Thus, the concepts of general and specific provisions continue to be relevant to the FSIs, which include provisions (non-performing loans net of provisions to regulatory capital, paragraph 7.27, and provisions to non-performing loans, paragraph 7.39), and compilers should follow the supervisory practices prescribed in their jurisdiction for the determination of specific provision amounts. Data should be obtained from supervisory sources, and details of the national treatment of specific and general provisions should be provided in the metadata.
IV. Valuation
4.35 The accounting principles for the recognition and measurement of financial assets and liabilities discussed in the Guide follow IFRS 9. In the Guide, valuation corresponds to the IFRS concept of measurement. Measurement involves assigning monetary amounts at which the elements of the financial statements are to be recognized and carried on the balance sheet.19
Amortized Cost and Fair Value
4.36 IFRS 9 requires measurement (valuation in the terms of the Guide) using amortized cost, fair value through other comprehensive income, or fair value through profit and loss. Determination of the appropriate approach is based on the entity’s business model for managing the financial assets, and the contractual cash flow characteristics of the financial asset.
4.37 Financial assets are valued (measured) at amortized cost if the asset is held to collect contractual cash flows and the contractual terms give rise, on specified dates to cash flows that are solely payments of principal and interest. Fair value through other comprehensive income is to be used if the business model includes both collecting contractual cash flows and selling financial assets, and the contractual terms give rise, on specified dates to cash flows that are solely payments of principal and interest. Financial assets not meeting the criteria for valuation (measurement) at amortized cost or fair value through other comprehensive income are to be measured at fair value through profit and loss.20
4.38 Amortized cost is the amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance.21 Interest income (or accrued interest) is calculated using the effective interest method and is recognized in profit and loss. Changes in fair value of assets valued at amortized cost are recognized in profit and loss only when the asset is derecognized or reclassified. The Guide recommends that financial assets other than loans (lines 19–22 in Table 5.1) that are valued at amortized cost be presented net of allowance for loss, which is consistent with IFRS 9. As noted earlier, however, the Guide recommends that loans (line 18 in Table 5.1) be presented net of specific provisions, with subtotals provided on gross loans by category and the amount of specific provisions. As discussed earlier in this chapter, this treatment varies from IFRS 9 as the allowance for loss calculated using the IFRS 9 ECL model does not include the supervisory concepts of specific and general provisions. The allocation of IFRS 9 loan loss allowance between spe-cific and general provisions should follow national supervisory guidance. Specific provisions are netted against gross loans (line 18.i in Table 5.1), and general provisions are recorded as a liability item in line 30.
4.39 Fair value is a market-equivalent value. It is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”22 Under IFRS 9, assets and liabilities that are not valued at amortized cost are to be measured at fair value. For measuring fair value, an entity assumes that market participants would use it when pricing the asset or liability under current market conditions, including assumptions about risk. Fair value measurement of a nonfinancial asset takes into account its highest and best use from the markets participant’s perspective.
4.40 Fair value measurement assumes an orderly and hypothetical transaction between market participants at the measurement date under current market conditions, and that the transaction takes place in the principal market for the asset or liability, or in the absence of a principal market, the most advantageous market for the asset or liability.
4.41 The fair value of a financial liability, or an entity’s own equity instruments, assumes it is transferred to another market participant without settlement, extinguishment, or cancellation of the liability when transferred. Fair value of a liability reflects non-performance risk, including an entity’s own credit risk and assuming the same non-performance risk before and after the transfer of the liability.
