BCEAO Instruction 029-11-2016 on Accounting and Valuation of Securities Held by Credit Institutions

The Governor of the Central Bank of West African States (BCEAO),

Having regard to the Treaty of the West African Monetary Union (UMOA) of January 20, 2007, particularly Article 34;

Having regard to the Statutes of the Central Bank of West African States (BCEAO), annexed to the UMOA Treaty of January 20, 2007, particularly Articles 30, 31, 32, 33, and 34;

Having regard to Regulation No. 06/2013/CM/UEMOA of June 28, 2013, concerning Treasury bills and bonds issued via auction or syndication with the assistance of the UMOA-Titres Agency, particularly Articles 4, 9, 10, 14, 29, and 30;

Having regard to the Uniform Act on Banking Regulation, particularly Articles 50, 51, 52, 53, and 54;

Having regard to Decision No. 397/12/2010 of December 6, 2010, by the BCEAO Monetary Policy Committee, establishing the rules, instruments, and procedures for implementing the BCEAO's monetary and credit policy;

Having regard to Decision No. 24/2013/CPM/BCEAO of December 9, 2013, amending and supplementing Decision No. 397/12/2010 of December 6, 2010, by the BCEAO Monetary Policy Committee establishing the rules, instruments, and procedures for implementing the BCEAO's monetary and credit policy;

Having regard to Decision No. 357-11-2016 of November 15, 2016, instituting the Revised UMOA Banking Chart of Accounts and its annex, particularly Articles 81, 84, 91, and 95;

Having regard to Instruction No. 011-09-2015 regarding the procedures for the auction sale of Treasury bills and bonds issued via auction with the assistance of the UMOA-Titres Agency;

Having regard to Instruction No. 02-09-2013 of September 6, 2013, regarding the general rules applicable to Treasury Securities Specialists (SVT) in the member states of the West African Economic and Monetary Union (UEMOA), particularly Articles 2, 3, and 4,

Avenue Abdoulaye FADIGA BP 3108 – Dakar - Senegal Tel.: (221) 33 839 05 00 / Fax: (221) 33 823 93 35 www.bceao.int

INSTRUCTION NO. 029 - 11 - 2016 RELATING TO THE ACCOUNTING AND VALUATION OF SECURITIES BELONGING TO CREDIT INSTITUTIONS

The Governor

2

DECIDES

Chapter 1: General Provisions

Article 1

In application of the provisions of the Revised UMOA Banking Chart of Accounts, banks and financial institutions with a banking character, hereinafter referred to as subject institutions, account for and evaluate, under the conditions provided by this Instruction, the securities they hold for their own account.

Article 2

For the purposes of this Instruction, securities are considered to include: – securities issued in the member states of the UMOA as well as abroad; – Treasury bills and bonds as well as other negotiable debt instruments issued in the member states of the UMOA as well as instruments of the same nature issued abroad; – in general, all claims, other than cash certificates, represented by a negotiable instrument on a market.

Article 3

Subject institutions shall classify the securities they hold for their own account according to the following two criteria: – the intention that led to their acquisition. This may be modified during the holding period of the securities, resulting in a new accounting classification; – the nature of the income from the securities. It may be fixed or variable.

Article 4

For the purposes of this Instruction, fixed-income securities are qualified as: – securities with a fixed interest rate; – securities with a variable or adjustable interest rate when the variation, stipulated at issuance, depends on a parameter determined by reference to rates practiced at certain dates or during certain periods, by the Central Bank or on a market, particularly interbank or bond markets.

Other securities, consisting essentially of shares, are qualified as variable-income securities.

Chapter 2: Common Provisions

Article 5

Subject institutions must disclose, notably through documentation specifying the strategies underlying the acquisition or holding of securities, their intentions regarding the duration of holding.

Based on this choice and subject to compliance with the conditions provided by this Instruction, subject institutions distinguish between trading securities, investment securities, investment-holding securities, portfolio activity securities, other long-term held securities, equity securities, and shares in affiliated companies.

