JPRM-2021-009-G — Policies for the Presentation and Preparation of Financial Statements

THE MONETARY POLICY AND REGULATION BOARD
CONSIDERING:
That, Article 226 of the Constitution of the Republic of Ecuador stipulates that public servants and persons acting under state authority shall exercise only the competencies and powers attributed to them in the Constitution and the Law; That, Article 227 ibidem states that the Public Administration constitutes a service to the community governed by the principles of effectiveness, efficiency, quality, hierarchy, coordination, planning, among others; That, Article 303 ibidem determines: “(…) The formulation of monetary, credit, exchange, and financial policies is the exclusive authority of the Executive Branch and shall be implemented through the Central Bank. The law shall regulate the circulation of the currency with legal tender status in Ecuadorian territory. / The execution of credit and financial policy shall also be carried out through public banking. / The Central Bank is a public law legal entity, whose organization and operation shall be established by law”; That, Article 26 of the Organic Monetary and Financial Code provides that the Central Bank of Ecuador is “a public law legal entity, part of the Executive Branch, of indefinite duration, with institutional, administrative, budgetary, and technical autonomy (…)”; That, Article 27 of the aforementioned Code states that the objective of the Central Bank of Ecuador is to implement the monetary policy formulated by the Monetary Policy and Regulation Board, aimed at fostering and maintaining a stable monetary system, contributing to financial stability, and managing its balance sheet to preserve the integrity of dollarization, including the safe, solid, and efficient operation of payment systems and means; That, Article 27.1 ut supra establishes the scope of the institutional autonomy provided for the Central Bank of Ecuador, in accordance with current regulations; That, Article 30 ibidem determines that: “The net results of the Central Bank of Ecuador shall be determined based on the financial statements prepared in accordance with internationally recognized accounting standards applicable to the institution, which must include the opinion of an independent external auditor. (…)”; That, Article 31 of the aforementioned Code provides: “The Monetary Policy and Regulation Board shall review and approve the annual financial statements provided they comply with the policies and accounting procedures of the Central Bank of Ecuador, which must be based on internationally recognized accounting standards. (…)”;