4.42 Tree valuation techniques are widely used for calculating fair value: (1) the market approach, which uses the prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities, or a group of assets and liabilities; (2) the cost approach, which reflects the amount that would be required to replace the service capacity of an asset (current replacement cost); and (3) the income approach, which converts future cash flows of income and expenses into a single current (discounted) amount, reflecting current market conditions and expectations about those future amounts.23
4.43 To increase consistency and comparability in fair value measurements, IFRS establish a fair value hierarchy. Entities are required to use Level 1 if possible and may only use Level 3 if the required inputs are not available to enable use of Level 1 or 2. Level 1 inputs, the highest priority, are (unadjusted) quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. Level 2 inputs, medium priority, are inputs other than quoted prices included within Level 1 that are directly or indirectly observable for the asset or liability, such as similar instruments or identical instruments in markets that are not active. Level 3 inputs, the lowest priority, are unobservable inputs for the asset or liability, which should be developed using the best information available to the entity.24
Transactions
4.44 Transactions are generally valued (measured) at the fair value of the consideration given or received.25 Consistent with IFRS 9, the Guide recommends that, for initial recognition, an entity should measure financial assets or financial liabilities at fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.26 If part of the consideration given or received is for something other than the financial instrument, an entity shall measure the fair value of the financial instrument.27 Under IFRS 9, at initial recognition, entities must classify financial assets into: amortized cost; fair value through other comprehensive income (FVOCI); or fair value through profit or loss (FVTPL).
4.45 As noted earlier, the basis for the classification is twofold: (1) the business model for managing the financial asset, and (2) the contractual cash flow characteristics of the financial asset.28 Some financial instruments, such as loans and deposits, are measured at amortized cost because they are held to collect cash flows and have contractual terms giving rise to payments of principal and interest. These instruments are measured using Level 3 inputs, specifically discounted cash flow using market rates of interest, as there are generally no observable market prices.
4.46 Positions of all financial assets that are not measured at amortized cost must be recorded at fair value, either as FVTPL or as FVOCI. FVTPL applies to all financial assets that: (1) the entity holds to sell, or (2) the entity has elected to value at fair value at initial recognition to address an accounting mismatch. FVOCI includes financial assets (debt instruments and equity) held with the purpose to collect contractual cash flows and to sell the financial asset.
Derivatives and Hedge Accounting
4.47 Under IFRS 9, all derivatives, including those linked to unquoted equity investments, are measured at fair value. Changes in the value of derivatives must be recognized in profit or loss, unless the entity has selected to apply hedge accounting designating a derivative as a hedging instrument.
4.48 Hedge accounting recognizes the offsetting effects on profit or loss of changes in the fair values of the hedging instrument and the hedged items. Trough hedge accounting, an entity can match the risk exposure in some instruments (the hedged instruments) due to changes in its fair value or future cash flows, with an opposite gain or loss on the hedging instruments. Implementation of hedge accounting rules results in netting or reclassification of hedged items and hedging instruments in the balance sheet presentation. There are three types of hedging relationships recognized in IFRS 9: (1) fair value hedge, (2) cash flow hedge, and (3) hedge of a net investment in a foreign operation.
V. Recording of Gains and Losses
4.49 Financial assets are classified into assets measured at amortized cost and assets measured at fair value. Where assets are measured at fair value, gains and losses are either recognized in profit or loss (FVTPL) or other comprehensive income (FVOCI).
4.50 The requirements for reporting gains or losses recognized at FVOCI are different for debt instruments and equity investment. For debt instruments at FVOCI, unrealized gains and losses are recognized in other comprehensive income. For equity investments at FVOCI, realized gains and losses are allocated directly to retained earnings.
4.51 Gain and losses on financial liabilities designated at FVTPL must be split into the amount of change in fair value attributable to changes in credit risk of the liability presented in other comprehensive income, and the remaining amount presented in profit or loss.
VI. Domestic and Foreign Currencies, Unit of Account, and Exchange Rate Conversion
4.52 Domestic currency is the one that is legal tender in the economy and issued by the monetary authority for that economy or for the common currency area to which the economy belongs.29 Any currencies that do not meet this definition are foreign currencies to that economy. Under this definition, an economy that uses as its legal tender a currency issued by a monetary authority of another economy—such as U.S. dollars—or of a currency area to which it does not belong should classify the currency as a foreign one, even though domestic transactions are settled in it.
