Adoption of the Accounting Rule Regarding Employee Rights in the United States

Bank of Israel
Supervisor of Banks
Policy Department of Supervision and Regulation Fax: 03-5661110 Tel: 03-5640520 528 P.O.B., Tel Aviv-61004

1 Iyar 5774
April 9, 2014
Circular No. 06-2416 - 8

To:
Banking Corporations and Credit Card Companies

Subject: Adoption of the Accounting Rule Regarding Employee Rights in the United States (Reporting Requirements)

Introduction

1. Given the importance of accounting treatment for employee benefits in the banking sector, it has been decided to align the accounting treatment of employee benefits in banking institutions with the accepted accounting rules in the United States.

2. After consulting with the Accountants' Association, the Supervisor of Banks, and the Advisory Committee on Banking Matters, I have decided to amend the reporting requirements as follows:

3. The reporting requirements shall be amended as specified in the requirement.

Explanatory Remarks

4. The amendments to the reporting requirements are intended to update the recognition, measurement, and disclosure requirements in accordance with the accepted accounting rules in the United States regarding employee benefits.

5. This circular includes certain updates to the reporting requirements, but does not include all updates. Other related topics, including updates to measurement and disclosure formats following the adoption of these rules, and the integration of the updated version of the accepted accounting rules in the United States, will be treated separately if additional clarifications are required.

6. Clarifications regarding the application of the accepted accounting rules in the United States regarding employee benefits:

(1) The existing requirement setting the discount rate for calculating provisions was deleted. In accordance with the accepted accounting rules in the United States, a banking institution shall determine the discount rate based on market yields on government bond coupons in Israel.

A banking institution shall establish clear policies and procedures specifying how to select the government bond coupons on which the discount rate will be calculated.

(2) The clarifications and guidelines specified in our letter dated 27.3.2011 were updated and incorporated into the reporting requirements. The following updates were included in Appendix Z to the reporting requirements:

6.2.1 The accounting treatment requirements were adapted to the relevant wording of the accepted accounting rules in the United States.

6.2.2 The requirement to include liabilities for management expectations was replaced with the requirement to include liabilities for employee-employer relations. It was clarified that liabilities arising from employee-employer relations should be included, and it was generally clarified that in situations where it is expected that contractual conditions will be met, there is a substantive obligation to pay post-employment benefits.

6.2.3 It was clarified that the banking institution shall classify employee benefits into groups, including clear policies and procedures specifying how to distinguish between the types of benefits specified in the accepted accounting rules in the United States.

(3) It was clarified that if a banking institution has difficulty performing an actuarial calculation of the liability for employee benefits, it shall seek preliminary guidance from the Manager of the Financial Reporting Unit supervised by the Banks.

Transitional Provisions

7. Banking institutions (hereinafter: a banking institution), including banking corporations and credit card companies, shall apply the amendments to the reporting requirements in accordance with this circular from January 1, 2015.

8. When first applying these rules, a banking institution shall restate comparative figures to comply with the requirements of these rules, starting from January 1, 2013.

1 If it is determined in the future that a market exists in Israel with high liquidity in high-quality corporate bond coupons, this guidance will be reconsidered.

9. Disclosure regarding the expected impact of the adoption of the accepted accounting rules in the United States regarding employee benefits shall be provided in the 2013 annual and quarterly reports and in the 2014 annual and quarterly reports, specifying:

(1) The main provisions of the accepted accounting rules in the United States regarding employee benefits.
(2) The manner in which the banking institution assesses the application of these rules.
(3) The main changes expected to apply to the accounting policies of the banking institution applying these rules.
(4) A verbal description of the expected impact of applying these rules as of January 1, 2015, on the results of operations, cash flows, financial position, and the volatility of net equity profit.
(5) Disclosure of the estimated expected impact (and direction) of applying these rules on net equity, along with disclosure of the main assumptions used to prepare the estimate and the means taken by the banking institution to ensure the reliability of the estimate, with details, to the Manager of the Financial Reporting Unit supervised by the Banks, in sufficient time prior to the disclosure of the estimate.

A banking institution that does not prepare an estimate of the impact shall provide at least a disclosure of the impact, using market yields on government bond coupons in Israel as the basis for the discount rates used in calculating the liability for employee benefits, on the quantitative impact on net equity as of the reporting date.

