FINMA Circular 2020/1 Accounting – Banks

Laupenstrasse 27 3003 Bern Tel. +41 (0)31 327 91 00 Fax +41 (0)31 327 91 01 www.finma.ch Circular 2020/1 Accounting – Banks Accounting regulations for banks, securities houses, financial groups and conglomerates Reference: FINMA-Circular 20/1 "Accounting – Banks" Issued: 31 October 2019 Entry into force: 1 January 2020 Last amendment: 4 November 2020 [Amendments are marked with * and listed at the end of the document] Concordance: formerly FINMA-Circular 15/1 "Accounting Banks" of 27 March 2014 Legal basis: FINMA Act Art. 7 para. 1 lit. b Banking Act Art. 6 ff. Banking Ordinance Art. 25 ff. Financial Institutions Act Art. 48 Financial Institutions Ordinance Art. 72 FINMA Accounting Ordinance (RelV-FINMA) in its entirety Annex 1: Details on the individual items of the balance sheet and off-balance sheet items Annex 2: Details on the individual items of the income statement Annex 3: Presentation of the equity statement Annex 4: Details on the individual items of the notes to the annual accounts / consolidated accounts Annex 5: Presentation of the cash flow statement

Addressees Banking Act (BankG) Insurance Supervision Act (VAG) Financial Institutions Act (FINIG) Financial Market Infrastructure Act (FinfraG) Collective Investment Schemes Act (KAG) Anti-Money Laundering Act (GwG) Others

Participants Banks Financial groups and conglomerates Other intermediaries Insurers Insurance groups and conglomerates Intermediaries Asset managers Trustees Managers of collective investment schemes Fund management Custodial securities houses Non-custodial securities houses Trading venues Central counterparties Central securities depositories Transaction registers Payment systems

SICAV KmG for KKA SICAF Custodian banks Representatives of foreign KKA Other intermediaries Self-regulatory organizations (SRO) SRO-supervised entities Audit firms Rating agencies X

Table of Contents 2/54 I. Subject matter and scope II. Recognition A. Other financial instruments measured at fair value B. Financial investments C. Structured products D. Hedging relationships E. Property, plant and equipment F. Impairment allowances for credit risks a) Treatment of overdue interest b) Option for the treatment of loans with frequent and high fluctuations G. Liabilities H. Provisions III. Statutory individual financial statement with reliable presentation A. Consistency in presentation and measurement B. Hidden reserves C. Impairment allowances for credit risks D. Provisions E. Reserves for general banking risks F. Employee share plans IV. Statutory individual financial statement True and Fair View A. Consistency in presentation and measurement B. Employee share plans V. Additional individual financial statement True and Fair View VI. Consolidated accounts VII. Transitional provisions Rz 1-2 3-26 3-4 5 6-9 10-11 12-13 14-20 14-15 16-20 21-22 23-26 27-38 27 28-30 31 32 33-36 38 39-40 39 40 41-43 44 45

3/54 I. Subject matter and scope This circular refers to the regulations on bookkeeping and accounting in Title 32 of the Code of Obligations (Art. 957–963b OR; SR 220) as well as the Banking Act of 8 November 1934 (Art. 6–6b BankG; SR 952.0), the Banking Ordinance of 30 April 2014 (Art. 25–42 BankV; SR 952.02) and the FINMA Accounting Ordinance of 31 October 2019 (RelV-FINMA; SR 952.024.1) and contains the corresponding booking and disclosure practice. Together with the accounting regulations of the Banking Act, the Banking Ordinance and the RelV-FINMA, it forms the accounting regulations for institutions according to Art. 1 para. 1 RelV-FINMA. These are equated to an accepted standard for accounting according to the Ordinance of 21 November 2012 on accepted accounting standards (Art. 2 para. 1 VASR; SR 221.432). The circular is addressed to banks according to Art. 1a BankG, securities houses according to Art. 2 lit. e and Art. 41 of the Financial Institutions Act of 15 June 2018 (FINIG; SR 954.1) as well as to financial groups and financial conglomerates according to Art. 3c para. 1 and 2 BankG. In the following, banks, securities houses, financial groups and financial conglomerates are summarized under the term "institutions", financial groups and financial conglomerates additionally under the term "financial groups".

II. Recognition A. Other financial instruments measured at fair value (Art. 15 RelV-FINMA) Changes in value and any interest accruals of financial instruments, which are measured at fair value using the fair value option, are recorded in item 3 "Income from trading business and fair value option" and disclosed in the corresponding annex. Any effects of a change in the entity's own creditworthiness on the fair value after initial recognition can be recorded in the clearing account.