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That, Article 33 of the Organic Monetary and Financial Code prescribes: “Within the general balance sheet of the Central Bank of Ecuador, the following systems are created: / First System: The liabilities of this System shall record national monetary species minted by the Central Bank of Ecuador that are in circulation, the Central Bank Bills (CBB) referred to in Article 126 of this Code, any other direct obligation with the public, and the deposits of other deposit societies, which include: private banks, mutual banks, savings and credit cooperatives, public banks with demand deposits. These liabilities must be covered one hundred percent by the assets of the international reserve. / Second System: The liabilities of this System shall record the deposits of other financial entities, including the National Financial Corporation B.P., the Bank of the Ecuadorian Social Security Institute, other public sector financial entities, and financial intermediaries that do not attract demand deposits from the public. These liabilities shall be covered with the remaining reserve assets once the First System is covered and must be equivalent to one hundred percent of the liabilities in this system. / Third System: The liabilities of this System shall record the deposits of the Non-Financial Public Sector (NFPS), duly authorized private legal entities, at the Central Bank of Ecuador, and transfers through the Payment System pending settlement, as well as the external debt specific to the Central Bank of Ecuador. These liabilities must be covered one hundred percent by the assets of the international reserve, once the second system has been fully covered. / Fourth System: Records the remaining asset and liability accounts of the Central Bank of Ecuador, including equity and results accounts. Once the Third System is covered, its remainder shall be added to the assets covering this System. / The liabilities of a system of lower priority shall not be honored with the assets of preceding systems. / The Monetary Policy and Regulation Board shall determine and publish the methodology for the distribution of assets and liabilities of each of the systems. The publication of the general balance sheet of the Central Bank of Ecuador, classified into the four systems, shall be carried out on a monthly basis.”; That, Article 47.1 of the aforementioned regulation creates the Monetary Policy and Regulation Board, as part of the Executive Branch, responsible for the formulation of monetary policy, the highest governing body of the Central Bank of Ecuador, and determines its composition; That, paragraph 21 of Article 47.6 of the aforementioned Code, as a function of the Monetary Policy and Regulation Board, establishes: “(…) 21. Approve the plan and dynamics of the accounting chart and the accounting policies of the Central Bank of Ecuador in consonance with internationally recognized accounting standards; (…)”; That, Transitional Provision Fifty-One of the Organic Monetary
and Financial Code provides: “(…) the Monetary Policy and Regulation Board shall adopt all necessary measures to ensure the full preparation and publication of its financial statements, policies, and accounting procedures in accordance with the adaptation of IFRS in all that is applicable to the nature of the Central Bank of Ecuador, for the closing of the financial year ending December 31, 2021, at the latest.”; That, Transitional Provision Fifty-Four of the Organic Monetary and Financial Code prescribes: “The resolutions contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions of the Monetary and Financial Policy and Regulation Board and the regulations issued by control bodies shall remain in effect until the Monetary Policy and Regulation Board and the Financial Policy and Regulation Board resolve what corresponds, within the scope of their competencies.”; That, it is necessary for the Monetary Policy and Regulation Board to recognize the monetary regulations contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions, issued by the former Monetary and Financial Policy and Regulation Board, which are currently in force, with the aim of incorporating these provisions into the monetary regulations specific to the Monetary Policy and Regulation Board, prior to the relevance analysis of each regulation and provision, in a disaggregated manner; That, it is necessary to establish the calculation methodology for the four balance systems for the measurement of the backing rule; as well as to update the Chart of Accounts of the Central Bank of Ecuador, in accordance with the current provisions established in the Organic Monetary and Financial Code; That, the Monetary Policy and Regulation Board, in an extraordinary session via technological means, on December 30, 2021, reviewed the proposal submitted via Memorandum No. BCE-BCE-2021-0231-M of December 29, 2021, by the General Manager of the Central Bank of Ecuador to the President of the Monetary Policy and Regulation Board, as well as Technical Report No. BCE-DFP-2021-213 of December 17, 2021; Technical Report No. BCE-DFP-2021-214 of December 17, 2021; and Legal Report No. BCE-CGJ-081-2021 of December 17, 2021. In exercise of its functions and in accordance with Article 47.7 of the Organic Monetary and Financial Code, the Monetary Policy and Regulation Board issues:
THE POLICIES FOR THE PRESENTATION AND PREPARATION OF FINANCIAL STATEMENTS, THE CHART OF ACCOUNTS OF THE CENTRAL BANK OF ECUADOR; AND, THE METHODOLOGY FOR THE DISTRIBUTION OF ASSETS AND LIABILITIES OF THE FOUR SYSTEMS FOR THE MEASUREMENT OF THE BACKING RULE.
Chapter I
POLICIES FOR THE PRESENTATION AND PREPARATION OF THE FINANCIAL STATEMENTS OF THE CENTRAL BANK OF ECUADOR