Article 6

Accounting recognition on the balance sheet occurs on the day of transfer of ownership, which corresponds to the settlement or delivery date. For fixed-income securities, the transfer of ownership cannot be deemed to have occurred before the date chosen to determine the amount of accrued interest due to the seller. Between the negotiation date and the transfer of ownership date, the purchase or sale commitment is recorded off-balance sheet, respectively as securities to be received and securities to be delivered.

Article 7

When the disposal of securities involves a fraction of a group of securities of the same nature conferring the same rights, the entry value of the disposed fraction is estimated using the weighted average cost or by presuming that the first element out is the first element in (FIFO).

Article 8

Income from variable-income securities, notably dividends, must be recognized in the income statement as soon as the entity's right to receive them is established. The date of their recording generally corresponds to the date of the allocation of the issuer entity's results, decided by the general meeting.

Income from fixed-income securities, particularly accrued interest or coupons, is accounted for at each accounting closing date in accounts for accrued income, in accordance with the principle of specialization of accounting periods.

Article 9

The market price referred to in this Instruction is determined as follows: – securities traded on an active market are valued at the most recent price. When a security is negotiable on several active markets, the institution retains the price available on the market to which it has immediate access; – if the market on which the security is traded is not or is no longer considered active, or if the security is not listed, the institution determines the probable negotiation value of the security concerned using valuation techniques.

Valuation techniques rely on recent transactions carried out under normal conditions, and the market price of the most recent quotation date is then adjusted to take into account the lower market activity and the effects of time over the period separating the last quotation from the closing date.

The institution may use valuation techniques commonly used by market participants to evaluate securities if it has been demonstrated that these techniques produce reliable estimates of prices obtained in real market transactions.

The prices of a few transactions observed on an inactive market do not necessarily constitute a determining component of the probable negotiation value. Similarly, transactions resulting from forced sales situations are not taken into account for the determination of the market price.

Chapter 3: Provisions Applicable to Trading Securities

Article 10

Securities are considered trading securities if, originally: – they are acquired or sold with the intention of reselling or repurchasing them in the short term; – they are held by the subject institution due to its market-making activity, provided that the stock of securities undergoes effective rotation and a significant volume of operations given market opportunities.

Trading securities meet the following characteristics: – they are negotiable on an active market; – accessible market prices must be representative of real transactions occurring regularly on the market under normal competitive conditions.

An active market is any market on which the prices of the concerned securities are constantly accessible to third parties, from a stock exchange, brokers, traders, market makers, or equivalent bodies. They thus have the obligation to ensure permanent quotations of buyer and seller prices corresponding to market practices or, failing that, to carry out operations of significant amounts on equivalent securities in sensitivity, the market for which necessarily influences that of the securities concerned.

Article 11

Upon acquisition, trading securities are accounted for at the purchase price, including, where applicable, accrued interest. Acquisition costs are charged directly to expenses.

Article 12

At each accounting closing, securities are valued at the market price of the most recent day. The global balance of differences resulting from market price variations is carried to the income statement.

If the characteristics of the market on which the trading securities were acquired evolve such that this market can no longer be qualified as active, the subject institution determines the revaluation value of the concerned securities based on evaluation techniques taking into account the new qualification of the market.

In the case of the sale of securities short, the debt representative of this sale is recorded on the liabilities of the selling institution at the sales price of the securities, coupon included where applicable and fees excluded. Short selling is understood as any economic position taken at a decline on a specific security.

Chapter 4: Provisions Applicable to Investment Securities

Article 13

Investment securities are fixed-income securities, with a fixed maturity, acquired with the manifest intention of holding them until maturity. They may also be securities transferred from the categories named trading securities or investment securities, which the subject institution decides to keep until maturity. The latter must be identified within the portfolio of investment securities.

Article 14

Subject institutions wishing to classify securities in this category must have the means to allow them to hold the securities durably by obtaining own resources or borrowing backed, in duration and rate, by their financing. They must not be subject to any legal or other constraint that could call into question their intention to hold the securities until their maturity.

Article 15

When a subject institution proceeds with the disposal of investment securities or a transfer to another category of securities, for an amount representing at least 10% of the total amount of investment securities held, it is no longer authorized to classify as investment securities, during the current fiscal year and for the following two fiscal years, securities to be acquired, nor to maintain in this category securities previously acquired. The latter are reclassified as investment securities at their net book value at the date of reclassification.