B. Financial investments (Art. 16 RelV-FINMA) For debt instruments intended to be held to maturity, impairment-related value changes are recognized immediately to item 1.6 "Changes in impairment allowances for credit risks and losses from interest business".

C. Structured products (Art. 18 RelV-FINMA) The accounting and valuation principles established by the institution contain information on the treatment of structured products. The structured products are recognized as follows:

4/54 • Assets from structured products: Structured products whose valuation is based on the fair value option are recorded in item 1.8 "Other financial instruments measured at fair value". For structured products that are valued separately and individually, the underlying instrument is recorded according to the type of underlying instrument and the derivative in item 1.7 "Positive replacement values of derivative financial instruments" or item 2.5 "Negative replacement values of derivative financial instruments". A joint recording in the item of the underlying instrument is permitted. • Obligations from structured products: The structured products issued by the institution, whose valuation is based on the fair value option, are recorded in item 2.6 "Obligations from other financial instruments measured at fair value". For structured products issued by the institution that are valued separately and individually, the underlying instrument is recorded according to the type of underlying instrument and the derivative in item 1.7 "Positive replacement values of derivative financial instruments" or item 2.5 "Negative replacement values of derivative financial instruments". A joint recording in the item of the underlying instrument is permitted.

D. Hedging relationships (Art. 19 RelV-FINMA) The results from hedging transactions are recorded in the same item of the income statement as the corresponding results from the underlying business. In the case of macro hedges in the interest business, the balance can be recorded either in item 1.1 "Interest and discount income" or in item 1.4 "Interest expense". Accrued interest on hedging transactions, which are recorded in the income statement using the accrual method, are not booked as prepaid expenses, but in the clearing account (in item 1.14 "Other assets" or item 2.10 "Other liabilities") to avoid double counting with already balance-sheeted replacement values. If the effect of the hedging transactions exceeds the effect of the underlying business, the exceeding part of the derivative financial instrument is treated as a trading transaction. The recording of the exceeding part is thus in item 3 "Income from trading business and fair value option" and not in the clearing account.

E. Property, plant and equipment (Art. 20 RelV-FINMA) Software developed by the institution itself is balance-sheeted under item 1.12 "Property, plant and equipment", provided the conditions for the activation of self-developed intangible assets (see Art. 22 RelV-FINMA) are met mutatis mutandis. The depreciation methods and the applied ranges for the intended useful life per category of property, plant and equipment are disclosed in the annex. If the ranges are relatively large, they are explained per category in the annex. If a depreciation method fixed once is replaced by another, this is disclosed in the annex. The material effects of the method change on the period's profit are quantified for each asset category.

5/54 If a depreciation method fixed once is replaced by another, this is disclosed in the annex. The material effects of the method change on the period's profit are quantified for each asset category.

F. Impairment allowances for credit risks a) Treatment of overdue interest (Art. 26 RelV-FINMA) Future accruing interest and credit commissions, which are considered part of interest, and are overdue, are no longer credited to income item 1.1 "Interest and discount income" until no overdue interest is outstanding for more than 90 days. A retroactive cancellation of interest income is not mandatory. If not cancelled retroactively, the claims from the interest accrued up to the expiry of the 90-day period (due, unpaid interest and accrued forward interest) are impaired via item 1.6 "Changes in impairment allowances for credit risks and losses from interest business". A different treatment of overdue interest deviating from the period is specified in the annex in the accounting and valuation principles established by the institution. The overdue interest is determined on a gross basis. The interest impairments that became available in another reporting period are recorded via income item 1.6 "Changes in impairment allowances for credit risks and losses from interest business".

b) Option for the treatment of loans with frequent and high fluctuations (Art. 24 RelV-FINMA) For loans (with corresponding credit limits) for which a risk provision is necessary and whose utilization typically undergoes frequent and high fluctuations (e.g., current account credits), the following option for recognition exists: • The initial and subsequent formation of the risk provision takes place collectively (i.e., impairment allowances for the effective utilization and provisions for the unused credit limit) via item 1.6 "Changes in impairment allowances for credit risks and losses from interest business". • In case of changes in utilization, a profit-neutral reclassification between impairment allowances and provisions is made and disclosed accordingly in item 16 "Presentation of impairment allowances and provisions as well as reserves for general banking risks and their changes during the reporting year". • Releases of available impairment allowances or provisions also take place via item 1.6 "Changes in impairment allowances for credit risks and losses from interest business". If this option is used, this is recorded in the accounting and valuation principles established by the institution.

