Instruction No. 09-2016 of August 8, 2016 on Securities and Financial Instruments

INSTRUCTION NO. 09/2016 of August 8
SUBJECT: SECURITIES AND FINANCIAL INSTRUMENTS

Given the need to establish a set of procedures regarding the recognition and measurement of securities and financial instruments within the scope of the provisions established in Notice No. 06/2016, of June 22, on the general principles to be observed by Banking Financial Institutions in the full adoption of International Accounting Standards/International Financial Reporting Standards.

This Instruction does not intend to make any interpretations of the International Accounting Standards/International Financial Reporting Standards, as these are developed exclusively by the IFRS Interpretations Committee and issued by the International Accounting Standards Board.

In accordance with the combined provisions of Article 21 and Article 51, both of Law No. 16/10 of July 15 – Law of the Bank of Angola, and Article 93 of Law No. 12/15 of June 17 – Law of the Bases of Financial Institutions.

I DETERMINE:

1. Object
   This Instruction establishes the procedures that Banking Financial Institutions must observe in the recognition and measurement of securities and financial instruments, hereinafter abbreviated as securities, in accordance with the provisions of International Accounting Standard 39 - Financial Instruments: Recognition and Measurement, hereinafter abbreviated as IAS 39.

2. Scope
   The addressees of the provisions contained in this Instruction are the Banking Financial Institutions under the supervision of the Bank of Angola, in accordance with the terms and conditions provided for in the Law of Financial Institutions, hereinafter abbreviated as Institutions.

3. Definitions
   Without prejudice to the definitions established in the Law of Financial Institutions, for the purposes of this Instruction, the following are understood:

3.1 Financial asset: any asset that is:
a) cash; b) an equity instrument of another entity; c) a contractual right to:
i. receive cash or another financial asset from another entity, or
ii. exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the Institution; or
d) a contract that will or may be settled in the Institution's own equity instruments and that is:
i. a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the Institution's own equity instruments. However, the Institution's own equity instruments do not include instruments that are contracts for the future receipt or delivery of the Institution's own equity instruments; or
ii. a non-derivative for which the Institution is or may be obliged to receive a variable number of the Institution's own equity instruments.

3.2 Available-for-sale financial assets: non-derivative financial assets that are designated as available for sale or that are not classified as:
a) loans and receivables; b) held-to-maturity investments; or c) financial assets at fair value through profit or loss.

3.3 Financial assets or liabilities at fair value through profit or loss: financial assets or liabilities that meet any of the following conditions:
a) classified as held for trading, if they are:
i. acquired or incurred principally for the purpose of selling or repurchasing them in the near term;
ii. part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or
iii. a derivative, except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument.
b) at initial recognition are designated by the Institution at fair value through profit or loss. An Institution may only use this designation when it results in more relevant information, because:
i. it eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognizing gains and losses on them on different bases; or
ii. a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally to the Institution's key management personnel on that basis.

3.4 Financial guarantee contract: a contract that requires the issuer to make specified payments to reimburse the holder for a loss incurred because a specified debtor fails to make payment when due, in accordance with the initial or modified terms of a debt instrument.

3.5 Amortized cost: the amount at which the financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount, minus any reduction, directly or through the use of a valuation allowance, for impairment or uncollectibility.

3.6 Derivative: a financial instrument for which the following characteristics are cumulatively met:
a) its value changes in response to the change in an interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided that, in the case of a non-financial variable, the variable is not specific to one of the parties to the contract; b) no initial net investment is required or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and c) it is settled at a future date.

3.7 Derecognition: removal of a previously recognized financial asset or financial liability from the balance sheet of an Institution.

3.8 Hedge effectiveness: the extent to which changes in the fair value or cash flows of the hedged item that are attributable to a hedged risk are offset by changes in the fair value or cash flows of the hedging instrument.

3.9 Hedged item: an asset, liability, firm commitment, highly probable forecast transaction or net investment in a foreign operation that (i) exposes the entity to risk of changes in fair value or future cash flows and (ii) has been designated as being hedged.

