Instruction No. 12/2019 of August 28

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INSTRUCTION NO. 12/2019 of August 28
ASSUNTO: FINANCIAL SYSTEM

• Securities and Financial Instruments
  Considering the entry into force on January 1, 2018, of International Financial Reporting Standard 9 – Financial Instruments (IFRS 9), which replaces International Accounting Standard 39 – Financial Instruments: Recognition and Measurement. Given the need to revise Instruction No. 09/2016 of August 8, regarding securities and financial instruments. Considering that this Instruction does not intend to provide 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 (IASB). In accordance with the combined provisions of Article 21 and Article 51, both of Law No. 16/10 of July 15 – Law of the National Bank of Angola, and Article 93 of Law No. 12/15 of June 17 – Framework Law on Financial Institutions.

DETERMINATION:

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", under the terms provided by International Financial Reporting Standard 9 – Financial Instruments, hereinafter abbreviated as "IFRS 9".

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2. Scope
This Instruction applies to Banking Financial Institutions under the supervision of the National Bank of Angola, under the terms and conditions provided in the Framework Law on Financial Institutions, hereinafter abbreviated as "Institutions".

3. Definitions
   Without prejudice to the definitions established in the Framework Law on 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.
   d) A contract that will or may be settled in the entity's own equity instruments and that is:
   i. A derivative that will or may be settled differently from the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity's own equity instruments. For this purpose, the entity's own equity instruments do not include instruments that are themselves contracts for future receipt or delivery of the entity's own equity instruments; or
   ii. A non-derivative for which the Institution is or may be obliged to receive a variable number of its own equity instruments.

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3.2 Financial Asset at Amortized Cost: financial asset that simultaneously satisfies the following conditions:
a) The financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and b) The contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal amount outstanding.

3.3 Financial Asset at Fair Value Through Other Comprehensive Income: financial asset that simultaneously satisfies the following conditions:
a) The financial asset is held within a business model whose objective is achieved both by collecting contractual cash flows and by selling financial assets; and, b) The contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal amount outstanding.

3.4 Financial Asset Acquired or Originated at Credit Impairment: financial asset acquired or originated with credit impairment at initial recognition.

3.5 Firm Commitment: a binding agreement to exchange a specified quantity of resources at a specified price on a specified future date or dates.

3.6 Amortized Cost: the amount at which a 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, and, for financial assets, adjusted by any loss allowance.

3.7 Transaction Costs: incremental costs that are directly attributable to the acquisition, issue, or disposal of a financial asset or financial liability. An incremental cost is one that would not have been incurred if the entity had not acquired, issued, or disposed of the financial instrument.

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3.8 Reclassification Date: corresponds to the first day of the first reporting period following a change in business model that gives rise to a reclassification of financial assets by an entity.

3.9 Derivative: a financial instrument or other contract within the scope of IFRS 9 for which the following characteristics are cumulatively met:
a) Its value changes in response to changes in an interest rate, financial instrument price, commodity price, foreign exchange rate, price or interest index, credit rating, or credit index, provided that, in the case of a non-financial variable, that variable is not specific to one of the parties to the contract; b) It requires no initial net investment or requires an initial net investment that is lower than would be required for other types of contracts expected to have a similar response to changes in market factors; and c) It is settled at a future date.

3.10 Derecognition: removal of a previously recognized financial asset or financial liability from an entity's balance sheet.

3.11 Hedged Item: asset, liability, firm commitment, forecast transaction, or net investment in a foreign operation that (i) exposes the entity to fair value or future cash flow changes and (ii) has been designated as being hedged.

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

3.13 Hedging Instrument: the following instruments may be designated as a hedging instrument:
a) A derivative measured at fair value, except for written options, unless they are designated as a hedge of a purchased option, notably embedded in another financial instrument (illustratively, a written call option used to cover a redeemable liability); b) A non-derivative financial asset or non-derivative financial liability measured at fair value through profit or loss, provided it is not a financial liability designated at fair value through profit or loss for which the amount of its change in fair value attributable to changes in its credit risk is presented in other comprehensive income; and, c) The foreign currency risk component of a non-derivative financial asset or non-derivative financial liability designated for foreign currency risk hedging, provided it is not an investment in an equity instrument regarding which the Institution has opted to present changes in fair value in other comprehensive income.

