Standards for the Accounting of Permanent Shareholdings of Insurance Companies

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador.
Tel. (503) 2281-8000 www.bcr.gob.sv
CDSSF-06/2001
NCS-017
STANDARDS FOR THE ACCOUNTING OF PERMANENT SHAREHOLDINGS OF INSURANCE COMPANIES Approval: 08/02/2001 Effective Date: 01/03/2001

The Board of Directors of the Superintendency of the Financial System, based on the regulatory power contained in letter c) of Article 10 of the Organic Law of the Superintendency of the Financial System and to comply with Articles 37 and 85 of the Insurance Companies Law and Article 26 of its Regulations, issues the:

STANDARDS FOR THE ACCOUNTING OF PERMANENT SHAREHOLDINGS OF INSURANCE COMPANIES

CHAPTER I
OBJECT AND SUBJECTS

Object
Art. 1.- The object of these Standards is to define the timing and value of the recording of investments in shares of Salvadoran and foreign companies by insurance companies.

Art. 2.- The subjects obliged to comply with these Standards are the following:
a) Insurance companies incorporated in El Salvador; b) Branches of foreign insurers; and c) Cooperative associations that provide insurance services.

When insurance companies are mentioned in these Standards, it shall be understood that they refer to the subjects mentioned in the letters of this article; likewise, when the Superintendency is mentioned, it shall be understood that it refers to the Superintendency of the Financial System.

CHAPTER II
ACCOUNTING PROCESS

Initial Recording
Art. 3.- Insurance companies shall record at acquisition cost the shares they acquire from Salvadoran or foreign companies.

When the acquisition value is greater than the book value of the issuing entity, the insurance company shall transfer the excess value to a deferred charges account, which shall be amortized annually over a period of up to three years counted from the date of acquisition of the investment.

Valuation of Shares
Art. 4.- The valuation of permanent shareholdings shall be based on the equity method.

This method consists of initially recording the share investment at acquisition cost, which shall be adjusted periodically to recognize the proportional share of profits or losses of the issuing company subsequent to the date of acquisition. If it concerns profit, this shall be recorded in the respective sub-account of account 5705 "FINANCIAL AND INVESTMENT INCOME", and if it concerns loss, in the respective sub-account of account 4702 "LOSSES FROM DEVALUATION OF INVESTMENTS".

The value of the investment shall be adjusted on December 31 of each year, based on the book value of the issuing entity.

Adjustments that increase the value of investments shall not include amounts from the revaluation of property owned by the entity.

Cash Sale of Investments
Art. 5.- The cash sale of shares registered as permanent investments, when the selling price is higher than the value of the investment recorded in the accounting of the insurance company, shall cause a debit in cash for the selling price; a credit in the account recording the investments up to their value; and for the difference between the selling price and the value of the investment, a credit in the extraordinary income account.

In the case where the selling price is lower than the value of the investment recorded in the accounting of the insurance company, it shall cause a debit in cash for the selling price; a credit in the account recording the investments up to the selling price; and for the difference between the selling price and the value of the investment, a debit to the extraordinary expense account.

Credit Sale of Investments
Art. 6.- The credit sale of shares of Salvadoran or foreign subsidiaries, when the selling price is higher than the value of the investment recorded in the accounting of the insurance company, shall cause a debit in the asset account that records the right to collect for the selling price; a credit in the account recording the investments up to their value; and for the difference between the selling price and the value of the investment, a credit in the deferred credits account corresponding. The deferred value shall be reduced when this balance is lower than the receivable account balance, with a credit to the extraordinary income account.

In the case where the selling price is lower than the value of the investment recorded in the accounting of the insurance company, it shall cause a debit in the asset account that records the right to collect for the selling price; a credit in the account recording the investments up to the selling price; and for the difference between the selling price and the value of the investment, a debit to the extraordinary expense account.

CHAPTER III
OTHER PROVISIONS AND EFFECTIVE DATE

Dividends in Shares and Shares from Capitalization of Revaluations Art. 7.- When the insurance company receives shares from the capitalization of dividends or revaluations of subsidiaries, it shall not make any recording in the equity accounts because the economic interest of the shareholder insurance company is not modified; however, they must be disclosed in the note of material facts.

The movement of securities representing shares shall be recorded in control accounts.

Shares Acquired Before the Effective Date of These Standards Art. 8.- The period to amortize the premium on shares acquired prior to the effective date of these provisions shall be counted from January 1, 2001.

Art. 9.- Matters not contemplated in these Standards shall be resolved by the Board of Directors of the Superintendency of the Financial System.

Effective Date
Art. 10.- These Standards shall enter into effect as of March 1, 2001.