Circular LISOL 1-86, CONAU 1-152, CREFI 1-37, OPRAC 1-369: Consolidation of Financial Entities' Accounting Statements. Application of Standards and Technical Relationships

BANCO CENTRAL DE LA REPUBLICA ARGENTINA __________________________________________________________________ COMUNICACION " A " 2227 15/07/94 __________________________________________________________________ TO FINANCIAL ENTITIES:
Ref.: Circular
LISOL 1 - 86.
CONAU 1 - 152.
CREFI 1 - 37.
OPRAC 1 - 369.
Consolidation of accounting statements of financial entities. Application of standards and technical relationships

We address you to inform you that this Institution adopted the following resolution:

"1. Order that, starting from September 1994, financial entities must present their accounting statements and other information adjusted to the provisions contained in the Annex to this Communication, so that the Superintendence of Financial and Exchange Entities may exercise supervision over the entities on a consolidated basis. To this effect, for the evaluation of solvency and compliance with the technical relationships in credit assistance matters, the financings granted by the entity directly and/or through its subsidiaries will be considered. Therefore, the deposit portfolio or its holders will not be subject to verification.

2. Establish that, starting from 1.10.94, the provisions
   contained in Annex I to Communication "A" 2140 will become applicable to operations carried out with other financial entities linked to the country or abroad, including balances in correspondent accounts and call placements.

3. Add to Annex I to Communication "A" 2140, with effect
   from 1.10.94, the following point:
   "3.5. Operations with entities or companies that the financial entity consolidates under the terms established in point 2. of the "Provisions for the consolidation of accounting statements of financial entities"."

4. Incorporate into Annex II to Communication "A" 2140, with ef-
   fect from 1.10.94, the following point:
   "4.6. Operations with entities or companies that the financial entity consolidates under the terms established in point 2. of the "Provisions for the consolidation of accounting statements of financial entities"."

5. Order that entities that possess or acquire participations
   in foreign subsidiaries must provide, within the timeframe to be determined, their consent to supply the information required by the Superintendence of Financial and Exchange Entities for the purposes of exercising supervision based on the consolidated financial situation. For the determination of informational requirements, that Su- perintendence will take into account the legislation of the country where the subsidiary is located and the agreements that are made with the local supervisory body.

6. Establish that financial entities constituted in the
   country may not maintain participations in other entities abroad whose operations are significant and whose balances must be consolidated according to what is provided in point 1. of the Annex to this Communication, in cases where the Superintendence of Financial and Exchange Entities cannot obtain the information it deems necessary to evaluate the situation of the consolidated financial entity as defined in point 2.2. of those provisions. The Superintendence of Financial and Exchange Entities will notify the financial entity when it considers that such a situation arises. The Central Bank, at the suggestion of that Superintendence will subsequently set, consequently, the deadline for the sale of the participations.

7. Order that, starting from December 1994, financial entities
   constituted in the country must provide to the Superintendence of Financial and Exchange Entities a detail, according to the model to be established, regarding companies or entities in the country or abroad linked to shareholders who possess 5% or more of the share capital and/or of the total votes of instruments with voting rights issued by the financial entity and of companies or entities in the country or abroad linked to the directors of the entity. Those companies will be included even if they do not operate with the entity, using for the purpose of establishing the existence of linkage the definitions contained in Annex I to Communication "A" 2140 or, if applicable, point 4.2. of Chapter I of Circular OPRAC - 1. The situation will be supplied as of 30.6 and 31.12 of each year at the latest by 31.7 and 31.1. of the following year.

Furthermore, changes in participations will be reported within 30 calendar days of occurrence when at any time during the calendar semester the transactions determine the possession of percentages higher than 5%, even if they are not reached at the end of that period. In these cases,

the Superintendence may require, if it deems it justified, the presentation of the aforementioned information.

In the case of entities whose shares are included in the public offering regime, the information regarding companies or entities in the country or abroad linked to holders of 5% or more of the share capital and/or the total votes of instruments with voting rights issued by the entity, must be provided only when it is verified that as of 30.6 or 31.12 the participation has been maintained for a period longer than six months. This will apply when it concerns persons who exclusively acquire the status of shareholders through transactions carried out with the securities offered publicly and provided that the participation does not grant control nor controlling influence.