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

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, not related to each other, 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 Effective Interest Method: method used to calculate the amortized cost of a financial asset or financial liability and to allocate and recognize interest income or expense in profit or loss, during the relevant period.

3.18 Business Model: reflects how groups of financial assets are managed together to achieve a specific business objective.

3.19 Financial Liability: any liability that is:
a) A contractual obligation to:
i. Deliver cash or another financial asset to another entity, or;
ii. Exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Institution.
b) A contract that will or may be settled in the Institution's equity instruments and that is:
i. A non-derivative for which the Institution is or may be obliged to deliver a variable number of its own equity instruments, or;
ii. A derivative that will or may be settled differently from the exchange of a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. For this purpose, the Institution's equity instruments do not include instruments that are themselves contracts for future receipt or delivery of the Institution's equity instruments.

3.20 Credit Loss: difference between all contractual cash flows due to an Institution according to the contractual agreement and all cash flows that the Institution expects to receive, discounted at (i) the original effective interest rate, or (ii) the credit-adjusted effective interest rate for financial assets acquired or originated at credit impairment.

3.21 Expected Credit Losses: weighted average of credit losses, using the respective probabilities of default as weights.

3.22 Lifetime Expected Credit Losses: corresponds to the expected credit losses resulting from all possible defaults over the expected life of a financial instrument.

3.23 Twelve-Month Expected Credit Losses: corresponds to the portion of lifetime expected credit losses that represents expected credit losses resulting from possible default events over a 12 (twelve) month period after the reporting date.

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3.24 Loss Allowance: corresponds to the:
a) Expected credit loss allowance for financial assets measured at amortized cost, lease receivables, and contract assets; b) Cumulative impairment for financial assets measured at fair value through other comprehensive income; and c) Expected credit loss allowance for loan commitment contracts and financial guarantee contracts.

3.25 Effective Interest Rate: rate that exactly discounts estimated future cash payments or receipts over the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortized cost of a financial liability.

3.26 Credit-Adjusted Effective Interest Rate: rate that exactly discounts estimated future cash payments or receipts during the expected life of the financial instrument to the amortized cost of a financial asset acquired or originated at credit impairment.

3.27 Forecast Transaction: a future transaction that is not the subject of a firm commitment but is expected to occur.

3.28 Gross Carrying Amount of a Financial Asset: amortized cost of a financial asset, before adjustment to take into account any loss allowance.

4. Recognition and Derecognition
   4.1 Institutions must recognize securities in the Balance Sheet when, and only when, they become party to the contractual provisions of the relevant financial instrument.
   4.2 Institutions must derecognize securities from the Balance Sheet when, and only when, their contractual rights to cash flows expire or are transferred and such transfer qualifies for derecognition.
   4.3 Institutions must consider the requirements described in Annex I of this Instruction to evaluate the conditions for derecognition of a security.

5. Classification Criteria
   Except for securities designated at initial recognition in the fair value through profit or loss category, Institutions must classify securities considering simultaneously:
   a) The characteristics of the contractual cash flows of the securities in question; and b) The Institution's business model for managing the securities.

6. Classifications and Reclassifications
   6.1 Institutions must classify securities into the following categories:
   a) Financial assets at fair value through profit or loss; b) Financial assets at fair value through other comprehensive income; and, c) Financial assets at amortized cost.
   6.2 Institutions must measure securities at fair value through profit or loss, except if they are measured at amortized cost or fair value through other comprehensive income. However, Institutions may irrevocably opt, at initial recognition of investments in equity instruments that (i) are not held for trading and/or (ii) are not a contingent consideration recognized by an acquirer in a business combination to which International Financial Reporting Standard 3 – Business Combinations applies, to present subsequent changes in fair value of these instruments in other comprehensive income.
   6.3 Institutions may, at initial recognition, irrevocably designate a security as measured at fair value through profit or loss if such designation eliminates or significantly reduces an accounting mismatch that would otherwise arise from measuring assets or liabilities or recognizing gains and losses on them on different bases.
   6.4 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.

