Notice No. 00009/GGBM/2001: Norms on Supervision on a Consolidated Basis

BANCO DE MOÇAMBIQUE
NOTICE NO. 00009/GGBM/2001
SUBJECT: NORMS ON SUPERVISION ON A CONSOLIDATED BASIS

The dynamics of the functioning of the Mozambican financial system, characterized by the constant emergence of new products and institutions, have shown a trend towards the formation of financial groups that trade various products and services.

Given the need to control contagion risk and safeguard transparency, the formation of financial groups imposes the establishment of prudential norms to guarantee the effectiveness of supervisory activities, particularly regarding supervision on a consolidated basis, the consolidation of accounts, and the calculation of own funds and solvency ratios on a consolidated basis.

Thus, the Bank of Mozambique, using the competence attributed by item d) of paragraph 2 of Article 37 of Law No. 1/92, of January 3 - Organic Law of the Bank of Mozambique - and under the provisions of Articles 62, paragraph 1, 64, 71, and 74 of Law No. 15/99, of November 1 - Law on Credit Institutions and Financial Societies, determines:

CHAPTER I
General Provisions

Article 1
Object
This Notice establishes the situations in which credit institutions and financial societies are subject to supervision on a consolidated basis by the Bank of Mozambique and sets the rules regarding the consolidation of accounts and the calculation of own funds on a consolidated basis.

Article 2
Definitions
For the purposes of this Notice, the following are considered:
a) Consolidated accounts - the consolidated balance sheet, the consolidated income statement, and the annex; b) Associated company - a company in which a credit institution or financial society holds a participation, in which the participating entity exercises significant influence over management and financial policy. Significant influence is presumed to exist when the participation corresponds to at least 20% of the voting rights; c) Parent company - a company (dominant) in a relationship of control over another company (subsidiary), referred to as a subsidiary, under item g) of paragraph 2 of Article 2 of Law No. 15/99, of November 1; d) Auxiliary services company - a company whose main activity is of an accessory or complementary nature to the activity of one or more credit institutions or financial societies, notably the ownership or management of real estate and the provision of computer services; e) Subsidiary or Subsidiary Company - a company over which another collective company, referred to as the parent company, is in a relationship of control in any of the variants of items i), ii), iv), and v) of item i) of paragraph 2 of Article 2 of Law No. 15/99, of November 1, or over which it effectively exercises dominant influence, in the judgment of the supervisory authorities of credit institutions and financial societies; f) Participation - The set of rights held directly or indirectly in the capital of a company, translated or not into securities, from which results the existence of a lasting link between the participating entity and the participant entity, with the objective of contributing to the activity of the latter; g) Financial participation - the direct or indirect holding of at least 20% of the voting rights or of the capital of a company; h) Administrative body - the management board, the board of directors, the executive management, or another body with analogous functions; i) Supervisory body - the supervisory board or another body with analogous functions. j) Supervision on a consolidated basis - supervision carried out by the Bank of Mozambique on credit institutions and financial societies obliged under this Notice to present consolidated accounts, notably because they constitute parent companies of other collective entities that are their subsidiaries or hold financial participations in them, or are linked to them by some other relationship or interest considered relevant under this Notice.

CHAPTER II
Supervision on a Consolidated Basis

Article 3
Entities Subject to Supervision on a Consolidated Basis Without prejudice to individual supervision, the Bank of Mozambique will exercise supervision on a consolidated basis on entities subject to its supervision that, exclusively or together with one or more other companies, control one or more companies, of which they are parent companies under item c) of the previous article.

2. Branches and subsidiaries of credit institutions or financial societies headquartered abroad, as well as credit institutions and financial societies that are subsidiaries of entities of another nature, headquartered or not in Mozambique, that are in the situation described in paragraph 1 of this article, shall be considered parent companies for the purposes established therein.

3. Credit institutions and financial societies, as well as the branches and subsidiaries referred to in paragraph 2 of this article, that hold financial participations in credit institutions, financial societies, and auxiliary services companies, shall also be subject to supervision on a consolidated basis.

Article 4
Exclusive Control
Without prejudice to the provisions of item g) of paragraph 2 of Article 2 of Law No. 15/99, of November 1, exclusive control over a given company is considered to exist when the parent company:
a) Has the majority of the voting rights corresponding to the capital of the company in question; or, b) Being the holder of a part of the capital of the company, controls alone, or by virtue of an agreement with other partners, the majority of the voting rights; or, c) Being a partner of the company, has the right to appoint or dismiss the majority of the members of the administrative or supervisory bodies; or, d) Participating in the capital of the company, has the right to exercise dominant influence over it as a result of an agreement with other partners or due to statutory clauses.