Additional Notes

10. Due to the adoption of the accepted accounting rules in the United States, changes in accounting treatment exist in the items specified in the United States. A banking institution shall check, in accordance with the accepted accounting rules, what the appropriate accounting treatment is for existing agreements regarding employee benefits in the United States. In situations where a banking institution concludes that it is appropriate to change the accounting treatment in a material manner, it shall examine whether the conditions justifying a change in treatment exist for a subject previously applied. In case of doubt, or in any case where it was decided to correct an error, the banking institution shall seek preliminary guidance from the Manager of the Financial Reporting Unit supervised by the Banks.

11. If a banking institution has difficulty applying this requirement, it shall contact Mr. Eido Gilad, Manager of the Financial Reporting Unit supervised by the Banks, for specific guidance.

12. Update of the Compilation

An update table of the reporting requirements compilation is attached in Appendix "Bet".

With respect,

David Zaken
Supervisor of Banks

Appendix
Update of the Compilation

13. The following pages of the reporting requirements compilation are attached to update the reporting requirements.

Insert Page | Remove Page
(04/14) [15] 661-3 | (6/13) [14] 661-3
*(6/13) [18] 661-4 | (6/13) [18] 661-4
(04/14) [4] 661-14.2 | (12/12) [3] 661-14.2
*(12/11) [2] 661-14.3 | (12/11) [2] 661-14.3
*(4/11) [14] 663-3 | (4/11) [14] 663-3
(04/14) [14] 663-4 | (4/11) [13] 663-4
(04/14) [10] 663-5 | (11/00) [9] 663-5
(04/14) [15] 663-6 | (4/11) [14] 663-6
(04/14) [13] 664-11 | (12/11) [12] 664-11
(04/14) [14] 664-12 | (10/07) [13] 664-12
(04/14) [4] 668-3 | (6/13) [3] 668-3
*(11/11) [13] 669-11 | (11/11) [13] 669-11
(04/14) [19] 669-12 | (6/13) [18] 669-12
(04/14) [10] 669-45 | (12/04) [9] 669-45
*(12/11) [11] 669-59 | (12/11) [11] 669-59
(04/14) [2] 669-59.1 | (12/11) [1] 669-59.1
*(6/13) [1] 669-177 | (6/13) [1] 669-177
(04/14) [1] 669-178-185 | - ------
(04/14) [20] 690-1 | (2/14) [19] 690-1
-------- | (1/04) [11] 690-7
*(2/14) [2] 699-110 | (2/14) [2] 699-110
(04/14) [2] 699-111 | (2/14) [1] 699-111
(04/14) [1] 699-112 | ------

(4/14) [1] Instructions for Public Reporting by the Banking Supervisor 669-180 'Page of Annual Financial Report

A bank may be required to recognize additional liabilities for employee benefits expected by employees. Even if there is no existing contractual or legal obligation, specific identification of the expected employee benefits is necessary to recognize them, as mentioned above, in addition to recognizing additional liabilities in the financial reports. Voluntary retirement benefits arising from non-contractual structural changes are not included among these. See Section 7 below.

7. Non-contractual voluntary retirement benefits as part of structural changes.
   7.1 Background: Certain banking institutions have a practice of initiating voluntary retirement programs once in a while. These programs provide preferred conditions for employees who choose to retire. In many cases, retiring employees from banking institutions receive benefits beyond those provided under the agreement (these benefits are referred to as "preferred conditions" below). The aforementioned does not occur as part of structural changes.

7.2 Focus on Internal Control Regarding Financial Reporting:
7.2.1 Banking institutions shall maintain detailed records of employee departure data for each group. For example, employees (including senior employees, other employees, etc.) who received increased severance upon their departure, or employees who did not receive increased severance through a voluntary retirement program but received regular severance and benefits, or employees who retired at the legal pension age, etc. The records shall be updated at each reporting date.
7.2.2 A banking institution is required to examine, for each group of employees, at each reporting date, whether, based on past experience and known conditions until the date of publication of the financial report, there is a commitment to pay employees substantive benefits beyond contractual conditions, such as severance upon termination, voluntary retirement, etc. If a banking institution has a commitment to pay substantive benefits to a group of employees, it shall include in the actuarial calculation of the obligation the contractual conditions, etc.