6/54 G. Liabilities (Art. 27 RelV-FINMA) For liabilities that have an issue value which is lower or higher than the nominal value (discount or premium), the difference amount is recorded under gross booking in item 1.10 "Active prepaid expenses" or item 2.9 "Passive prepaid expenses". In both gross and net booking, the discount is amortized until the final maturity of the liability via item 1.4 "Interest expense" using the accrual method. The booking of the premium is applied mutatis mutandis.

H. Provisions (Art. 28 RelV-FINMA) The formation of provisions and the profit-effective (partial) release of provisions no longer required is recorded as follows: • Tax provisions via item 12 "Taxes"; • Pension provisions and restructuring provisions related to personnel expenses via item 5.1 "Personnel expenses"; • Other provisions via item 7 "Changes in provisions and other impairment allowances and losses".

III. Statutory individual financial statement with reliable presentation A. Consistency in presentation and measurement (Art. 37 RelV-FINMA) If errors from previous periods are discovered in a reporting period, the correction is made profit-effectively in the reporting period according to Art. 37 RelV-FINMA via the regular items of the income statement. The correction via item 10 "Extraordinary expenses" or item 9 "Extraordinary income" is permissible for business transactions unrelated to operations. If the amount of the error correction is material, the reason for the error is explained in the annex and the effects are specified quantitatively.

B. Hidden reserves (Art. 38 RelV-FINMA) Hidden reserves in item 2.11 "Provisions" are shown in item 16 "Presentation of impairment allowances and provisions as well as reserves for general banking risks and their changes during the reporting year" in the annex under the sub-item "Other provisions".

7/54 Reclassifications of hidden reserves into reserves for general banking risks are disclosed accordingly in item 16 "Presentation of impairment allowances and provisions as well as reserves for general banking risks and their changes during the reporting year" in the annex. An upward revaluation of participations or property, plant and equipment up to the acquisition cost is specified and justified in the notes to the annual accounts.

C. Impairment allowances for credit risks (Art. 42 RelV-FINMA) It is possible to waive the profit-effective release of impairment allowances no longer required. These thus represent hidden reserves and are transferred profit-neutral to item 2.11 "Provisions" or item 2.12 "Reserves for general banking risks" (reclassification). This allocation is disclosed accordingly in item 16 "Presentation of impairment allowances and provisions as well as reserves for general banking risks and their changes during the reporting year" in the annex.

D. Provisions (Art. 43 RelV-FINMA) It is possible to waive the release of provisions no longer required, which were previously funded to income item 7 "Changes in provisions and other impairment allowances and losses" or according to Rz 17 and 18. These thus represent hidden reserves and are treated accordingly (conversion and disclosure in item 16 "Presentation of impairment allowances and provisions as well as reserves for general banking risks and their changes during the reporting year" in the sub-item "Other provisions") or transferred profit-neutral to item 2.12 "Reserves for general banking risks" (reclassification). This allocation is disclosed accordingly in item 16 "Presentation of impairment allowances and provisions as well as reserves for general banking risks and their changes during the reporting year" in the annex.

E. Reserves for general banking risks (Art. 46 RelV-FINMA) Reserves for general banking risks are recorded: • Via item 11 "Changes in reserves for general banking risks"; • due to a reclassification of previously economically necessary impairment allowances and provisions, insofar as these were formed to item 7 "Changes in provisions and other impairment allowances and losses"; or • by means of reclassification of hidden reserves in item 2.11 "Provisions".

8/54 If the impairment allowances and provisions newly no longer required in an accounting period are used in the same accounting period for the formation of reserves for general banking risks (reclassification), this is disclosed accordingly in item 16 "Presentation of impairment allowances and provisions as well as reserves for general banking risks and their changes during the reporting year" in the annex.

F. Employee share plans (Art. 49 RelV-FINMA) Any differences upon settlement are booked via item 5.1 "Personnel expenses".

IV. Statutory individual financial statement True and Fair View A. Consistency in presentation and measurement (Art. 51 RelV-FINMA) Rz 27 regarding consistency in presentation and measurement applies mutatis mutandis to the statutory individual financial statement True and Fair View.

B. Employee share plans (Art. 63 RelV-FINMA) Rz 38 regarding the treatment of any differences upon settlement of employee share plans applies mutatis mutandis to the statutory individual financial statement True and Fair View.

V. Additional individual financial statement True and Fair View (Art. 77 RelV-FINMA) Concealed contributions from participants are recorded in the "Capital reserve". They arise when own capital shares are acquired below fair value or when own capital shares are sold in the context of a resale at a price above fair value, or if a participant or an affiliated company provides money or other goods or services without the institution providing a counter-performance or if this counter-performance is smaller than the fair value of the received service. No adjustment is necessary for normal capital increases with an issue price below the current fair value, as long as the incoming funds are recorded themselves at fair value. Concealed contributions to participants are charged to the item "Capital reserve". They arise when own capital shares are acquired above fair value or sold below fair value, or if goods or services are provided to the participant or an affiliated company without the institution receiving a counter-performance or if this counter-performance is smaller than the fair value of the given service.