8. Order that financial entities must request each
   shareholder in the country or abroad or, if applicable, group of shareholders that control them -as defined in point 1.2. of Annex I to Communication "A" 2140-, the preparation of consolidated semi-annual balances of the group or economic unit they form, with an audit report by a public accountant. These balances must be presented to the Superintendence of Financial and Exchange Entities within 120 calendar days after the semesters conclude, except for the exceptions determined by the Superintendent. This provision will be effective regarding semi-annual closings that operate from 31.12.94.

The preceding informational requirement is not applicable when the shareholders or group of shareholders have the status of a financial entity in the country or abroad, provided that in the country of origin there is a consolidated supervision regime.

In the case of consolidated accounting statements of groups from abroad, it will be required that they be audited by firms of recognized prestige.

9. Incorporate into Circular CREFI - 1 as a requirement for
   the opening in the country of branches or financial subsidiaries of foreign financial entities, even not installed at the date of dissemination of this Communication, the following point:
   "- That the country where the financial entity that directly or indirectly -through a subsidiary- controls the local financial entity is located has implemented a consolidated supervision system -to the satisfaction of the Superintendence of Financial and Exchange Entities- through which it assumes the surveillance of liquidity and solvency, evaluating and controlling risks and equity situations on a consolidated basis and that the relevant information is accessible to that Superinten- dence."

10. Establish that local branches or local financial entity
    subsidiaries of foreign financial entities must send to the Superintendence of Financial and Exchange Entities the consolidated accounting statements with the frequency and in the terms established by the banking supervisory body of the country where the financial entity that directly or indirectly - through a subsidiary- controls the local financial entity is located. This information must be sent within 30 calendar days after the deadline for its presentation before that supervisory body has expired.

Without prejudice to this, within 30 calendar days of the date of dissemination of this Communication, the entities included must send the last information they have presented to the respective control authority.

11. Incorporate the item "Third-party participation" as a concept
    included within "Basic net equity" referred to in point 3.1. of Chapter VI of Circular LISOL - 1 (text according to Communication "A" 2223), for the purpose of establishing the computable equity responsibility in cases of consolidation with subsidiaries.

12. Establish that excesses in the technical relationships
    indicated in points 5.1.2. and 5.1.3. of the Annex to this Communication, originated exclusively in the application of the new supervision criteria on consolidated bases, do not constitute non-compliance insofar as those excesses arise from operations pre-existing to 14.7.94 and provided that as of that latter date they were included within the prevailing limits or, if applicable, in the situations provided in points 2. and 5. of the resolution made known by Communication "A" 2140 and point 2. of Communication "A" 2223. This exemption will apply until the operations included expire. When their maturity occurs in the period 15.7/31.12.94, extensions, extensions, renewals or other express or tacit facilities agreed upon on that portfolio will not be considered as new financings until that latter date, so they will be counted as such -observing the prevailing limits in the matter- from 1.1.95.

13. Establish that participations in companies that do not
    have as their corporate object the provision of complementary services to the financial activity that, due to the consolidation referred to in the Annex to this Communication, exceed the cap of 12.5% of the capital of the company, do not constitute non-compliance with the pertinent norm on credit grading insofar as the holding is pre-existing to 14.7.94.

Entities will have a period of 5 years, counted from 31.12.94, to liquidate the excess holdings."

We salute you very attentively.
BANCO CENTRAL DE LA REPUBLICA ARGENTINA Juan Carlos Isi Alfredo A. Besio Deputy Manager of Standards Manager of Standards for for Financial Entities Financial Entities

ANNEX to
Com. "A" 2227
PROVISIONS FOR THE CONSOLIDATION OF ACCOUNTING STATEMENTS OF THE FINANCIAL ENTITIES. APPLICATION OF STANDARDS AND TECHNICAL RELATIONSHIPS