2 See guidelines. - Provisions for contingent and non-contingent liabilities, as defined in International Accounting Standard 37 - "Exit or Disposal Cost Obligations" in Codification 420-10.
3 Similar to the requirements in the previously effective Instructions for Public Reporting before the adoption of US GAAP for banks, there may be certain situations where, in accordance with US GAAP for banks, an entity is not required to bring into account the obligation for employee rights regarding certain benefits, for example, when there is a substantive commitment (as defined in Codification 715) to provide those benefits to employees. In situations where a banking institution expects to pay substantive benefits beyond contractual conditions, and in cases where, in US GAAP for banks, there is a substantive commitment, and now the banking institution has concluded that it has no commitment to pay substantive benefits beyond contractual conditions, the banking institution is requested to refer to the manager of the financial reporting unit for guidance on whether to grant the aforementioned benefits to employees.

(4/14) [1] Instructions for Public Reporting by the Banking Supervisor 669-181 'Page of Annual Financial Report

The bank shall take into account the percentage of employees expected to leave, including employees expected to retire under voluntary retirement programs (and the benefits they are expected to receive upon their departure) or receive other preferred conditions, including the benefits they will receive under these programs or upon receiving other preferred conditions. In this situation, the obligation for these benefits to the group of employees shall be calculated on an actuarial basis, and the additional expected cost to the banking institution for providing these benefits shall be included in the financial report as stated.

7.2.3 If a banking institution has no commitment to pay substantive benefits to a group of employees beyond contractual conditions, it shall not take into account in the actuarial calculation of the obligation the departure rate of employees who retired under voluntary retirement programs or upon receiving other preferred conditions.
7.2.4 A banking institution shall check what is the average percentage of employees in the group of employees who retired or departed in a specific period of seven years preceding the reporting date, under voluntary retirement programs or upon receiving other preferred conditions. Despite the aforementioned, if the resulting average for a group of employees is higher than 10%, the banking institution considers that there is no implied commitment to provide preferred conditions to any employees from that group. It is required to maintain documentation based on evidence justifying its decision not to verify the reliable estimate on preferred conditions for the group of employees, or to bring into account the additional cost for the group of employees.

8. Defined Benefit Retirement Benefits.
   8.1 The banking institution shall determine policy and procedures regarding the management of costs of the plan's assets for a defined benefit plan. For the purpose of distinguishing between management costs of the plan's assets and other management costs, the calculation of return on the plan's assets shall include management costs. These shall be recognized as expenses in the report as profit and loss.
   8.2 The banking institution shall determine policy and procedures regarding taxes paid on the plan's assets for a defined benefit plan. For the purpose of distinguishing between taxes that shall be included in the determination of the return on the plan's assets and taxes that shall be included in actuarial assumptions to measure the current value of the defined benefit obligation.

4 This section clarifies that this refers mainly to commitments to pay substantive benefits beyond contractual conditions upon retirement. There may be other situations where a banking institution will have a commitment to pay substantive benefits to employees for non-contractual benefits, such as benefits for a short time or benefits for a longer time (before retirement). 5 A banking institution that considers it appropriate may examine the voluntary retirement rate over a period different from the preceding seven years, provided that the average voluntary retirement rate according to that period does not fall below the average voluntary retirement rate over the seven years preceding the reporting date. A banking institution operating according to the aforementioned policy shall set the voluntary retirement rate over the seven years preceding the reporting date for consistent accounting on this matter.

(4/14) [1] Instructions for Public Reporting by the Banking Supervisor 669-182 'Page of Annual Financial Report

8.3 The banking institution shall determine policy and procedures specifying how to choose discount rates. The discount rate shall be calculated based on government bond yields.
8.4 The banking institution shall determine policy and procedures specifying how to estimate the long-term expected return on plan assets. The rate shall be applicable to the same period.