9/54 VI. Consolidated accounts (Art. 95 RelV-FINMA) Rz 41–43 regarding the treatment of transactions with participants apply mutatis mutandis to the consolidated accounts.

VII. Transitional provisions The formation of impairment allowances for credit risks as well as provisions for credit risks of off-balance sheet items can also be done according to FINMA-Circular 15/1 "Accounting Banks" for the financial year 2020.

Annex 1 Details on the individual items of the balance sheet and off-balance sheet items 10/54 The following explanations on the content of the individual items cover the essential elements. The list of elements to be included is not exhaustive.

Pos. 1 Assets Pos. 1.1 Liquid funds • current Swiss coins and banknotes, without numismatics; • foreign currencies, insofar as they are freely convertible into Swiss Francs; • credits at post offices abroad, provided the credits have an unlimited guarantee of the respective state and are freely transferable; • current account credits at the Swiss National Bank; • current account credits at clearing centers recognized by FINMA; • sight deposits at a foreign central bank; • clearing credits of foreign branches at a recognized clearing bank of the respective country.

Pos. 1.2 Claims against banks • all claims against banks, insofar not to be shown under another item; • claims against custodial securities houses according to FINIG; • claims against central banks, clearing institutions and foreign post offices, insofar they are not to be shown under item 1.1; • due, unpaid interest; • delivery claims from precious metal credits against banks outside the trading business; • commercial bills of exchange, if the drawee is a bank; • own bills of exchange to the order of the bank (mere security bills are excluded); • checks, if the drawer is a bank.

Pos. 1.3 Claims from securities financing transactions • Claims from cash collateral in connection with securities borrowing and reverse repurchase transactions.

Pos. 1.4 Claims against customers • All claims against non-banks, insofar not to be shown under another item; • mortgage-secured claims in the form of current account credits, including construction loans before consolidation and operating credits; 9.1*

Annex 1 Details on the individual items of the balance sheet and off-balance sheet items 11/54 • Claims of the institution as lessor in the context of financial leasing, without real estate financing; • Delivery claims from precious metal credits against customers, outside the trading business; • due, unpaid interest; • commercial bills of exchange, if the drawee is not a bank; • checks, if the drawer is not a bank.

Pos. 1.5 Mortgage claims • Direct and indirect real estate claims in the form of loans against real estate coverage (pledge or security transfer of real estate titles); • Land loans in the form of loans and fixed advances; • Real estate financial leasing; • due, unpaid interest.

Pos. 1.6 Trading business All held in the context of the trading business and owned by the institution • Debt securities, money market papers / transactions; • Participation securities; • Physical and account-held precious metals and commodities; • Cryptocurrencies; • Other trading assets.

Pos. 1.7 Positive replacement values of derivative financial instruments • Positive replacement values of all derivative financial instruments open on the balance sheet date from own and customer business (regarding offsetting see Art. 8 para. 2 lit. d RelV-FINMA), regardless of the profit-effective treatment, for example of hedging transactions.

The following principles apply to the balance sheet recording of replacement values from customer business: Replacement values of derivative financial instruments from customer business are balance-sheeted if the institution can incur a risk during the remaining term of the contract if the customer on the one hand or the other counterparty (exchange, exchange member, issuer of the instrument, broker, etc.) on the other hand can no longer comply with any obligations. From this principle, the following rules are derived: • Over-the-counter contracts (OTC):

12/54 • Institution as commission agent: The replacement values from commission transactions are generally balance-sheeted, unless the institution discloses the counterparty to the customer by name. In this case, the institution only bears a credit risk if the contract represents a loss for the customer. Consequently, only such positive replacement values are balance-sheeted. The corresponding negative replacement values, i.e., the profit of the counterparty with which the institution trades in its own name for third-party accounts, serve as the contra-entry. If, however, the contract represents a profit for the customer, the transaction is not balance-sheeted. If an institution is technically unable to make these distinctions, all replacement values from commission transactions are balance-sheeted. The institution records in the accounting and valuation principles according to which principles it records replacement values from commission transactions. • Institution as principal: Replacement values are balance-sheeted. • Institution as broker: Replacement values are not balance-sheeted. • Exchange-traded contracts Institution as commission agent: Replacement values are generally not balance-sheeted, unless the accumulated daily loss (variation margin) is exceptionally not covered by the effectively deposited margin.