Consultation on the Prudential Treatment of Software Assets

Bank of Jamaica

CONSULTATION PAPER Guidance on the Prudential Treatment of Software Assets

1 Guidance on the Prudential Treatment of Software Assets for DTIs under Standard of Sound Practice – Pillar 1 – Minimum Capital Requirements for Licensees under the BSA (June 2022) This draft Guidance is available on Bank of Jamaica’s website at www.boj.org.jm Bank of Jamaica, May 2026. All rights reserved. No reproduction or translation of this publication may be made without the prior written permission of Bank of Jamaica. Applications for such permissions, for all or part of this publication, should be made to: Bank of Jamaica Nethersole Place, Kingston, Jamaica (Telephone 876- 922-0750-9; Fax 876-922-2519 or email fisdMailbox@boj.org.jm)

2 Table of Contents Introduction: ................................................................................................................................3 Purpose and Scope.......................................................................................................................3 Prudential Amortisation Requirement .........................................................................................4 Determination of “Available for Use” .........................................................................................5 Regulatory Capital Treatment......................................................................................................5 Treatment of Software-Related Expenditure ...............................................................................6 Non-eligible software assets........................................................................................................6 Governance and Risk Management Expectations.......................................................................7 Illustrative Example of the Prudential Treatment of a Software Asset........................................8

3 Introduction: This Guidance reflects the prudential principle that software assets, while capable of generating economic value, may not be readily realisable or loss-absorbing in periods of financial stress. Accordingly, an accelerated amortisation approach is adopted to ensure that regulatory capital remains prudent, consistent, and reflective of underlying risk. This approach reflects Bank of Jamaica’s objective of ensuring that the recognition of software assets for regulatory capital purposes remains prudent, risk-sensitive, and aligned with international best practices, while taking into account the characteristics of the domestic financial system. Purpose and Scope

1. Bank of Jamaica recognises that certain software assets may have value in supporting the operational resilience of a deposit-taking institution (DTI). However, such assets may also be subject to rapid technological obsolescence, impairment risk, and limited value in the event of stress or resolution. Accordingly, the prudential treatment set out in this Guidance is intended to ensure that the recognition of software assets for regulatory capital purposes remains conservative, transparent, and consistent across institutions.
2. This Guidance, which applies to all DTIs, sets out the supervisory expectations of Bank of Jamaica regarding the prudential treatment of software assets for the purposes of calculating regulatory capital under the forthcoming Capital Regulations and related Guidelines.
3. For the avoidance of doubt, and for the purposes of this Guidance, the prudential treatment set out in this Guidance applies only to software assets recognised as intangible assets in accordance with applicable accounting standards, including IAS 38 Intangible Assets that are: a. identifiable, measurable, and controlled by the institution; and b. expected to generate future economic benefits.
4. Software assets include, but are not limited to: a. internally developed software; b. purchased or licensed software; and c. capitalised development costs associated with system implementation.
5. This Guidance applies only to software assets that meet all of the following: a. The software asset must demonstrate ongoing operational value, including its ability to support the delivery of important business services, core banking functions, risk management, financial reporting, or regulatory compliance. The DTI must demonstrate that the software is not expected to be fully impaired, obsolete, or non￾functional over the relevant prudential amortisation period. b. The DTI must demonstrate that the software asset is not expected to be immediately written down or rendered unusable under conditions of stress, resolution, or operational disruption. In assessing this, Bank of Jamaica will consider: i. the software’s role in maintaining critical operations;

4 ii. the extent of reliance on the software for continuity of important business services; and iii. the institution’s ability to maintain, support, and operate the software under adverse conditions. c. The software asset must be recognised as an intangible asset in accordance with applicable accounting standards, including IAS 38 Intangible Assets. Where requested by Bank of Jamaica, the DTI must provide supporting documentation, including: i. capitalisation criteria and justification; ii. amortisation methodology and useful life assumptions; iii. impairment assessments; and iv. where applicable, documentation of the development phase for internally generated software. d. The software asset must not be recognised elsewhere in regulatory capital in a manner that would result in double counting, including within: i. goodwill; ii. deferred tax assets; or iii. any other component subject to deduction from regulatory capital. 6. The following items must not be treated as software assets for the purposes of this Guidance: a. goodwill; b. brands, customer relationships, or similar intangible assets; c. data assets or internally generated datasets; d. research expenditure; e. training costs; f. maintenance and support costs that are expensed; and g. any other intangible asset not directly attributable to identifiable software. 7. Costs associated with cloud computing arrangements, including configuration or customisation costs, must be treated in accordance with applicable accounting standards and should only fall within the scope of this Guidance where such costs are recognised as intangible software assets. 8. Software assets that do not meet the qualifying criteria under this Guidance must be fully deducted from CET1 capital. Prudential Amortisation Requirement 9. DTIs must apply a prudential amortisation to all software assets on a day￾by-day basis over a period of three (3) years. In that regard, prudential amortisation must be calculated on a daily basis using the actual number of days elapsed since the software asset became available for use, divided by the total number of days in the applicable amortisation period. The prudential amortisation formula is as follows:

5 𝑃𝑟𝑢𝑑𝑒𝑛𝑡𝑖𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑜𝑓𝑡𝑤𝑎𝑟𝑒 ∗ (1 − 𝐸𝑙𝑎𝑝𝑠𝑒𝑑 𝑑𝑎𝑦𝑠 1095 𝑑𝑎𝑦𝑠 ) 10. The amortisation period must commence from the date on which the software asset is available for use, consistent with applicable accounting standards. 11. The prudential amortisation requirement must apply irrespective of the useful life or amortisation period applied under accounting standards. 12. Where a software asset is impaired under applicable accounting standards, the accounting carrying amount after impairment must be used as the basis for determining the prudential treatment. In no case should the prudentially recognised value of a software asset exceed the carrying amount under applicable accounting standards. 13. Any impairment loss recognised must be fully reflected in the determination of: a. the accounting carrying amount; and b. the prudentially amortised value. 14. Where a software asset is retired, replaced, abandoned, or otherwise no longer expected to generate future economic benefits, the institution must immediately reflect the accounting treatment in its prudential calculation. 15. Where a software asset is fully derecognised for accounting purposes, no prudential value must be recognised. Determination of “Available for Use” 16. For the purposes of this Guidance, a software asset must be considered available for use when it is substantially complete and capable of operating in the manner intended by management. 17. The determination of this date must not be deferred solely on the basis that: a. the software has not reached full utilisation; or b. minor enhancements or post-implementation adjustments remain outstanding. 18. DTIs must maintain adequate documentation to support the determination of the date on which a software asset becomes available for use. Regulatory Capital Treatment 19. DTIs must calculate the prudential value of each software asset by applying the amortisation specified in paragraphs 9-16. 20. The amount to be deducted from Common Equity Tier 1 (CET1) capital must be determined as the difference between the carrying amount of the software asset under applicable accounting standards and its prudentially amortised value. 21. The remaining prudential value of the software asset must be: a. recognised as an on-balance sheet exposure; and b. assigned a 100 per cent (100%) risk weight for the purposes of calculating risk-weighted assets and be included under the “All Other Asset Category” of the reporting form.

6 22. The aggregate amount of software assets eligible for prudential recognition will be capped at 10% of CET1 capital requirements. Any amount exceeding the applicable cap will be deducted from CET1 capital. 23. Where the aggregate prudentially amortised value of a DTI’s software assets exceeds the Aggregate Cap, the amount by which it exceeds the threshold must be deducted from CET1 capital. This deduction is in addition to, and independent of, the asset-level CET1 deductions required under paragraph 20 of this Guidance, and applies irrespective of the prudential amortisation position of any individual software asset. 24. The Aggregate Cap serves as a system-wide supervisory backstop to limit excessive reliance on software assets in regulatory capital. It does not replace, and must be applied cumulatively with, the asset-level prudential amortisation and deduction requirements set out in this Guidance. Treatment of Software-Related Expenditure 25. Expenditure on software must be classified as follows: a. maintenance and support costs, which must be expensed and should not be recognised as software assets; b. enhancements or upgrades that are capitalised in accordance with applicable accounting standards. “Capitalised in accordance with applicable accounting standards” means expenditure that is recognised as an intangible asset on the balance sheet in accordance with applicable accounting standards, including IAS 38 Intangible Assets, and not expensed through profit or loss; and c. additions or modules that constitute distinct software assets. 26. Where expenditure gives rise to a separate identifiable software asset, a new prudential amortisation period may apply from the date that the asset becomes available for use. 27. Where expenditure enhances an existing software asset and is not separately identifiable: a. the cost may be added to the carrying amount of the existing asset; and b. the combined amount may be subject to prudential amortisation over the remaining amortisation period of the original asset. Non-eligible software assets 28. If a software-related item is not recognised as an intangible asset under applicable accounting standards, including IAS 38 Intangible Assets, such assets must not be eligible for the prudential software asset treatment under this Guidance and must be fully deducted from CET1 capital. 29. Where a software asset date of available for use exceeds three years, such assets must not be eligible for the prudential software asset risk weighted treatment under this Guidance and must be fully deducted from CET1 capital.