4.53 In the Guide, the currency composition of assets and liabilities is determined primarily by characteristics of their currency of denomination. Foreign currency instruments are those denominated in a currency other than the domestic currency. Foreign-currency-linked instruments are those payable in domestic currency but with the amounts payable linked to a foreign currency and, therefore, are considered to be denominated in foreign currency. Domestic currency instruments are those denominated in the domestic currency and not linked to a foreign currency. In the instance of debt instruments with interest payable in a foreign currency, but principal payable in a domestic currency, or vice versa, only the present value of the amounts payable in a foreign currency should be classified as a foreign currency instrument.
4.54 From the perspective of the national compiler, the domestic currency unit is the obvious choice in which to calculate FSIs. Such data are compatible with the national accounts and most of the economy’s other economic and monetary statistics, which are expressed in that unit.
4.55 The calculation of FSIs can be complicated by the fact that transactions, other flows, and positions may be expressed initially in a variety of currencies or in other standards of value. Their conversion into a reference unit of account is a requisite for the construction of a consistent and analytically meaningful set of FSI statistics. Assets and liabilities shall be translated at the closing rate at the date of the financial statement position. Income and expenses presented in the income statement and other comprehensive income shall be translated at the exchange rate at the dates of the transactions. The most appropriate exchange rate to be used for conversion of position data denominated in foreign currency into the unit of account is the market (spot) exchange rate prevailing on the reference date to which the position relates. The midpoint between buying and selling rates is preferred to ensure consistency of approach among the reporting population.
4.56 For conversion of an instrument in a multiple rate system,30 the rate on the closing date of the actual exchange rate applicable to the specific liabilities or assets should be used. If this information is not available, the average rates for the shortest period applicable should be used. If only information on aggregated transactions over a period is available, then the average exchange rate over this period is a suitable proxy.
VII. Maturity
4.57 Maturity is relevant for financial stability analysis, both from a liquidity viewpoint (e.g., in calculating the value of liabilities falling due in the short term) and from an asset/liability mismatch perspective (e.g., in estimating the effect of changes in interest rates on profitability).31 In the Guide, short-term is defined as a maturity of three months or less.32
4.58 One approach is to determine the maturity classification of financial instruments on the basis of the time until repayments of principal (and interest) are due—known as remaining maturity (and sometimes referred to as residual maturity).33 Another approach uses the maturity at issuance—known as original maturity—thus indicating whether the funds were raised in the short-term or long-term markets. The Guide recommends calculating short-term liabilities based on residual maturity; if this information is unavailable, original maturity can be used as an alternative and should be noted in the metadata.
The accounting rules applied in national accounts are presented in the 2008 System of National Accounts (2008 SNA), paragraphs 2.43–2.72.
The 2008 SNA (paragraphs 2.21–2.35) provides a more complete definition of transactions and other flows.
Economic ownership is also referred to as beneficial ownership, as the holder retains claims to the risks and rewards of ownership. See Monetary and Financial Statistics Manual and Compilation Guide, paragraph 4.9.
In general, a change in legal ownership also involves a change in economic ownership. In some cases, however, a change of economic ownership takes place even though the legal ownership remains unchanged (e.g., financial leases). In other cases, there is no change in economic ownership, even though there is a change in legal ownership (e.g., repurchase agreements).
Control exists when an entity is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. See IFRS 10, paragraph 6.
IFRS allow the use of trade or settlement date for recognition of regular way sales and purchases (IFRS 9, paragraphs 3.1.1 and 3.1.2). If both parties use the same basis, then recognition and derecognition will occur simultaneously. However, if one party records on a trade date basis while the other party records on a settlement day basis, there will be a mismatch in their respective recognition and derecognition of the instrument.
See IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraphs 27–35.