Article 5
Joint Control
A situation of joint control is considered to exist when the effective control of a company is exercised by a limited number of partners and the decisions relating to it result from common agreement among them.

Article 6
Elements to Consider in Qualifying Control
For the purposes of Articles 4 and 5:
a) The voting, appointment, and dismissal rights belonging to the parent company must be added to the rights corresponding to any other subsidiary company, as well as to the subsidiaries of this company, and also to those of any person acting in their own name but on behalf of the parent company or one of its subsidiaries; b) The voting rights of the holders of the capital of the subsidiary must be deducted by the amounts corresponding to the own shares or quotas held by this company, as well as those owned by a subsidiary of this company or by a person acting in their own name but on behalf of these companies.

Article 7
Other Cases of Subjecting or Inclusion in Supervision on a Consolidated Basis The Bank of Mozambique may also determine that a credit institution or financial society is subject to or included in supervision on a consolidated basis when:
a) It exercises significant influence over another credit institution, financial society, or auxiliary services company, regardless of the amount of participation held in them. b) Two or more credit institutions, financial societies, or auxiliary services companies in which these hold financial participations:
i. Are under single direction, even if this does not result from statutory or contractual clauses;
ii. Have administrative or supervisory bodies mostly composed of the same persons;
iii. Are held by common shareholders in a proportion considered significant.

Article 8
Exemption or Exclusion from Supervision on a Consolidated Basis

1. Upon a duly justified request, the Bank of Mozambique may exempt or exclude from supervision on a consolidated basis a credit institution or financial society, as well as the accounts of its subsidiaries and auxiliary services companies, if their inclusion presents little relevance for supervision;
2. It is considered that companies whose balance sheet has a value of less than two billion five hundred million meticais or represents less than 1% of the balance sheet of the parent company may not constitute cases of relevant interest. When there are several companies that meet these conditions, the value corresponding to the sum of their respective balance sheets must be used to assess the degree of interest.
   The Bank of Mozambique may also exclude from supervision on a consolidated basis entities whose inclusion, in its view, is inadequate or likely to mislead.

Article 9
Ratios and Prudential Limits
The ratios and limits established in Notice No. 05/GGBM/99, published in the Official Gazette No. 12, III series, of March 24, 1999, when applicable, must be respected by credit institutions and financial institutions, not only in individual terms, but also at the consolidated level. For this purpose, the consolidated financial situation of the set of entities included in the consolidation, established in harmony with the rules fixed by this notice, will be considered.

Article 10
Duty to Provide Information to the Bank of Mozambique Credit institutions, financial societies, associated companies, and auxiliary services companies, companies participated in by credit institutions or financial societies, as well as those that participate in the capital of these, directly or indirectly, are obliged to provide the Bank of Mozambique with all elements or information that it considers relevant and necessary for supervision on a consolidated basis.

Institutions subject to supervision by the Bank of Mozambique, whose capital is wholly or partially held by credit institutions headquartered abroad, may provide participating institutions with the information necessary for supervision on a consolidated basis carried out by the supervisory authorities of the country of the participating company.

Whenever it deems necessary for the supervision on a consolidated basis of credit institutions and financial societies, the Bank of Mozambique may carry out or order expert checks and examinations in its subsidiaries, associated companies, auxiliary services companies, and other participated entities.

Article 11
Cooperation with Other Supervisory Entities
When any of the entities referred to in the previous article is subject to the supervision of another entity, the Bank of Mozambique will request from it the information necessary for supervision on a consolidated basis.

Within the scope of supervision on a consolidated basis, the provisions of Article 57 of Law No. 15/99, of November 1, are applicable.

Article 12
Form, Periodicity, and Responsibility of Information The Bank of Mozambique will establish the necessary reports for supervision on a consolidated basis and their periodicity.
The responsibility for providing the information necessary for supervision on a consolidated basis belongs to:
a) The parent company, subject to supervision by the Bank of Mozambique, as described in Article 3 of this notice; b) Whoever the Bank of Mozambique requests it from, in other cases.