9. Actuary and Accountant's Report.
   The actuary shall prepare his work to assess the banking institution's obligations as stated above. In addition, he shall prepare an accountant's report as of December 31 of each year. If significant changes have occurred, this report shall be submitted to the management of the banking institution in each quarterly report. It shall be attached to the banking institution's annual financial reports and the published quarterly financial reports. If the conditions set forth in pages 680-1.2 and 620-4 are met for attaching valuation estimates:
   The actuary's report shall include, at least, references to the following topics:
   9.1 Actuary's Declaration: A declaration signed by the actuary through his overall opinion - the actuary's declaration. Example: Professional opinion regarding the assessment of the banking institution's obligations for employee rights. The declaration is detailed in Appendix A.
   9.2 Description of Benefits: The level of detail regarding the employee benefits for which the actuarial assessment was performed. The description shall not be less detailed than the disclosure in the financial report regarding employee benefits.
   9.3 Description of Data: Description of the data sources used by the actuary, and the responsibility for them.
   9.4 Calculation Assumptions: Description of the assumptions used by the actuary as the basis for the calculation - the calculation assumptions. Description of the main assumptions used in the actuarial assessment, such as sensitivity to:

   • Demographic assumptions regarding future characteristics of current and former employees, such as mortality, disability, loss of earning capacity, early retirement, and turnover rates; and the percentage of plan members who will be entitled to benefits according to medical programs.
   • Financial assumptions, such as future salary increase, discount rate, future medical costs, and medical benefits, etc.
     9.5 Valuation Method and Results: Description of the valuation method used for the calculation - the valuation method and results (the projected unit credit method for assessing the obligation).
     9.6 Additional Topics: Requiring special attention of the report reader, such as significant changes in assumptions, actuarial methods, and benefits compared to the previous year's assessment, and special risks to which the banking institution is exposed.

10. Reliance on Actuarial Assessment.
    10.1 The banking institution shall validate the actuary's assessment for the purpose of calculating the obligation for employee rights. In accordance with the principles specified in the Supervisor's Guidelines on Validation of Models (dated 19.10.2010 Reg10.115.007A).

(4/14) [1] Instructions for Public Reporting by the Banking Supervisor 669-183 'Page of Annual Financial Report

10.2 As part of the validation procedure, the banking institution shall prepare a procedure defining the validation process. This includes, among other things, a description of the bank's work against the actuary, prior to the transfer of data to the actuary. Upon receiving the actuary's assessment, the bank shall perform checks on the data transferred to the actuary, and on the actuarial assumptions. The validation of the actuary's assessment shall include, among other things, checking the assumptions on which the assessment is based. The Board of Directors shall ensure that the banking institution does not rely exclusively on an external actuary for the obligation regarding employee rights, but rather exercises professional judgment. The banking institution shall understand and document the data, assumptions, and methods used by the actuary, particularly for the purpose of assessing obligations. It shall check, while maintaining appropriate documentation, at least once a year, and with higher frequency if significant changes have occurred, the assumptions on which the actuary relied. Examples of topics for these checks include factors influencing the assumptions more or less ('detailed in Appendix B).

11. Disclosure in Public Reports.
    11.1 Within the framework of disclosure on accounting policy regarding critical accounting estimates, the banking institution shall disclose, among other things, the quantitative impact of the critical estimates on the sections of the financial reports affected by their use, and provide sensitivity analysis for any assumption used as the basis for the estimate for the obligation for employee rights. It is clarified in this regard that the banking institution may, among other things, provide sensitivity analysis for:
    11.1.1 Expected salary increase rate.
    11.1.2 Discount rate.
    11.1.3 Average departure rate, including adjustments made (if adjustments were made) to mortality tables, disability, insurance savings, and the equity market, and its impact.
    11.2 Disclosure regarding employee rights shall be given separately for each type of obligation for employee rights. This disclosure shall include: The difference between the estimate and the amount of the obligation in the financial report, due to the actuarial assessment performed for which there is no conformity between the estimates specified in the accountant's report and the obligations taken into account for the financial reports. Explanation of the difference in the financial report obligation.

12. Implementation of Standard 309 "Internal Control Instructions for Banking Management" Regarding Disclosure of Internal Control Procedures.
    The banking institution shall examine whether there are additional controls on the process of recognizing "additional liabilities" - and re-examine the effectiveness of the measurement of employee rights in the process of work with the actuary. In light of the guidelines specified in this appendix, update the existing controls as needed.

(4/14) [1] Instructions for Public Reporting by the Banking Supervisor 669-184 'Page of Annual Financial Report

Appendix A
Example Form of Actuary's Declaration Assessing the Obligation for Employee Rights

Identity of the Actuary
I, <Actuary Name>, was requested to assess the obligation of the banking institution <Bank Name> for the benefits to employees as of December 31, <Year>, in accordance with the Instructions for Public Reporting and the generally accepted accounting principles of the Banking Supervisor in Israel.

