Accounting Treatment of Securities Company Financing Transactions

To:

1. Board of Directors and Board of Commissioners of Securities Companies;
2. Board of Directors of the Indonesia Stock Exchange (PT Bursa Efek Indonesia);
3. Board of Directors of the Indonesia Stock Exchange Clearing and Guarantee Corporation (PT Kliring Penjaminan Efek Indonesia);
4. Board of Directors of the Indonesia Central Securities Depository (PT Kustodian Sentral Efek Indonesia);
5. Indonesia Securities Company Association (Asosiasi Perusahaan Efek Indonesia);
6. Indonesia Investment Manager Association (Asosiasi Manajer Investasi Indonesia);
7. Financial Services Sector Accountant Forum (Forum Akuntan Sektor Jasa Keuangan); and
8. Institute of Public Accountants of Indonesia (Institut Akuntan Publik Indonesia).

At your location.

COPY
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY REPUBLIC OF INDONESIA NUMBER 25 /SEOJK.04/2022 CONCERNING ACCOUNTING TREATMENT OF SECURITIES COMPANY FINANCING TRANSACTIONS

In order to implement the mandate of Article 5 paragraph (3) of Financial Services Authority Regulation Number 20/POJK.04/2021 concerning the Preparation of Financial Statements of Securities Companies (State Gazette of the Republic of Indonesia Year 2021 Number 223, Supplement to the State Gazette of the Republic of Indonesia Number 6725), in conjunction with Financial Services Authority Circular Letter Number 25/SEOJK.04/2021 concerning Guidelines for Accounting Treatment of Securities Companies, and in order to provide clarity and legal certainty as well as guidelines for securities companies regarding the accounting treatment of securities company financing transactions, it is necessary to regulate the accounting treatment of securities company financing transactions as follows:

I. GENERAL PROVISIONS

1. In this Financial Services Authority Circular Letter, the following terms are defined:
   a. Securities Company is a party that conducts business activities as an underwriter of securities, securities broker, and/or investment manager. b. Securities are securities instruments, namely debt acknowledgment instruments, commercial paper, shares, bonds, debt certificates, Unit Trusts of Collective Investment Contracts, futures contracts on Securities, and any derivatives of Securities.
   c. Financing Transaction is a repurchase agreement transaction, securities lending/borrowing transaction, margin transaction, and short selling transaction, conducted by a Securities Company.
   d. Securities Lending/Borrowing Transaction, hereinafter referred to as PME Transaction, is a securities lending/borrowing activity between the owner of the Securities as the lender and the party requiring the Securities as the borrower, with collateral (guarantee) in the form of funds, Securities, and/or other financial instruments. e. Repurchase Agreement Transaction, hereinafter referred to as Repo Transaction, is a contract to sell or buy Securities with a promise to buy back or sell back at a predetermined time and price. f. Margin Transaction is a transaction to purchase Securities for the benefit of clients, financed by the Securities Company. g. Short Selling Transaction is a transaction to sell Securities where the Securities are not owned by the seller at the time the transaction is executed. h. Financial Accounting Standards, hereinafter abbreviated as SAK, are statements and interpretations issued by the Financial Accounting Standards Board of the Indonesian Accountants Association and the Sharia Financial Accounting Standards Board of the Indonesian Accountants Association, as well as regulations in the field of capital markets for entities conducting capital market activities.

2. Transferred Financial Assets
   Transferred financial assets in Financing Transactions include:
   a. Underlying assets of the transaction

1. Securities lent in PME Transactions;
2. Securities repurchased in Repo Transactions; and
3. Securities pledged (collateralized) in Margin Transactions.
   b. Collateral (guarantee) in the form of Securities Securities pledged (collateralized) in transactions within the scope of the definition of Financing Transactions in these provisions, which involve the transfer of Securities as collateral (guarantee).