Article 13
Internal Control Procedures
Entities covered by supervision on a consolidated basis must have adequate internal control procedures to verify, at any time, compliance with the limits referred to in Article 9 and to guarantee the reliability of the information referred to in Article 10, both of this notice, with the institution responsible for providing the information ensuring the existence and adequacy of such procedures.

CHAPTER III
Consolidation of Accounts

Article 14
Requirements for Preparing Consolidated Accounts and Report

1. Credit institutions and financial societies subject to supervision on a consolidated basis under Article 3 of this notice, as well as those determined by the Bank of Mozambique under Article 7, must prepare consolidated accounts and a consolidated management report.
2. Consolidated accounts must faithfully represent the assets, financial situation, and results of the companies included in the consolidation as if it were a single company.

Article 15
Accounts of Parent Company and Subsidiaries
For the preparation of consolidated accounts, the accounts of the parent company and all its subsidiaries, auxiliary services companies in which it holds financial participations, and other companies whose inclusion in the consolidation of accounts is determined by the Bank of Mozambique must be considered, regardless of the location of their headquarters.

Article 16
Accounts Excluded from Consolidation

1. The accounts of companies that, taking into account the different nature of their activity, notably those of commercial, industrial, agricultural, and insurance companies, do not allow the presentation of consolidated accounts that clearly translate the assets, financial situation, and results of the set of companies included in the consolidation are not included in the consolidation.
2. The accounts of companies in which the following occur may also be excluded from consolidation:
   a) Facts occur, with severe and lasting effects, that substantially limit the exercise by the parent company of its rights over the assets or management of the company in question; b) The information necessary for the preparation of consolidated accounts cannot be obtained without disproportionate costs or within an acceptable timeframe; c) The representative parts of its share capital are held exclusively with the objective of their short-term alienation.
3. The accounts of entities subject to supervision by the Bank of Mozambique, as well as those that develop a complementary or auxiliary activity to that of the parent company or subsidiaries included in the consolidation, notably companies providing computer services or management services or holding real estate, shall always be included in the consolidation.
4. The exclusion from consolidation always requires prior authorization from the Bank of Mozambique.

Article 17
Full Consolidation Method
For the preparation of the consolidated accounts of the parent company and its subsidiaries, the "full consolidation method" will be used, which requires that:
a) The consolidated balance sheet includes the total assets, liabilities, and equity of the companies included in the consolidation, after making the corresponding deductions for:
i. Credits and debts between companies;
ii. Assets corresponding to gains resulting from operations carried out between companies;
iii. Provisions for risks relating to the same companies.
b) The consolidated income statement includes the total revenues and gains, as well as costs and losses, of the companies included in the consolidation after eliminating those corresponding to operations carried out between these same companies, including those that are part of the accounting value of the assets; c) The accounting values of the parent company's participations in the capital of its subsidiaries are eliminated against the corresponding part of the nominal value of the equity of these subsidiaries; d) The compensation referred to in the previous number is made based on the accounting values existing on the date when the subsidiaries are first included in the consolidation, and the differences found are imputed, as far as possible, directly to the asset and liability items that have a fair value higher or lower than their accounting value. Fair value is considered to be the price at which a certain asset could be negotiated between a knowledgeable and interested buyer and seller in a transaction within their reach; e) The difference that remains after carrying out the operations referred to in items c) and d) of this article is recorded in the consolidated balance sheet in a line item called "Consolidation Differences," whose value:
i. If positive, must be considered an intangible fixed asset, and its amortization must occur according to a plan established based on the objectives of the acquisition, but in no case may it exceed forty years, or, alternatively, directly deducted from consolidated reserves;
ii. If negative, it should be recorded in the liabilities, and may be charged to the consolidated income statement if it corresponds to the prediction, at the date of acquisition of the participation, of an unfavorable evolution of the future results of the participated company, the prediction of losses it will cause, and to the extent that such prediction has materialized at the date when the consolidated accounts are prepared, or to an effectively realized capital gain.
f) Values corresponding to the parts of capital held in the subsidiary companies included in the consolidation by persons who are not the companies included in that same consolidation are recorded in the consolidated balance sheet in a line item titled "Minority Interests"; g) The part of the results corresponding to the parts of capital held in the subsidiary companies included in the consolidation by persons who are not the companies included in that same consolidation is recorded in the consolidated income statement in a line item titled "Minority Interests".