This chapter shall describe the nature of the actuary's business relationship with the banking institution, including family members with beneficial interests in the banking institution, or subsidiaries of the banking institution, or companies related to the banking institution. If the actuary is a beneficial owner, he shall specify whether he is a family member or subsidiary of the banking institution, or a fixed consultant or employee of a subsidiary of the banking institution, or of a company related to the banking institution providing other services to the banking institution. The actuary shall also indicate the date of appointment by the banking institution.

Scope of the Actuary's Opinion

1. I relied on the data provided to me for the calculation of the obligation of the banking institution. Requests for information were answered in a manner that provides data for the assessment. I examined the reasonableness and adequacy of the data and procedures, including the data for the financial reports, and compared the data for the current year to the data of previous years. To the extent necessary, I also relied on data obtained from other reliable sources. I examined the degree of suitability and relevance of the data.
2. The actuarial assumptions and methods used in my work, as determined for the assessment of the obligation, were conducted in accordance with professional judgment, subject to the instructions and guidelines specified below.
3. In my opinion, the obligation was assessed in accordance with the actuarial rules and generally accepted accounting principles.
4. After examining the data mentioned in sections 1 and 2 above, I concluded that the data are reasonable and can be relied upon for my assessment.
5. The assumptions and methods used for the assessment of the obligation were determined by me in accordance with professional judgment and in accordance with the instructions and rules specified above.
6. The specified obligation constitutes, to the best of my knowledge and belief, a suitable coverage for the obligations of the banking institution for the benefits to employees specified in [Plan Details].

Signature of the Actuary
Name
Date

(4/14) [1] Instructions for Public Reporting by the Banking Supervisor 669-185 'Page of Annual Financial Report

Appendix B

Checking Actuarial Assumptions
The following are specified topics that the banking institution, for example, should take into account when checking, as this list is not exhaustive. The actuary's assumptions:

1. The actuary's assessment brings into account all plan conditions, including changes, other events affecting the actuary's calculations, or the plan.
2. Checking Actuarial Assumptions - The data on which the actuary's assumptions are based is checked. For example, departure rates, pension benefit utilization rates, withdrawal rates, etc., are based on an updated data set including the data of the past year, etc.
3. Checking Assumptions Regarding Future Salary Increases: The assumptions are based on past experience and existing contracts. Also checked against current market forecasts for the end of the reporting period.
4. Checking Assumptions Regarding Discount Rates: The discount rates are based on yields of government bond rates. They are determined by a consistent method from period to period.
5. Internal Consistency Between Discount Rates and Assumptions Regarding Expected Cash Flows: For example, whether the discount rates are appropriate for the expected periods of payment of benefits. Also, if using the assumption of real wage growth, check if a discounted rate was used (for the index).
6. Use of Mortality and Disability Tables:
   6.1 The actuary shall use the most reliable, up-to-date information available in the actuarial assessment for the banking institution.
   6.2 For this purpose, one may refer to the updated mortality and disability tables published by the Ministry of Treasury, Insurance Savings, and Capital Market. Within the framework of adjustments to these tables, the banking institution shall maintain documentation on the adjustments performed and the explanation of the impact of the adjustments. If the impact of the adjustment is less than the actuarial assessment of the obligation for employee rights, the banking institution shall refer to the manager of the financial reporting unit for guidance.
7. Checking Consistency of Assumptions Compared to Previous Periods.
8. Checking Actuarial Assumptions - The actuary's assumptions are based on estimates made according to past data. Also checked for the reasonableness and adequacy of the historical period on which the actuary's assumptions are based. The estimates made for previous periods are compared by means of actual results for those periods.
9. Alternatively, if the management believes that the assumptions regarding the future may differ from past data, the management shall have clear documentation showing why the estimates deviated from the received estimates, clarifying the management's judgment exercised and the historical data.