7. Initial Measurement
   7.1 Institutions must initially measure securities at their fair value plus transaction costs directly attributable to their acquisition or issue, whenever the securities are not classified in the fair value through profit or loss category.
   7.2 Transaction costs include fees and commissions paid to agents (including employees acting as sales agents), consultants, brokers, and market operators, fees charged by regulatory agencies and securities exchanges, and taxes and duties due upon transfer. Transaction costs do not include premiums or discounts on debt securities, financing costs, internal administrative costs, or holding costs.
   7.3 Institutions must record transaction costs as follows:
   a) For debt securities measured at amortized cost or fair value through other comprehensive income, transaction costs must be included in the effective interest rate calculation and must therefore be recognized gradually in profit or loss until maturity of the respective security; b) For equity instruments designated at fair value through other comprehensive income, transaction costs must remain in equity and must not be subsequently reclassified to profit or loss; and c) For securities classified in the fair value through profit or loss category, transaction costs must be recognized immediately in profit or loss upon initial recognition.

8. Subsequent Measurement
   8.1 After initial recognition, and considering their respective classification categories, Institutions must measure securities by:
   a) Amortized cost; b) Fair value through other comprehensive income; or, c) Fair value through profit or loss.
   8.2 Securities designated as hedged items must be measured according to hedge accounting requirements.
   8.3 Institutions must apply the impairment requirements, defined in Annex III of this Instruction, to securities classified in the amortized cost and fair value through other comprehensive income categories.

9. Fair Value Measurement
   Institutions must observe the fair value measurement hierarchy described in International Financial Reporting Standard 13 – Fair Value Measurement for purposes of measuring the fair value of securities.

10. Transitional Provision
    Institutions must comply with the provisions of this Instruction within 180 (one hundred and eighty) days after its publication.

11. Final Provisions
    11.1 This Instruction does not dispense with consulting the International Accounting Standards/International Financial Reporting Standards, hereinafter abbreviated as IAS/IFRS.
    11.2 Whenever discrepancies occur between this Instruction and the IAS/IFRS, standards issued by the IASB shall prevail.

12. Doubts and Omissions
    Doubts and omissions resulting from the interpretation and application of this Instruction shall be resolved by the National Bank of Angola.

13. Revocation
    All regulations contrary to this Instruction are revoked, namely Instruction No. 09/2016 of August 8.

14. Entry into Force
    This Instruction enters into force on the date of its publication.
    PUBLISHED.
    Luanda, August 28, 2019.
    THE GOVERNOR
    JOSÉ DE LIMA MASSANO

ANNEX I
Derecognition
Part 1 – Framework

1. Institutions must consider the requirements indicated below in evaluating the derecognition of securities.
2. For the purposes of the preceding 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).

• Have the rights to cash flows from the asset expired? No → Institution transferred its rights to receive cash flows from the asset? No → Institution assumed an obligation to pay the cash flows of the asset according to paragraph 3.2.5 of IFRS 9? → Institution transferred substantially all risks and benefits associated with ownership of the asset? Yes → Institution must derecognize the asset.
• (If No to transferred rights) → Institution assumed obligation? Yes → Institution retained substantially all risks and benefits associated with ownership of the asset? No → Institution must continue to recognize the asset.
• (If Yes to retained risks/benefits) → Institution retained control of the asset? Yes → Institution must continue to recognize the asset. No → Institution must derecognize the asset.

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Part 2 – Evaluation of Transfer of Risks and Benefits of Ownership of the Security

1. Institutions must consider that a transfer of risks and benefits associated with 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 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 (i.e., an option so far out of the money that it is highly unlikely to become in the money before expiration).
2. If Institutions transfer substantially all risks and benefits associated with ownership of a security, they must not re-recognize it in a future period, except in situations where they reacquire that security as part of a new transaction.

Part 3 – Retention of Risks and Benefits Associated with Ownership of the Security
Institutions must consider that a retention of risks and benefits associated with 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 return to the lender; b) Securities lending agreement; c) Sale of a security together with a total return swap that transfers 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.

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Part 4 – Evaluation of Transfer of Control Over the Security

1. Institutions must evaluate situations in which they do not hold control over a given security following the transfer of that control.
2. Institutions do not retain control over 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 a third party not related, and is able to exercise that ability unilaterally and without imposing additional restrictions on the transfer.
3. For the purposes of the preceding 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.
4. Even if the entity receiving the transfer has a reduced probability of selling the transferred asset, this does not, by itself, mean that the Institution has retained control over the transferred security.
5. Institutions must consider that they retain control over 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 – Framework

1. Institutions may carry out reclassifications of securities when, and only when, they change the business model.