Article 18
Proportional Consolidation Method
In situations of joint control, as referred to in Article 5, the "proportional consolidation method" is used, according to which the accounts of companies in such a situation are included in the consolidated accounts in proportion to the rights held in their capital by the parent company and the subsidiaries included in the consolidation. The rules provided for in Article 17 apply, with the necessary adaptations.

Article 19
Proportional Equivalence Method
Participations in companies where there is no exclusive or joint control, but where the participating entity exercises significant influence, must be recorded in the consolidated balance sheet in a line item titled "Parts of capital in associated companies."

Participations corresponding to companies excluded from consolidation under the terms of Article 16 are also recorded in the consolidated balance sheet, in a line item titled "Parts of capital in subsidiaries excluded from consolidation."

This procedure, usually designated as the "equity method," presupposes that:
a) The first time it is applied, each participation is recorded in the consolidated balance sheet by the amount corresponding to the proportion of the equity of the participated company that this same participation represents; b) The difference between the value referred to in the previous point and the value at which the participation is recorded in the balance sheet of the participating company is recorded in the consolidated balance sheet in a line item titled "Revaluation Differences - Equity Method," which, if positive, must be amortized within a period of 5 years. In duly justified cases, this period may be extended, but may not exceed 40 years; c) The value referred to in the previous point is increased or decreased by the amount corresponding to any variation verified during the exercise of the part corresponding to the proportion of the equity held in the participated company. The amount of dividends or profits, corresponding to the participation, attributed or made available to the participating company must be deducted from this same value; d) The part of the results of these companies corresponding to their participations is recorded in the consolidated income statement in a line item called "Results in associated companies and in subsidiaries excluded from consolidation".

Article 20
Consistency of Consolidation Methods

1. Consolidation methods and procedures must be applied consistently from one financial year to another.
2. The criteria for valuing assets and liabilities considered in the consolidated balance sheet must be applied according to the valuation criteria provided for in the "Chart of Accounts for Credit Institutions and Financial Societies." When any of the companies to be included in the consolidation uses different valuation criteria, appropriate adjustments must be made, unless the difference is not relevant for the purpose of the consolidated accounts.
3. Consolidated accounts must refer to the same date and period as the accounts of the parent company.

Article 21
Composition of Consolidated Accounts

1. Consolidated accounts consist of the consolidated balance sheet, the consolidated income statement, and the annex.
2. The models for the consolidated balance sheet and consolidated income statement are published as an annex to this notice.
3. The annex to the consolidated accounts must include indications on:
   a) The aspects referred to in the notes provided for in point 1.2.6 of Chapter VI of the Chart of Accounts for Credit Institutions and Financial Societies (Notice No. 13/GGBM/99, published in the Official Gazette No. 50, III Series, of December 13, 2000), when the consolidated accounts represent a significant modification relative to the accounts of the parent company; b) The value of the line items "Consolidation Differences" and "Revaluation Differences - Equity Method," the methods used, and, if relevant, the changes registered relative to the previous financial year and the grounds justifying an amortization period of more than five years; c) The existence of cases where the consolidation difference was deducted from the value of reserves; d) The valuation criteria used for the various line items of assets and liabilities of the consolidated accounts, the methods for determining provisions and amortizations, and the process for converting originally foreign currency-denominated asset elements; e) A summary description of the group structure, referring to the evolution registered during the financial year, and information that allows successive consolidated balance sheets and consolidated income statements to be comparable in case the composition of the set of companies included in the consolidation has changed significantly during the financial year; f) The name and headquarters of the subsidiary companies included in the consolidation, as well as the part of the capital held in them, whether by the parent company, by other companies also included in the consolidation, or by persons acting in their own name but on behalf of the said companies; g) The name and headquarters of the companies that, under paragraph 1 of Article 16, were not included in the consolidation, as well as the part of the capital held in them, whether by the parent company, by other companies also included in the consolidation, or by persons acting in their own name but on behalf of the said companies; h) The name and headquarters of the companies that have been included in the consolidation according to the proportional consolidation method, the demonstration of the existence of joint direction, and the proportion of capital held by the companies included in the consolidation or by persons acting in their own name but on behalf of these companies; i) The name and headquarters of the associated companies of the parent company or subsidiary companies, included or not in the consolidation, with indication of the part of the capital held by the said companies or by persons acting in their own name but on behalf of the same companies; j) The total amount of debts registered in the consolidated balance sheet whose residual duration is more than five years, as well as the total value of the debts that appear in the consolidated balance sheet