1. Concepts
   For the purposes of the application of these provisions, the following definitions will be taken into account:
   1.1. Subsidiaries
   1.1.1. A local financial entity's subsidiary is considered
   another financial entity, in the country or abroad, or a company that provides services complementary to the financial activity -according to the Central Bank's norms-, in the country or abroad, when:
   1.1.1.1. the local financial entity possesses or
   controls, directly or indirectly, more than 50% of the total votes of any instrument with voting rights in said entity or company, in the country or abroad.
   1.1.1.2. the local financial entity has the
   control, directly or indirectly, to determine by itself the formation of the majority of the governing bodies of said entity or company, in the country or abroad.
   1.1.1.3. the majority of the directors of the local
   financial entity is also the majority of the directors in said entity or company, in the country or abroad. Indirect situation is defined as that in which the financial entity, through another legal person, its controlling shareholders, directors appointed by controlling shareholders and persons linked to them possess or control -measured jointly- more than 50% of the total votes of any instrument with voting rights in said entity or company, in the country or abroad. Any other modality of control or participation in which, in the judgment of the Superintendence of Financial and Exchange Entities, a situation of control is configured and, therefore, the character of subsidiary of an entity or company, in the country or abroad, will also be considered as "indirect".

1.1.2. A significant subsidiary of a local en-
tity financial is considered another financial entity or a company that provides complementary services to the financial activity -according to the norms of the Central Bank-, in the country or abroad, when any of the following circumstances are present:
1.1.2.1. its assets, contingent liabilities and
operations recorded off-balance sheet (futures, options, etc.) represent 10% or more of the computable equity responsibility of the local financial entity and its subsidiaries abroad.
1.1.2.2. its results for the current fiscal year
represent 10% or more of the results of the current fiscal year, calculated on homogeneous time bases, of the local financial entity and its subsidiaries in the country or abroad.
1.1.2.3. the subsidiary entity or company, in turn,
possesses one or more subsidiaries -according to the definitions in point 1.1.1.-that, consolidated with it, constitute a significant subsidiary according to any of the guidelines mentioned in points 1.1.2.1 or 1.1.2.2.
1.2. Associated entity or company.
An associated entity or company of a local financial entity is considered another financial entity or a company that provides complementary services to the financial activity -according to the norms of the Central Bank-, in the country or abroad, when the local financial entity possesses or controls, directly or indirectly through another controlled legal person, more than 25% and up to 50% of the total votes of any instrument with voting rights in said entity or company in the country or abroad.
1.3. Complementary interest.
In cases where the participation of the local fi- nancial entity in a financial entity or company that provides complementary services to the financial activity -defined as a subsidiary-, in the country or abroad, is less than 100% of the total capital, the complementary interest is the participation that corresponds to third parties unrelated to the local financial entity, that is, the portion that it does not possess or control.

2. Consolidated accounting regime.
   2.1. Information up to 31.8.95.
   Financial entities must present their monthly balances that reflect in a consolidated manner the opera- tions of:
   2.1.1. the head office or parent;
   2.1.2. the affiliates in the country and abroad;
   2.2. Information from 30.9.95
   Financial entities must present their monthly balances that reflect in a consolidated manner the opera- tions of:
   2.2.1. the head office or parent;
   2.2.2. the affiliates in the country and abroad;
   2.2.3. the significant subsidiaries -as established
   in point 1.1.2.- in the country and in the country or abroad.
   2.3. In addition to what is provided in points 2.1. and 2.2., the en-
   local financial entities must present quarterly and annual balances that reflect in a consolidated manner the operations of:
   2.2.1. the head office or parent in the country;
   2.2.2. the affiliates in the country or abroad;
   2.2.3. the subsidiaries;
   2.2.4. the significant subsidiaries of significant
   subsidiaries;
   2.2.5. the associated entities or companies that, by
   resolution, the Superintendent of Financial En- tities and Exchange determines;
   2.2.6. the entities or companies not included in the
   preceding sections but that the entity chooses to consolidate, with prior authorization of the Superinten- dence of Financial and Exchange Entities.
   2.4. The consolidated balances presented will have the
   character of complementary information. In the case of quarterly and annual closings, an external audit report regarding their reasonableness will be required taking into account the consolidation guidelines defined in these norms.

