Computability of Period or Year-End Profits in Tier 1 Core Capital

Computability of Period or Year-End Profits in Tier 1 Core Capital.

1. Premise

Article 26(2) of Regulation (EU) No 575/2013 of the European Parliament and of the Council (CRR) provides that banks and investment firms may include in Tier 1 Core Capital (CET1) profits (1) of the period or year-end before adopting a formal decision confirming the final year-end result, provided that such profits have been verified by the external auditor appointed to audit the financial statements (hereinafter external auditor(s)) and it has been satisfactorily demonstrated to the competent authority that all foreseeable costs and dividends have been deducted from such profits.

In this context, Circular No. 285 of 17 December 2013 (Supervisory provisions for banks) acknowledges that banks and banking groups may include period or year-end profits in CET1 subject to the conditions set out in the aforementioned Article 26 of the CRR. This provision also applies to SIMs (Securities Investment Firms), as provided by the Bank of Italy Communication of 31 March 2014 (SIMs and SIM groups: application of the new European prudential legislation) (2).

With this Communication, operational guidelines are provided to significant banks (3) and SIMs for the verification by external auditors of period or year-end profits for the purposes of their inclusion in CET1 (4). These guidelines are consistent with the conditions set by the European Central Bank (ECB) for the inclusion of bank profits in CET1 for significant banks (5)(6).

2. Computability of Period or Year-End Profits in Tier 1 Core Capital

It is initially noted that the profits to be verified by the external auditor derive from a accounting situation resulting from the balance sheet, income statement, statement of comprehensive income, and statement of changes in equity, which are approved by the bodies with strategic supervision and management functions according to their respective competencies.

For year-end profits, verification consists of an audit report on the financial statements, or a provisional comfort letter, by which the external auditor attests that the audit of the financial statements has not been completed and that nothing has come to their attention that would lead them to believe that the final report will present a qualified opinion.

For period profits, verification consists of a limited accounting review report (review report), as defined by International Standard on Review Engagements 2410 (1) issued by the International Auditing and Assurance Standards Board (IAASB) or by a comparable national audit principle.

In cases where period or year-end profits are included in CET1 at different levels of consolidation, the external auditor's verification covers at least the profit generated at the highest level of consolidation.

It is noted that these verification methods must be prepared and communicated by external auditors to intermediaries by the dates for submitting supervisory reporting on own funds as required by Regulation (EU) No 680/2014, referring to the same date as the profit.

It is finally specified that any changes subsequently made upon approval of the financial statements and allocation of profits are promptly communicated to the Bank of Italy, and previously submitted reports are rectified.

(1) See definition provided by Article 4(121) of the CRR.
(2) It is recalled that for SIMs not included in the scope of application of the CRR/CRD IV package, as indicated in the aforementioned Communication of 31 March 2014, the regulations provided by the Bank of Italy Regulation of 24.10.2007 continue to apply.
(3) Subject to direct supervision by the Bank of Italy.
(4) With reference to the further condition provided by Article 26(2)(b) of the CRR, to determine the amount of foreseeable costs and dividends to be deducted from the profit amount, intermediaries refer to the articles of the CRR and Articles 2 and 3 of Commission Delegated Regulation (EU) No 241/2014. (5) As identified in Council Regulation (EU) No 1024/2014 and ECB Regulation (EU) No 468/2014. For clarity, it is recalled that for the purpose of the "significance" of the entity, reference must be made to the individual bank or, in the case of banks belonging to a group, to the banking group. (6) See ECB Decision (EU) 2015/656, which established specific conditions for granting authorization to include period or year-end profits in CET1 under Article 26(2) of the CRR.