(04/14) [20] Instructions for Public Reporting by the Banking Supervisor 690-1 'Page of Hourly Instructions

691A-1 'Page - The Following

Hourly Instructions - Content of Matters

Hourly Instructions

Page Description
691A-1 Report of the Board of Directors of a banking institution submitted to the General Meeting of Credit Card Companies 692-3 Credit Card - Shares 694-1 Quality reporting on exposure to market risks and their management 694-1 Summary of reports on a consolidated basis of the annual financial report of a banking institution (only if the banking institution is not consolidated) 694-4 Implementation in reports of banking institutions and credit card companies for the year 2009 according to the disclosure requirements of Pillar 3 of Basel II 694A-1 Disclosure requirements based on the FSF report 696-1 Business description of the banking institution and forward-looking information in the Board of Directors' report 697-1 Disclosure regarding the internal auditor of the banking institution's Board of Directors 697A-1 Disclosure regarding the approval process of the financial reports 698-1 Details regarding the banking institution's contributions 698-2 Disclosure on accounting policy regarding critical matters

Differences

Reporting in millions of NIS
695-1 Group Provision for Credit Losses - Hourly Instruction for the years 2011-2012 698A-1 698C-1 Disclosure on credit risk in quarterly reports 699-1 Key Updates

(04/14) [2] Instructions for Public Reporting by the Banking Supervisor 699-111 'Page of Key Updates

Updates to the "Disclosure on Credit Quality" (Circular No. 2409-06 dated 10/02/2014) - Continued - "Provision for Credit Losses in Credit Card Companies"

Updates to the "Adoption of US GAAP" (Circular No. 2416-06 dated 09/04/2014) - Continued - "Regarding Employee Rights"

Page to Insert | Page to Remove
(04/14) [15] 661-3 | (6/13) [14] 661-3
*(6/13) [18] 661-4 | (6/13) [18] 661-4
(04/14) [4] 661-14.2 | (12/12) [3] 661-14.2
*(12/11) [2] 661-14.3 | (12/11) [2] 661-14.3
*(4/11) [14] 663-3 | (4/11) [14] 663-3
(04/14) [14] 663-4 | (4/11) [13] 663-4
(04/14) [10] 663-5 | (11/00) [9] 663-5
(04/14) [15] 663-6 | (4/11) [14] 663-6
(04/14) [13] 664-11 | (12/11) [12] 664-11
Page to Insert | Page to Remove
(2/14) [3] 691F-11 | (4/11) [2] 691F-11
(2/14) [2] 691F-11.1 | (4/11) [1] 691F-11.1
(2/14) [2] 691F-11.2 | (4/11) [1] 691F-11.2
691F-11.3-11.6 ------ | (2/14) [1]
------ | (4/11) [1] 691F-12
------ | (4/11) [1] 691F-13
*(2/07) [1] 691F-14 | (2/07) [1] 691F-14
*(2/07) [1] 691F-31 | (2/07) [1] 691F-31
(2/14) [5] 691F-32 | (12/11) [4] 691F-32
*(11/11) [3] 691G-9.3 | (11/11) [3] 691G-9.3
(2/14) [4] 691G-10 | (4/11) [3] 691G-10
(2/14) [2] 691G-10.1 | (4/11) [1] 691G-10.1
691G-10.2-10.7 ------ | (2/14) [1]
(2/14) [2] 699-110 | (2/14) [1] 699-110
(2/14) [1] 699-111 ------

(4/14) [1] Instructions for Public Reporting by the Banking Supervisor 699-112 'Page of Key Updates

Updates to the "Adoption of US GAAP" (Circular No. 2416-06 dated 09/04/2014) - Continued - "Regarding Employee Rights"

Page to Insert | Page to Remove
(04/14) [14] 664-12 | (10/07) [13] 664-12
(04/14) [4] 668-3 | (6/13) [3] 668-3
*(11/11) [13] 669-11 | (11/11) [13] 669-11
(04/14) [19] 669-12 | (6/13) [18] 669-12
(04/14) [10] 669-45 | (12/04) [9] 669-45
*(12/11) [11] 669-59 | (12/11) [11] 669-59
(04/14) [2] 669-59.1 | (12/11) [1] 669-59.1
*(6/13) [1] 669-177 | (6/13) [1] 669-177
(04/14) [1] 669-178-185 - ------
(04/14) [20] 690-1 | (2/14) [19] 690-1
-------- | (1/04) [11] 690-7
*(2/14) [2] 699-110 | (2/14) [2] 699-110
(04/14) [2] 699-111 | (2/14) [1] 699-111
(04/14) [1] 699-112 ------