7 Governance and Risk Management Expectations 30. DTIs must ensure that: a. policies governing the recognition, amortisation, and impairment of software assets are clearly documented and approved by the board of directors; b. systems are in place to accurately track the date of availability for use, amortisation schedules, and carrying values; and c. appropriate controls are implemented to ensure consistency between accounting and prudential reporting. 31. DTIs must ensure that: a. the classification and treatment of software assets are subject to appropriate governance and oversight; b. the finance and information technology functions jointly validate the recognition and measurement of software assets; and c. internal audit periodically reviews compliance with this Guidance. 32. The DTI must demonstrate that the software asset is subject to robust governance and lifecycle management, including: a. formal policies governing development, acquisition, maintenance, and replacement; b. documented upgrade and replacement cycles; c. vendor support arrangements, where applicable; and d. controls to monitor performance, impairment indicators, and obsolescence risk. Interaction with Other Prudential Requirements 33. Any deferred tax assets arising from temporary differences associated with software assets must be treated in accordance with the applicable prudential requirements governing deferred tax assets. 34. The prudential treatment set out in this Guidance must not affect the application of other regulatory requirements unless expressly stated. Reporting, Record-Keeping and Disclosure Requirements 35. DTIs must maintain a software asset register containing, at a minimum, the description of the asset, date capitalised, date available for use, original cost, accumulated accounting amortisation, valuation methodology, accumulated prudential amortisation, accounting carrying amount, prudentially amortised value, CET1 deduction, amount subject to risk-weighting and any impairment recognised. 36. DTIs must ensure that the information in the software register is accurate, complete, and readily available for supervisory review, and appropriate systems and controls are in place to ensure consistency between accounting and prudential reporting. 37. The software asset register must be submitted to the Bank on an annual basis.

8 Transitional Arrangements 38. This Guidance must apply to all software assets recognised on or after the effective date of this Guidance. For software assets recognised prior to the effective date, DTIs must apply the prudential treatment based on the original date on which the asset became available for use. Illustrative Example of the Prudential Treatment of a Software Asset Assume that a deposit-taking institution acquires a software asset at a cost of J$12,000,000 and that the asset becomes available for use on 1 January 2026. For accounting purposes, the institution amortises the asset on a straight-line basis over 6 years. For prudential purposes, however, the asset must be amortised on a day-by-day basis over 3 years in accordance with the Guidance. Step 1: Determine annual amortisation under accounting standards The cost of the software asset is J$12,000,000, the accounting useful life is 6 years, and the annual accounting amortisation is J$2,000,000. Step 2: Determine annual prudential amortisation The cost of the software asset is J$12,000,000, the prudential amortisation period is 3 years, and the annual prudential amortisation is J$4,000,000. Step 3: Reporting position as at 31 December 2026 i. Accounting carrying amount, after one-year, accumulated accounting amortisation is J$2,000,000, so the accounting carrying amount is J$12,000,000 – J$2,000,000 = J$10,000,000. ii. Prudentially amortised value, after one year, accumulated prudential amortisation is J$4,000,000, so the prudential value is J$12,000,000 – J$4,000,000 = J$8,000,000. iii. Amount to be deducted from CET1 capital, which is the difference between the accounting carrying amount and the prudentially amortised value, is J$10,000,000 – J$8,000,000 = J$2,000,000 iv. Amount to be risk-weighted, which is the remaining prudential value of J$8,000,000, is then assigned a 100% risk weight. Step 4: Position as at 31 December 2027 i. Accounting carrying amount, after two years, accumulated accounting amortisation is J$2,000,000 × 2 = J$4,000,000. So, the accounting carrying amount is J$12,000,000 – J$4,000,000 = J$8,000,000. ii. Prudentially amortised value, after two years, accumulated prudential amortisation is J$4,000,000 × 2 = J$8,000,000. So, the prudential value is J$12,000,000 – J$8,000,000 = J$4,000,000. iii. Amount to be deducted from CET1 capital is J$8,000,000 – J$4,000,000 = J$4,000,000.

9 iv. The amount to be risk-weighted is the remaining J$4,000,000, which is assigned a 100% risk weight. Step 5: Position as at 31 December 2028 i. Accounting carrying amount, after three years, accumulated accounting amortisation is J$2,000,000 × 3 = J$6,000,000. So, the accounting carrying amount is J$12,000,000 – J$6,000,000 = J$6,000,000. ii. Prudentially amortised value, after three years, the software is fully prudentially amortised, which is J$12,000,000 – J$12,000,000 = J$0. iii. Amount to be deducted from CET1 capital is J$6,000,000 – J$0 = J$6,000,000. iv. Amount to be risk-weighted will be zero since the prudential value is now nil; there is no remaining amount to be risk-weighted.