3. Party transferring financial assets (transferor)
   a. The party transferring financial assets (transferor) is the party that hands over transferred financial assets to the party receiving transferred financial assets (transferee) in Financing Transactions. b. The party transferring financial assets includes:

1. the lender in PME Transactions;
2. the seller in Repo Transactions; and
3. the party handing over Securities pledged (collateralized) in Margin Transactions and/or Financing Transactions involving the transfer of Securities as collateral (guarantee).

4. Party receiving transferred financial assets (transferee)
   a. The party receiving transferred financial assets (transferee) is the party that receives transferred financial assets from the party handing over transferred financial assets (transferor) in Financing Transactions. b. The party receiving transferred financial assets includes:

1. the borrower in PME Transactions;
2. the buyer in Repo Transactions; and
3. the party receiving Securities pledged (collateralized) in Margin Transactions and/or Financing Transactions involving the transfer of Securities as collateral (guarantee).

II. APPLICATION OF ACCOUNTING TREATMENT FOR FINANCING TRANSACTIONS

1. Securities Companies conducting Financing Transactions must apply the accounting treatment provisions as regulated in this Financial Services Authority Circular Letter.
2. In applying the accounting treatment provisions for Financing Transactions as regulated in this Financial Services Authority Circular Letter, Securities Companies must also observe the principles regulated in SAK.
3. In the event that there is accounting treatment regarding Financing Transactions not regulated in this Financial Services Authority Circular Letter, such unregulated accounting treatment must follow SAK.
4. In the event that there are changes to SAK and/or new SAK after the implementation of this Financial Services Authority Circular Letter, the accounting treatment for Financing Transactions by Securities Companies must follow the latest SAK provisions, unless otherwise stated by the Financial Services Authority.

III. ACCOUNTING TREATMENT FOR TRANSFERRED FINANCIAL ASSETS

1. Derecognition Test for Transferred Financial Assets.
   a. In Financing Transactions, the treatment of transferred financial assets transacted is first subject to a derecognition test for transferred financial assets in accordance with the applicable SAK. b. In the event that, based on the test results, the transfer of transferred financial assets does not meet the qualification for derecognition:

1. the transferred financial assets remain recognized by the party transferring the financial assets;
2. the party receiving the transferred financial assets does not recognize the financial assets in its financial position report, but documents and discloses the receipt of the transfer of such financial assets; and
3. the party transferring the financial assets:
   a) reclassifies the transferred financial assets in its financial position report separately from other assets as regulated in the Financial Services Authority Circular Letter concerning guidelines for accounting treatment of Securities Companies, if the party receiving the transferred financial assets has the right to transfer such financial assets to a third party; or b) continues to present the transferred financial assets as regulated in the Financial Services Authority Circular Letter concerning guidelines for accounting treatment of Securities Companies, if the party receiving the transferred financial assets does not have the right to transfer such financial assets to a third party.
   c. In the event that, based on the test results, the transfer of transferred financial assets meets the qualification for derecognition, such transfer is treated in accordance with the applicable SAK.

2. Measurement of transferred financial assets that do not meet the qualification for derecognition.
   a. The party transferring financial assets conducts a test to determine the classification of financial assets in accordance with the applicable SAK, both before and after the transfer. b. The transfer of financial assets that does not meet the qualification for derecognition does not always cause a change in the classification of such transferred financial assets from what was previously determined.
   c. Changes in classification of financial assets as referred to in letter b are still determined based on tests in accordance with the applicable SAK.
   d. The party transferring financial assets recognizes changes in the value of transferred financial assets based on the classification of such financial assets.

3. Offset of transferred financial assets
   In the event that transferred financial assets remain recognized by the party transferring the financial assets:
   a. transferred financial assets and related financial liabilities are not offset; and b. no offset is performed between income arising from transferred financial assets and expenses arising from related liabilities.

IV. ACCOUNTING TREATMENT FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES ARISING FROM FINANCING TRANSACTIONS

1. Securities Companies recognize financial assets or financial liabilities arising from Financing Transactions in the financial position report when they become a party to the contractual provisions of such instruments.
2. At initial recognition, financial assets or financial liabilities arising from Financing Transactions are classified and measured in accordance with the applicable SAK.
3. At subsequent measurement, Securities Companies measure financial assets or financial liabilities arising from Financing Transactions based on the classification of such financial assets or financial liabilities in accordance with the applicable SAK.
4. In the event that Securities Companies intend to offset financial assets and financial liabilities arising from Financing Transactions and present their net value in the financial position report, such Securities Companies conduct a test to determine that such offset meets the requirements in accordance with the applicable SAK.