2.6. For the presentation of consolidated monthly
balances, entities will have 30 calendar days after each period has concluded. Quarterly or annual consolidated balances must be presented within 45 days of the conclusion of each pe- riod.
3. Exclusions.
The Superintendent of Financial and Exchange Entities may admit that consolidated accounting excludes cases of subsidiaries that the financial entity possesses or controls on a temporary basis, and provided that it is determined that such exclusion does not violate the spirit and objectives of this norm.
4. General instructions for consolidation.
4.1. Consolidation will be carried out in accordance with the
technical criteria of the accounting profession and norms of proce- dure established by the Superintendence of Financial En- tities and Exchange.
4.2. In the event of subsidiaries of subsidiaries, the con-
solidation, according to what is established in points 2. and 3., must contemplate the following requirements:
4.2.1. each subsidiary must consolidate the statements
with those of its subsidiaries according to the criteria exposed in point 4.1.;
4.2.2. each subsidiary consolidated according to what
is provided in point 4.2.1. will be considered as a subsidiary for the purposes of establishing, according to the concepts enumerated in point 1., if it corresponds to be consolidated with the level of con- solidation immediately superior.
4.3. The complementary interests defined in point 1.3.
will be exposed by local financial entities in the liability item "Third-party participation" in the consolidated balance sheet of the entity. Separately, the detail of those complementary interests must be reported. The results corresponding to said complementary interests will be included in the items "Other Profits" or "Other Losses" in the consolidated income statement, as applicable.
4.4. The closing date of the annual fiscal year of the subsidiaries
included in the consolidated information regime must coincide with that of the local financial entity. Consequently, in case of discrepancy, it will be necessary to unify the fiscal year closing date of them with that of the entity.

If this is not possible -for duly justified reasons- consolidation will be admitted through the preparation of special balances duly audited with the same date as the closing of the local financial entity.
5. Application of technical relationships and other norms.
5.1. The entities included in these provisions
will observe the relationships and norms mentioned on the basis of consolidated information:
5.1.1. Minimum capital requirement and integration
(Communication "A" 2136 and its complementary ones)
5.1.2. Operations with linked persons or companies
(Annex I to Communication "A" 2140).
5.1.3. Credit risk fragmentation (Annex II to
Communication "A" 2140 and its complementary ones).
5.1.4. Holding of participations in companies that do
not have as their corporate object the provision of complementary services to the financial activity (Second paragraph of point 1. of the Annex to the Communication "A" 467, text according to point 8. of the Communication "A" 2140).
5.1.5. Classification of debtors and minimum provisions for
credit risk (Communication "A" 2216).
5.2. For the purposes indicated in the previous point, the
following will be taken into account:
5.2.1. Monthly Consolidation.
Data from the local financial entity will be taken, its affiliates in the country and abroad and, from 1.9.95, of the subsidiaries included in the obligation to consolidate monthly. The limits referred to in the norms mentioned in points 5.1.2. and 5.1.3. must be observed at all times on consolidated bases, that is, considering the operations included of the respective clients in the entities and companies subject to monthly consolidation. The determination of the computable equity responsibility will be carried out applying the norms in force in the matter -Communication "A" 2136 and its complementary ones-, both regarding the requirement and integration, regarding bases consolidated.

5.2.2. Quarterly Consolidation.
Data from all affiliates and sub- sidiaries included in the obligation to con- solidate quarterly will be taken. The limits referred to in the norms mentioned in points 5.1.2. and 5.1.3. must be observed at all times on consolidated bases, that is, considering the operations included of the respective clients in the entities and companies subject to quarterly consolidation. The determination of the computable equity responsibility will be carried out considering -both for the requirement and for integration- the balances at the end of the quarter, applying in the other aspects the provisions contained in the Communication "A" 2136 and its complementary ones. This responsibility will be the parameter of compa- rison during the following quarter to deter- mine compliance with the relationships included in this provision, whose observance is additional and independent to that corresponding by application of point 5.2.1.
5.3. It will be the obligation of the local financial entity to ensure
full compliance with those regulations on consolidated bases. When it does not observe those requirements, the entity will remain subject to the charges and other provisions that, for cases of non-compliance, each of those norms provides. Additionally, the Superintendent of Financial En- tities and Exchange may:
(i) order that the treatment established for linked financial entities will be applicable to the entity or entities classified as subsidiaries. (ii) revoke the authorization previously granted to acquire the participation in the subsidiary entity.
5.4. The "Norms on external audits" (Communication "A"
2152 and its complementary ones) will apply regarding the consolidated balance sheet that must be prepared with frequency quarterly and annual for the Central Bank.