3.10 Loans and receivables: non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, that are not:
a) those that the Institution intends to sell immediately or in the near term, which will be classified as held for trading, and those that the Institution after initial recognition designates at fair value through profit or loss; b) those that the Institution after initial recognition designates as available for sale; or c) those with respect to which the holder may not recover substantially all of its initial investment, for reasons other than credit deterioration, which will be classified as available for sale.

3.11 Equity instrument: any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

3.12 Hedging instrument: a derivative designated or, only for a hedge of the risk of changes in foreign currency exchange rates, a designated non-derivative financial asset or non-derivative financial liability whose fair value or cash flows are expected to offset changes in the fair value or cash flows of a designated hedged item.

3.13 Financial instrument: any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

3.14 Held-to-maturity investments: non-derivative financial assets with fixed or determinable payments and fixed maturity that an Institution has the intention and capacity to hold to maturity and that are not:
a) those that the Institution designates at initial recognition at fair value through profit or loss; b) those that the Institution designates as available for sale; and c) those that meet the definition of loans and receivables.

3.15 Fair value: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

3.16 Active market: a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

3.17 Financial liability: any liability that is:
a) a contractual obligation:
i. to deliver cash or another financial asset to another entity; or
ii. to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Institution; or
b) a contract that will or may be settled in the Institution's own equity instruments and that is:
i. a non-derivative for which the Institution is or may be obliged to deliver a variable number of the Institution's own equity instruments; or
ii. a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the Institution's own equity instruments. However, the Institution's own equity instruments do not include instruments that are contracts for the future receipt or delivery of the Institution's own equity instruments.

3.18 Orderly transaction: a transaction that assumes exposure to the market for a period before the measurement date to allow for usual and customary marketing activities for transactions involving the assets or liabilities in question.

4. Recognition and Derecognition
   4.1 Institutions must recognize securities in the balance sheet when they become a party to the contractual provisions of the financial instrument in question.
   4.2 Institutions must derecognize securities in the balance sheet when the contractual rights to the cash flows resulting from them expire or when they are transferred, and this transfer qualifies for derecognition.
   4.3 Institutions must consider the requirements described in Annex I of this Instruction to assess the conditions for derecognition of a security.

5. Classifications and Reclassifications
   5.1 Institutions must classify securities into the following categories:
   a) financial assets at fair value through profit or loss; b) available-for-sale financial assets; c) held-to-maturity investments; and d) loans and receivables.

5.2 Institutions must observe the requirements established in Annex II of this Instruction regarding reclassifications of securities between the categories referred to in the previous point.

6. Initial Measurement
   6.1 Institutions must initially measure securities at their fair value plus transaction costs that are directly attributable to the acquisition or issuance, whenever the securities are not classified in the category of financial assets at fair value through profit or loss.
   6.2 Institutions must record transaction costs as follows:
   a) for securities measured at amortized cost or classified in the category of available-for-sale financial assets, transaction costs must be initially recognized as part of the carrying amount of the security; and b) for securities classified in the category of financial assets at fair value through profit or loss, transaction costs must be recognized in profit or loss.

7. Subsequent Measurement
   7.1 Institutions must measure securities at fair value, without any deduction of transaction costs that may be incurred in the sale or other disposal, except for securities measured at amortized cost or cost.
   7.2 Securities designated as hedged items must be measured according to the requirements of hedge accounting.
   7.3 Securities that are not measured at fair value through profit or loss must be subject to impairment analysis as established in Annex III of this Instruction.

8. Fair Value Measurement
   Institutions must observe the fair value measurement hierarchy described in IFRS 13 - Fair Value Measurement for the purposes of measuring the fair value of securities.

9. Transitional Provisions
   9.1 Institutions that comply with at least one of the criteria provided for in number 2 of Article 5 of Notice No. 06/2016, of June 22, on the full adoption of International Accounting Standards/International Financial Reporting Standards, must be in compliance with the provisions of this Instruction starting from the 2016 fiscal year, inclusive.
   9.2 Institutions that do not meet the conditions provided for in the previous point must observe the provisions of number 3 of Article 5 of Notice No. 06/2016, of June 22, on the full adoption of International Accounting Standards/International Financial Reporting Standards.

10. Final Provisions
    10.1 This Instruction does not dispense with consulting the International Accounting Standards/International Financial Reporting Standards or International Accounting Standards/International Financial Reporting Standards, designated as IAS/IFRS.
    10.2 Whenever there are discrepancies between this Instruction and the IAS/IFRS, the standards issued by the IASB shall prevail.