V. ACCOUNTING TREATMENT FOR INCOME FROM FINANCING TRANSACTIONS

1. In determining the accounting treatment for income from Financing Transactions where the transferred financial assets do not meet the qualification for derecognition, Securities Companies first identify the Financing Transaction contract to determine the scope of appropriate accounting treatment for income in accordance with the applicable SAK.
2. Based on the results of such identification, income arising from Financing Transaction contracts is recognized and measured in accordance with the applicable SAK.
   a. In the event that, based on the identification of Financing Transaction contracts, such income meets the interest element:

1. the party recognizing the arising financial assets as referred to in number IV recognizes and calculates interest income in accordance with the applicable SAK; and
2. the party recognizing the arising financial liabilities as referred to in number IV recognizes and calculates interest expenses in accordance with the applicable SAK.
   b. In the event that, based on the identification of Financing Transaction contracts, such income does not meet the interest element:
3. the party recognizing the arising financial assets as referred to in number IV recognizes commission income in accordance with the applicable SAK; and
4. the party recognizing the arising liabilities as referred to in number IV recognizes commission expenses in accordance with the applicable SAK.

VI. ACCOUNTING TREATMENT FOR BENEFITS FROM TRANSFERRED FINANCIAL ASSETS

1. In the event that benefits arise from transferred financial assets, such as income paid by Securities issuers, the party that is the ultimate recipient/owner of the benefits from transferred financial assets according to the derecognition test at initial recognition, recognizes such benefits as income.
2. In the event that benefits from transferred financial assets are to be paid by the party receiving transferred financial assets to the party transferring financial assets, the party transferring financial assets is the ultimate recipient/owner of the benefits from transferred financial assets, including if there is a delay in payment by the party receiving transferred financial assets for benefits from financial assets already received by the party receiving transferred financial assets from the Securities issuer.

VII. ACCOUNTING TREATMENT FOR TRANSFERRED FINANCIAL ASSETS TRANSACTED AGAIN BY THE PARTY RECEIVING TRANSFERRED FINANCIAL ASSETS AND SALE OF FINANCIAL ASSETS NOT YET OWNED

1. Repo Transactions or PME Transactions over transferred financial assets
   In the event that the party receiving the transfer of financial assets that do not meet the derecognition qualification conducts Repo Transactions or PME Transactions over the transferred financial assets received by them to third parties as permitted by regulations, the party receiving the transfer of such financial assets must comply with relevant accounting treatment provisions as a party transferring financial assets as regulated in this Financial Services Authority Circular Letter.

2. Sale of Transferred Financial Assets or Financial Assets Not Yet Owned
   a. In the event that there are conditions:

1. Securities Companies as the party receiving transferred financial assets that do not meet the derecognition qualification, sell such transferred financial assets to third parties as permitted by regulations; and/or
2. Securities Companies sell financial assets not yet owned,
   Securities Companies conducting such sales must recognize the arising financial liabilities which are obligations to deliver back financial assets and present them as regulated in the Financial Services Authority Circular Letter concerning guidelines for accounting treatment of Securities Companies. b. The party conducting sales as referred to in letter b determines the classification and measures such financial liabilities in accordance with the applicable SAK.