Article 16

For the application of the provisions of Article 15 of this Instruction, disposals or transfers to another category of securities realized before the maturity of the concerned investment securities are presumed not to cast doubt on the intention to keep other securities of this category until maturity, if these disposals or transfers are due to one of the following reasons: – a significant deterioration in the credit quality of the issuer; – a modification of tax legislation eliminating or significantly reducing the tax exemption benefiting from interest on investment securities; – a change in legal and regulatory provisions modifying significantly, either what constitutes a security eligible for the category of investment securities, or the maximum amount of certain types of investment, leading thus the institution to part with an investment security; – a significant strengthening of obligations regarding prudential capital requirements which leads the institution to restructure by selling investment securities; – a significant increase in the risk weighting of investment securities used within the framework of prudential regulation based on own funds; – the fact that trading and investment securities previously transferred to investment securities in exceptional market situations requiring a change in strategy become negotiable again on an active market.

Article 17

The provisions of Article 15, above, do not apply to the following disposals or transfers: – disposals or transfers close to the repayment date of the security such that variations in interest rates are likely to have a negligible effect on the value of the security; – disposals or transfers occurring after the institution has collected the quasi-totality of the original principal amount of the security, within the framework of the scheduled payment schedule or due to early payments.

Article 18

Upon acquisition, investment securities are recorded at their acquisition price. Acquisition costs are charged directly to expenses, and accrued coupons are recorded in accounts for accrued income.

If they come from investment securities, they are accounted for at their acquisition price, and previously constituted depreciations are reversed over the remaining life of the securities.

If they come from trading securities, they are recorded at their book value determined on the day of the transaction according to the provisions applicable to this category.

Article 19

When the acquisition price of investment securities is higher than their repayment price, the difference, called a premium, is amortized over the remaining life of the security according to the actuarial method or the linear method. The method used must be applied uniformly and constantly, in accordance with the permanence of methods.

In the event of an acquisition price lower than the repayment value, the difference, called a discount, is taken into account in income according to the same modalities as premiums.

Article 20

At each accounting closing, unrealized losses resulting from the difference between the acquisition price, corrected for amortizations and reversals of differences described above, and the market value of investment securities do not give rise to depreciation, unless there is a high probability that the subject institution will not hold the securities until maturity due to new circumstances.

Unrealized gains are not accounted for.

At each accounting closing, subject institutions use accounts for accrued income to record accrued interest in the result.

Chapter 5: Provisions Applicable to Equity Securities, Shares in Affiliated Companies, Portfolio Activity Securities, and Other Long-Term Held Securities

Article 21

Equity securities are variable-income securities whose durable possession is estimated to be useful to the activity of the acquiring subject institution. The following are presumed to meet this definition: 1°) securities representing 10% or more of the voting rights in the capital of a company; 2°) securities representing less than 10% of the voting rights in the capital of a company if one of the following conditions is met:

• existence of common directors or managers between the subject institution and the issuing company;
• holding by the issuing company of a portion of the shares issued by the subject institution;
• belonging to the same group controlled by natural or legal persons exercising control over the whole and asserting a unit of decision.

Article 22

Shares in affiliated companies are variable-income securities issued by companies controlled exclusively within the meaning of the instruction relating to the preparation and publication by subject institutions of consolidated accounts.

Article 23

Securities intended for portfolio activity are variable-income securities whose acquisition aims to derive a capital gain in the medium term. This portfolio activity is exercised without intervention in the management of the companies whose securities are held.

Article 24

Other long-term held securities concern investments made with the intention of favoring the development of durable professional relationships by creating a privileged link with the issuing company, but without influence on their management, due to the low percentage of voting rights they represent.

Article 25

Equity securities and shares in affiliated companies are recorded on the date of their purchase at the acquisition price, increased by costs directly attributable to the transaction.

Securities of portfolio activity as well as other long-term held securities are accounted for on the date of their acquisition at the acquisition price. Acquisition costs are charged to expenses.