11. Doubts and Omissions
    Doubts and omissions resulting from the interpretation and application of this Instruction will be resolved by the Bank of Angola.

12. Revocation
    All regulation contrary to the provisions of this Instruction is hereby revoked.

13. Entry into Force
    This Instruction enters into force on the date of its publication.

PUBLISH
Luanda, August 8, 2016.
THE GOVERNOR
VALTER FILIPE DUARTE DA SILVA

ANNEX I
DERECOGNITION
Part 1 - Framework

1. Institutions must consider the requirements indicated below in the evaluation of derecognition of securities.
2. For the purposes of the previous number, Institutions must verify whether the derecognition requirements indicated below are applied to part or to the entirety of a given security (or group of similar securities).

The institution must continue to recognize the asset to the extent of its continuing involvement.
Have the rights to the asset's cash flows expired?
Has the institution transferred its rights to receive the cash flows from the asset?
Has the institution assumed an obligation to pay the cash flows from the asset in accordance with the conditions provided for in paragraph 19 of IAS 39?
Has the institution transferred substantially all the risks and rewards associated with the ownership of the asset?
Has the institution retained control of the asset?
Has the institution retained substantially all the risks and rewards associated with the ownership of the asset?

No -> No -> No -> No -> The institution must continue to recognize the asset.
No -> No -> No -> Yes -> The institution must derecognize the asset.
No -> No -> Yes -> No -> The institution must continue to recognize the asset.
No -> No -> Yes -> Yes -> The institution must derecognize the asset.
No -> Yes -> No -> No -> The institution must continue to recognize the asset.
No -> Yes -> No -> Yes -> The institution must derecognize the asset.
No -> Yes -> Yes -> No -> The institution must continue to recognize the asset.
No -> Yes -> Yes -> Yes -> The institution must derecognize the asset.
Yes -> No -> No -> No -> The institution must continue to recognize the asset.
Yes -> No -> No -> Yes -> The institution must derecognize the asset.
Yes -> No -> Yes -> No -> The institution must continue to recognize the asset.
Yes -> No -> Yes -> Yes -> The institution must derecognize the asset.
Yes -> Yes -> No -> No -> The institution must continue to recognize the asset.
Yes -> Yes -> No -> Yes -> The institution must derecognize the asset.
Yes -> Yes -> Yes -> No -> The institution must continue to recognize the asset.
Yes -> Yes -> Yes -> Yes -> The institution must derecognize the asset.

Part 2 - Evaluation of the transfer of risks and rewards of ownership of the security

1. Institutions must consider that a transfer of the risks and rewards associated with the ownership of a given security occurs, among others, in the following situations:
   a) unconditional sale of a security; b) sale of a security together with an option to repurchase it at its fair value on the repurchase date; and c) sale of a security together with a put or call option that is significantly out of the money.

2. If Institutions transfer substantially all the risks and rewards associated with the ownership of a security, they must not re-recognize, in a future period, that security, except in situations where they reacquire that security as part of a new transaction.

Part 3 - Retention of the risks and rewards associated with ownership of the security
Institutions must consider that a retention of the risks and rewards associated with the ownership of a given security occurs, among others, in the following situations:
a) sale and repurchase transaction where the repurchase price is a fixed price or the sale price plus a lender's return; b) securities lending agreement; c) sale of a security together with a total return swap that transfers the market risk exposure back to the Institutions; and d) sale of a security together with a put or call option that is significantly in the money.

Part 4 - Evaluation of the transfer of control over the security
Institutions must evaluate situations where they do not retain control over a given security following a transfer of that control.

1. Institutions do not retain control of the security if the entity receiving the transfer has practical ability to sell the transferred security. Such ability exists if the entity can sell the transferred security in an active market or to an unrelated third party and is able to exercise that ability unilaterally and without imposing additional restrictions on the transfer.

2. For the purposes of the previous number, Institutions must consider the following situations:
   a) a contractual right to dispose of the transferred security has little practical effect if there is no market for the transferred security; and b) the ability to dispose of the transferred security has little practical effect if it cannot be exercised freely.