VIII. ACCOUNTING TREATMENT FOR COLLATERAL (GUARANTEE) IN THE FORM OF CASH (FUNDS)

1. In the event that there is the handover of collateral (guarantee) in the form of cash (funds), the recognition of the receipt of cash (funds) by the party receiving collateral (guarantee) observes the applicable SAK provisions regarding the derecognition test for cash (funds) by the party transferring.
2. In the event that, based on the derecognition test results:
   a. the transferred cash (funds) is not derecognized by the party transferring:

1. the party receiving the transfer of cash (funds) does not recognize such cash (funds) as an asset, but continues to document and disclose the receipt of such transfer of cash (funds); and
2. the party transferring cash (funds) recognizes such cash (funds) as collateral (guarantee) and reclassifies such cash (funds) in its financial position report separately from other assets; or
   b. the transferred cash (funds) is derecognized by the party transferring:
3. the party receiving the transfer of cash (funds) recognizes the received cash (funds) as an asset and recognizes the arising financial liabilities as debts; and
4. the party transferring cash (funds) derecognizes such cash (funds) and recognizes the arising financial assets as receivables.

IX. DISCLOSURE

1. Disclosure of Transferred Financial Assets
   In the event that, based on the derecognition test results, the transfer of financial assets does not meet the qualification for derecognition:
   a. the party transferring financial assets discloses the basis used in determining the presentation or reclassification of transferred financial assets; and b. the party receiving transferred financial assets discloses the details of the type and amount of such transferred financial assets in the financial assets or financial liabilities positions arising from Financing Transactions. Specifically for PME Transactions, the party receiving transferred financial assets (borrower) discloses the details of the type and amount of transferred financial assets received by them in the financial assets position arising from the recording of collateral (guarantee) provided to the party transferring financial assets (lender).

2. Disclosure of Collateral (Guarantee) in the Form of Cash (Funds).
   a. In the event that there is the transfer of cash (funds) as collateral (guarantee), the party receiving the transfer of cash (funds) and the party transferring cash (funds) disclose the basis for consideration that such transfer of cash (funds) meets or does not meet the qualification for derecognition of such cash (funds). b. In the event that the transfer of cash (funds) as collateral (guarantee) is not derecognized by the party transferring cash (funds), the party receiving cash (funds) must disclose the receipt of such cash (funds) in the position related to Financing Transactions involving the transfer of cash (funds) as collateral (guarantee).

3. Additional Disclosure for Repo Transactions
   The party receiving the transfer of Securities (buyer) and/or the party transferring Securities (seller) discloses among others:
   a. in accounting policies, among others:

1. the type of Repo Transactions and margin maintenance methods; and
2. accounting policies regarding the margin maintenance methods applied; and
   b. in the financial assets or financial liabilities positions arising from Repo Transactions, the amount of benefits received from Securities issuers is disclosed, if there are benefits received from Securities issuers during the Repo Transaction period, including accrued income calculated into the repurchase price in buy/sale back transactions.

4. Additional Disclosure for Margin Transactions and/or Short Selling Transactions with Financing from Securities Financing Institutions.
   In the other short-term liabilities position, disclose:
   a. the amount of facilities from Securities Financing Institutions and the amount of facilities utilized; b. requirements to be met, such as specific ratios; and
   c. the repayment time.

5. Disclosure related to failure events.
   In the event that failure events occur regarding Financing Transactions as regulated by regulations, both parties in Financing Transactions disclose among others:
   a. information regarding transactions that failed, including the type, amount, and value of transferred financial assets that must be delivered by or to the party causing the failure; b. the cause of the failure event;
   c. the reference used in measuring transferred financial assets;
   d. the date of measuring transferred financial assets; and e. the amount of funds to be delivered or received, separated between principal transaction payments and failure compensation. Principal transaction payments are settlements of Financing Transactions terminated due to failure events outside of failure compensation.

This copy is consistent with the original
Legal Director 1
Legal Department signed
Mufli Asmawidjaja

X. ACCOUNTING TREATMENT FOR OTHER MATTERS
Accounting treatment for other matters determined based on agreements, such as the settlement of failure events, refers to the applicable SAK.

XI. CLOSING
The provisions in this Financial Services Authority Circular Letter take effect on the date of establishment.

Established in Jakarta on December 12, 2022
EXECUTIVE HEAD
CAPITAL MARKET SUPERVISOR
FINANCIAL SERVICES AUTHORITY
REPUBLIC OF INDONESIA, signed
INARNO DJAJADI