Securities transferred from another accounting category are subject, on the date of transfer and prior to it, to an evaluation according to the rules of the original category. Provisions or reversals of depreciation resulting from this evaluation are recognized in the income statement prior to the transfer.

Article 26

At each accounting closing, equity securities, shares in affiliated companies, portfolio activity securities, and other long-term held securities are valued at the lowest value between their purchase price or acquisition cost, as the case may be, and their utility value, calculated by line of securities. In the event that this utility value is lower than the acquisition price or acquisition cost, as the case may be, unrealized losses give rise to depreciation. Otherwise, unrealized gains cannot be recognized as income, nor serve to offset losses from other securities.

Article 27

For portfolio activity securities, the utility value is determined taking into account the general perspectives of evolution of the issuer and the holding horizon.

For shares in affiliated companies, equity securities, and other long-term held securities, the utility value represents what the subject institution would accept to disburse to obtain these securities if it had to acquire them, taking into account its holding objective.

Chapter 6: Provisions Applicable to Investment Securities (Note: Context implies 'Available-for-Sale' or similar residual category based on Article 28 description, though text says 'titres de placement')

Article 28

Securities are considered investment securities (titres de placement) if they are not classified in any other category.

Notably included in this category are fixed-income securities acquired with a view to holding until their maturity but which, due to lack of adequate financing, cannot be classified among investment securities (titres d'investissement) within the meaning of Article 13 of this Instruction.

Article 29

Investment securities (titres de placement) are accounted for on the date of their acquisition at the purchase price, excluding fees, excluding accrued coupon. The excluded accrued coupon is recorded in an account for accrued income, and acquisition costs in an expense account.

When it is a fixed-income security, the difference between the purchase price and the repayment price is treated as follows: – when the acquisition price is higher than the repayment price, the positive difference is amortized over the remaining life of the securities; – when the acquisition price is lower than the repayment price, the negative difference is carried to income over the remaining life of the securities.

The spreading of the difference is realized using the actuarial method or the linear method. The method used must be applied uniformly and constantly, in accordance with the principle of permanence of methods.

Securities transferred from categories named portfolio activity securities, equity securities, shares in affiliated companies, and other long-term held securities are subject, on the date of transfer and prior to it, to an evaluation according to the rules of the original category. They are transferred to the category named investment securities (titres de placement) at this book value.

Article 30

At each accounting closing, unrealized losses resulting from the difference between, on the one hand, the book value, corrected for amortizations and reversals of differences mentioned above, and, on the other hand, the market price of the securities give rise to depreciation which can be determined by homogeneous sets of securities, without compensation with unrealized gains recognized on other categories of securities. Unrealized gains are not accounted for.

The following may be grouped into a homogeneous set: – fixed-income securities that present, in a stable manner, a sensitivity to interest rate variations roughly equivalent, in absolute value, to that of other securities in the same set, which implies notably that they are denominated in the same currency or in currencies whose rates are closely correlated; – or variable-income securities that confer the same rights.

In the absence of a liquid market, the evaluation of fixed-income securities is carried out based on the discounting of future interest flows and repayment of the nominal amount, at the longest rate offered on the UMOA money market observed on the day of evaluation.

In the case of unlisted variable-income securities, the evaluation is made based on the mathematical value of the securities concerned.

Accrued interest since the acquisition of fixed-income securities up to the closing date are recorded in the accounts for accrued income provided for this purpose by the chart of accounts.

Chapter 7: Specific Provisions for Transfers Between Categories

Article 31

Taking into account the intentions underlying the acquisition of the securities, the following transfers are not authorized: – transfer to the category named trading securities; – transfer of investment securities (titres d'investissement) to the category named investment securities (titres de placement), except in the cases provided for in Articles 16 and 17 of this Instruction; – transfer from the categories named equity securities, shares in affiliated companies, and other long-term held securities to the category named portfolio activity securities; – transfer from the category named portfolio activity securities to the category named other long-term held securities; – transfer from the category named investment securities (titres de placement), of securities coming from other categories to any other category except in the case of reclassification into investment securities (titres d'investissement) of securities originally registered in this category and downgraded to investment securities (titres de placement), at the end of the restriction period of two fiscal years, in application of the provisions of Articles 16 and 17 of this Instruction.