3. Even if the entity receiving the transfer has a low probability of selling the transferred asset, this does not mean, in itself, that the Institution has retained control of the transferred security.

4. Institutions must consider that they retain control of the asset in situations where there is a put option or a guarantee that prevents the entity receiving the transfer from selling the transferred asset.

ANNEX II
RECLASSIFICATIONS
Part 1 - Reclassifications from other categories to the category of financial assets at fair value through profit or loss
Institutions must not reclassify securities from other categories to the category of financial assets at fair value through profit or loss after their initial recognition.

Part 2 - Reclassifications from the category of financial assets at fair value through profit or loss to other categories

1. Institutions must consider the following requirements in the reclassifications of securities from the category of financial assets at fair value through profit or loss to other categories:

[Flowchart Logic]
Is the security designated at fair value through profit or loss?
No -> Is the security's maturity defined?
No -> Reclassification prohibited.
Yes -> Does the security meet the definition of loans and receivables?
No -> Can the security be reclassified to the category of loans and receivables or to the category of available-for-sale financial assets?
No -> Reclassification prohibited.
Yes -> Does the Institution have the intention and capacity to hold the security in the foreseeable future or until maturity?
No -> Can the security be reclassified to the category of available-for-sale financial assets or to the category of held-to-maturity investments?
No -> Reclassification prohibited.
Yes -> Are the circumstances underlying the reclassification being considered rare?
No -> Can the security be reclassified to the category of available-for-sale financial assets?
No -> Reclassification prohibited.
Yes -> The security can be reclassified to the category of available-for-sale financial assets.
Yes -> The security can be reclassified to the category of available-for-sale financial assets.
Yes -> The security can be reclassified to the category of available-for-sale financial assets or to the category of held-to-maturity investments.
Yes -> Can the security be reclassified to the category of loans and receivables or to the category of available-for-sale financial assets?
No -> Reclassification prohibited.
Yes -> Does the Institution have the intention and capacity to hold the security in the foreseeable future or until maturity?
No -> Can the security be reclassified to the category of available-for-sale financial assets or to the category of held-to-maturity investments?
No -> Reclassification prohibited.
Yes -> Are the circumstances underlying the reclassification being considered rare?
No -> Can the security be reclassified to the category of available-for-sale financial assets?
No -> Reclassification prohibited.
Yes -> The security can be reclassified to the category of available-for-sale financial assets.
Yes -> The security can be reclassified to the category of available-for-sale financial assets.
Yes -> The security can be reclassified to the category of available-for-sale financial assets or to the category of held-to-maturity investments.
Yes -> The security can be reclassified to the category of available-for-sale financial assets or to the category of held-to-maturity investments.

2. Reclassifications of securities from the category of financial assets at fair value through profit or loss to other categories must be carried out based on the fair value of the securities on the date of their respective reclassification. Gains or losses recognized in profit or loss of the year up to the date of reclassification must not be reversed.

Part 3 - Reclassifications from other categories to the category of available-for-sale financial assets

1. Institutions may reclassify a fixed-income or equity instrument from the category of financial assets held for trading to the category of available-for-sale financial assets. In these situations, gains or losses resulting from the reclassification must not be recognized, and all amounts previously recognized in profit or loss of the year must be maintained in this item.

2. Institutions must reclassify a fixed-income instrument from the category of held-to-maturity investments to the category of available-for-sale financial assets in situations where the intention and/or capacity to hold the fixed-income instrument until its maturity ceases to exist. In these situations, the difference between the carrying amount and the fair value of the security must be recognized in equity on the date of reclassification.

Part 4 - Reclassifications from the category of available-for-sale financial assets to other categories

1. Institutions may reclassify fixed-income instruments from the category of available-for-sale financial assets to other categories. Equity instruments must not be reclassified from the category of available-for-sale financial assets to other categories.

2. Institutions may reclassify a security classified from the category of available-for-sale financial assets to the category of held-to-maturity investments in situations where there is an intention and capacity to hold the security until its maturity, except if during the current fiscal year or in the two immediately preceding fiscal years, the Institutions have disposed of or reclassified more than 1% of held-to-maturity investments before their maturity.

3. In reclassifications of securities from the category of available-for-sale financial assets to...