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Section I
General Standards
Art. 1.- Legal and General Provisions.-
In accordance with Article 303 of the Constitution of the Republic and the Organic Monetary and Financial Code, Article 27 “Objective”, of Section 2 “Of the Central Bank of Ecuador”, Chapter 1 “General Principles”, it is provided that the Central Bank of Ecuador shall implement the monetary policy formulated by the Monetary Policy and Regulation Board, aimed at fostering and maintaining a stable monetary system, contributing to financial stability, and managing its balance sheet to preserve the integrity of dollarization, including the safe, solid, and efficient operation of payment systems and means, for which, in accordance with Article 31 of the same Code, the Monetary Policy and Regulation Board shall review and approve the annual financial statements provided they comply with the policies and accounting procedures of the Central Bank of Ecuador, which must be based on internationally recognized accounting standards. In this regard, the Financial Statements of the Central Bank of Ecuador shall be issued for the review and approval of the Monetary Policy and Regulation Board, for annual periods, as of December 31 of each year. Likewise, it shall issue the following financial statements and reports on a monthly basis, which shall be submitted to the Public Finance Regulatory Authority:
a) Statement of Financial Position. b) Statement of Financial Performance. c) Established Technical Equity. d) Daily Consolidated General Ledger Accounts Statement. e) Analytical Balance.
The foregoing implies establishing accounting policies and criteria considering the nature of the Central Bank of Ecuador's operations so that the Financial Statements of the Central Bank of Ecuador permanently meet both the requirements established by the International Financial Reporting Standards (IFRS) and the amendments thereto, issued by the International Accounting Standards Board (IASB) insofar as they are applicable to the Central Bank of Ecuador; these policies and criteria shall be issued by the Monetary Policy and Regulation Board in the exercise of the powers established in the Organic Monetary and Financial Code. Art. 2.- Scope of Application and Reach.- The criteria established herein set forth principles, policies, and specific procedures adopted by the Central Bank of Ecuador in the preparation and presentation of its financial statements, as well as the minimum requirements regarding the content of the accounting and the preparation of financial reports of the Central Bank of Ecuador, as provided in the Organic Monetary and Financial Code, the regulations established by the Monetary Policy and Regulation Board, and the international financial reporting standards. Art. 3.- Objectives of the Financial Statements and Qualitative Characteristics of Useful Financial Information.- The objective of the Financial Statements of the Central Bank of Ecuador is to provide information about the financial position, profitability performance, and cash flows of the Institution at a given date, which is useful to a wide variety of users in making their economic decisions. To fulfill this objective, the financial statements will provide information about its assets, liabilities, equity, income, and expenses, and cash flows. The Financial Statements prepared for this purpose must cover the common needs of users of this information; therefore, for further analysis, the Financial Statements may be supplemented with other sources of information, for example, general economic conditions and expectations, events, and the political situation, at the local and international levels. In accordance with the objective described above, it is sought to ensure that the Financial Statements of the Central Bank of Ecuador provide qualitative information that is:
a) Relevant to the decision-making process. b) Faithful representation, in the sense that financial information meets the characteristics of being complete, neutral, and free from error.
Additionally, care must be taken that, complementarily, the financial information is:

• Comparable, meaning it allows evaluating the situation over time.
• Verifiable, meaning the figures presented have demonstrable support before any reviewer.
• Timely, meaning it is available and on time for decision-making.
• Understandable, it must be clear and concise for users of the Financial Statements.
• Prudent, economic and other events generally occur under conditions of uncertainty, so caution must be exercised in estimates.
• The economic essence of transactions, events, conditions, and not merely their legal form, shall be reflected.
  Although it is sought that the information in the Financial Statements meets all complementary characteristics, there may be a need to consider a balance among such characteristics that allows achieving the reasonableness of the Financial Statements in a timely manner.

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Art. 4.- Fundamental Accounting Principles.-
To the extent applicable, considering the special legal institutional nature of the Central Bank of Ecuador, in its capacity as a public law legal entity, part of the Executive Branch, of indefinite duration, with institutional, administrative, budgetary, and technical autonomy, the following fundamental accounting principles shall be observed:

• Going Concern: The Financial Statements are normally prepared under the assumption that the Institution is a going concern and will continue its activities in the foreseeable future. Therefore, it is assumed that the Institution has no intention or need to liquidate or significantly curtail its activities.
• Accrual Basis of Accounting: The Central Bank of Ecuador shall prepare its financial statements, except for information related to cash flows, using the accrual basis of accounting.
• Materiality: The Central Bank of Ecuador shall present separately each class of significant similar items and items of a different nature or function unless they are not material.
• Offset: The Central Bank of Ecuador shall record assets, liabilities, income, and expenses separately arising from its operations, except for those operations in which the accounting policy established by the Monetary Policy and Regulation Board or IFRS allows for net recording.
  Art. 5.- Elements of the Financial Statements and Their Recognition.- The Financial Statements reflect the financial effects of transactions and other events, grouping them into broad categories according to their economic characteristics. These broad categories are the elements of the Financial Statements of the Central Bank of Ecuador. The elements directly related to the valuation of the economic-financial position in the Statement of Financial Position are assets, liabilities, and equity. The elements directly related to the measure of performance in the Statement of Financial Performance are income and expenses. The description of these elements is as follows:
  Assets: An asset is a resource controlled by the Central Bank of Ecuador as a result of past events, from which the entity expects to obtain, in the future, economic benefits, meaning they can directly or indirectly contribute to the cash flows and other cash equivalents of the entity and also have a cost or value that can be measured reliably.
  It may also include as assets resources that, although they do not provide an economic benefit, generate a social benefit as part of the inherent nature of the Central Bank of Ecuador.
  Liabilities: A liability is a present obligation of the Central Bank of Ecuador, arising from past events, at the settlement of which, and to cancel it, the Central Bank of Ecuador expects to part with resources incorporating economic benefits.
  A liability is recognized in the statement of financial position when it is probable that, from the settlement of that present obligation, there will be an outflow of resources incorporating economic benefits, and furthermore, the amount of the disbursement to be made can be evaluated reliably.
  Equity: Equity is the residual interest in the assets of the Central Bank of Ecuador, after deducting all its liabilities.
  At times, legal, regulatory, or other requirements affect specific components of equity. The equity of the Central Bank of Ecuador is defined in the Organic Monetary and Financial Code, the legal regulation governing it.
  Income: Income are increases in economic benefits, produced over the accounting period, in the form of inflows or increases in the value of assets, or as decreases in liabilities, which result in increases in equity, and are not related to contributions to equity.
  Income is recognized in the statement of financial performance when there is a right as fulfillment of obligations agreed upon by the parties, or by events that generate an economic benefit for the entity and the amount of the income can be measured reliably.
  Expenses: Expenses are decreases in economic benefits, produced over the accounting period, in the form of outflows or decreases in the value of assets, or by the generation or increase of liabilities that result in decreases in equity, and are not related to distributions made from equity.
  An expense is recognized in the statement of financial performance when the events causing the consumption of the economic benefit associated with the expense are known or the factors that allow estimating an impairment of the resource are identified.
  The Central Bank of Ecuador shall apply the accounting standards established by the Monetary Policy and Regulation Board contained in the accounting policies, Chart of Accounts, and in the codification of resolutions of the Monetary Policy and Regulation Board adapted based on the International Financial Reporting Standards; in matters not provided for by said catalogs and cited codification, the provisions of IFRS shall apply. Art. 6.- General Criteria for the Presentation of the Financial Statements of the Central Bank of Ecuador.-

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The presentation format of the Financial Statements is framed within an economic-accounting scheme, which allows reflecting the financial position of the Institution and, on the other hand, facilitating the economic analysis of the Central Bank of Ecuador's operations by clearly identifying whether they are carried out with domestic or foreign agents. In this way, it is possible to appreciate the Central Bank of Ecuador's participation in the local supply or demand of monetary and credit assets, and how this affects the institution's creditor position with third parties. Thus, the economic concepts of international reserves, domestic assets, and local and external monetary liabilities form an integral part of the Balance Sheet elements. The set of Financial Statements to be presented by the Central Bank of Ecuador comprises:

1. Statement of Financial Position: This statement shows the representative items of the Central Bank of Ecuador's monetary operations, clearly separating international assets and liabilities from domestic or internal assets and liabilities according to liquidity or exigibility order.
2. Statement of Financial Performance: This statement separately shows the income and expenses generated from the Central Bank of Ecuador's monetary operations, both international and domestic, as well as income and expenses resulting from administrative management and other Bank activities, taking into account the nature of the expense.
3. Statement of Other Comprehensive Income: Corresponds to income and expense items that are not recognized in the profit or loss of the period, as they are recorded in equity accounts.
4. Statement of Changes in Equity: This statement shows a reconciliation between the initial and final balance of the same period for equity accounts.
5. Statement of Cash Flows: This statement shows in the functional currency the cash flows and cash equivalents occurring during the period, classifying them by operating, investing, and financing activities.
6. Notes to the Financial Statements: The annual Financial Statements of the Central Bank of Ecuador will include explanatory notes and supplementary tables with the disclosure of additional relevant information for the respective authorities and the general public, users of the entity's accounting information, regarding the accounting criteria used, risk management, as well as explanation and detail of certain items in the Financial Statements and any other situation deemed relevant to report. The set of explanatory notes, according to the circumstances and information needs of each period, may undergo changes through the modification, elimination, or inclusion of new notes.
   The general characteristics referred to the Financial Statements will be, among others, the following:
   a) They shall be prepared for annual periods as of December 31 of each year, and their preparation shall be carried out in accordance with the Accounting Policies and Chart of Accounts issued by the Monetary Policy and Regulation Board, and in matters not provided for by said documents, the provisions of IFRS shall apply. b) They shall include the opinion of external auditors appointed by the Governing Body, which shall be published in accordance with what is established by Law. c) The results that arise in