Interest accrual on nonperforming assets is discussed in paragraph 5.15. In many countries supervisory standards prohibit recognition of accrued interest income on non-performing assets. Reflecting this, the Guide recommends that interest accrued on non-performing assets be credited to the provisions for accrual of interest on non-performing assets account rather than income. Only when interest is actually paid is the provision account reduced and the amount taken into income.
See IFRS 9, Appendix A.
Under IFRS, certain fees are treated as an integral part of the effective yield of a financial instrument, and hence affect the rate at which interest accrues.
One possibility is to calculate interest income as the amount the debtors will have to pay to their creditors over and above the repayment of the amounts advanced by the creditors. A second possibility is to define interest as the income that follows from applying, at any point in time, the discount rate of future receivables implicit in the instrument’s market value. Finally, a third alternative is to calculate interest as the income that follows from applying the discount rate implicit in the cost at which the instrument was acquired (see BPM6, paragraph 11.52).
It is recognized that, in some instances, arrears arise for operational reasons rather than due to a reluctance or inability to pay. Nonetheless, in principle, when outstanding at the reference date, they should be recorded as arrears.
There are often supervisory rules that restrict the ability to recognize arrears as income when a loan has been rescheduled, for example, requiring that a specified number of payments be made before the arrears can be extinguished. The Guide defers to supervisory requirements for the reporting of non-performing loans and the recognition of income on non-performing and rescheduled loans.
In the Guide, financial derivatives instruments, including credit derivatives, are actual—not contingent—positions. For a definition of financial derivatives, see Chapter 5, paragraphs 5.55–5.65.
The Financial Accounting Standards Board, which governs United States Generally Accepted Accounting Principles, has adopted a similar, but not identical approach, Current Expected Credit Losses, to become effective in 2020 for some banks, and more broadly in 2021. Early adoption is permitted from 2019.
For further details, see Basel II paragraphs 381–383.
See BCBC Regulatory treatment of accounting provisions— interim approach and transitional arrangements (March 2017).
See footnote 18.
See IFRS Conceptual Framework for Financial Reporting, paragraph 4.54.
There are options for adoption of an alternative method at time of recognition for some specific types of asset. See IFRS 9, paragraphs 4.1.4 and 5.7.5–5.7.6.
IFRS 9, Appendix A.
IFRS 13 Fair Value Measurement, paragraph 9.
See IFRS 13, paragraphs B5–B11.
See IFRS 13, paragraphs 72–90.
See IFRS 9, Initial Measurement Section 5.1.
IFRS 9, paragraph 5.1.1.
IFRS 9, paragraph B51.1.
See IFRS 9, paragraph 4.1.1.
A common currency area, or currency union, consists of more than one economy and has a regional central decision making body, usually a currency union central bank, with the authority to conduct a single monetary policy and to issue the legal tender of the area. To belong to this area, an economy must be a member of the decision making body (see BPM6, paragraph A3.9).
A multiple exchange rate system is one in which there are schedules of exchange rates, set by the authorities, and where different exchange rates are applied to various categories of transactions/transactors.
In the latter case, maturity may not capture the interest rate mismatch of some instruments if they have a repricing period that is shorter than the term to maturity. For example, a five-year bond with interest adjusted quarterly in relation to a reference rate would have a short-term maturity for interest rate risk analysis, but long-term maturity from the perspective of the timing of liabilities falling due.
For financial instruments, inter alia, this category includes amounts payable on demand and those debt instruments redeemable at short notice. There is no universal definition of short-term liabilities, with one year being another common definition. In line with the focus on financial stability, the Guide recommends three months or less as a maturity better suited to capturing in the FSIs liquid assets to total assets, and liquid assets to short term liabilities, the ability to deal with a short-term market disruption.
Strictly defined, the outstanding amount of short-term assets or liabilities on a remaining maturity basis is the present value of payments due in one year or less. In practice, the outstanding amount of short-term assets or liabilities on a remaining maturity basis can be measured by adding the present value of short-term debt (original maturity) to the present value of long-term debt (original maturity) to be paid in one year or less.