Technical Standards for the Registration of Property Revaluations of Financial Entities

NCF-03
REAL ESTATE OF FINANCIAL ENTITIES
Approval: 05/06/2024
Validity: 20/06/2024

THE TECHNICAL COMMITTEE OF THE CENTRAL BANK OF RESERVE OF EL SALVADOR,

CONSIDERING:

I. That articles 236 of the Banks Law, 65 of the Investment Banks Law, and 45 of the Cooperative Banks and Savings and Credit Societies Law establish that banks, investment banks, and cooperative banks may acquire or conserve real estate and movable property, as well as construct buildings necessary for their operation or ancillary services, provided that their total value, excluding twenty-five percent of the revaluation value, does not exceed seventy-five percent of their equity fund. (1)

II. That article 155 of the Cooperative Banks and Savings and Credit Societies Law establishes that savings and credit societies shall be subject to the provisions of the Banks Law, except as provided in Book IV of the Cooperative Banks and Savings and Credit Societies Law.

III. That article 3, third paragraph of the Investment Banks Law establishes that, in accordance with the Financial System Supervision and Regulation Law, Investment Banks constituted in accordance with the Investment Banks Law shall have the status of members of the Financial System. (1)

IV. That article 2, first paragraph of the Financial System Supervision and Regulation Law establishes that the Financial Supervision and Regulation System aims to preserve the stability of the financial system and ensure its efficiency and transparency, as well as ensure the safety and solidity of the members of the financial system in accordance with what is established by said Law, other applicable laws, regulations, and technical standards issued for this purpose, all in concordance with international best practices on the matter. (1)

V. That article 3, letter c) of the Financial System Supervision and Regulation Law establishes that it is the responsibility of the Superintendence of the Financial System to proactively monitor the risks of the members of the financial system and the manner in which they manage them, ensuring the prudent maintenance of their solvency and liquidity. (1)

VI. That article 99, third paragraph, letter a) of the Financial System Supervision and Regulation Law establishes that it is the responsibility of the Technical Committee of the Central Bank of Reserve of El Salvador to approve technical standards, instructions, and provisions that the laws regulating the supervised entities establish must be issued to facilitate their application, especially those related to solvency requirements, liquidity, provisions, reserves, classification of risky assets, criteria for establishing the need for consolidation, good corporate governance practices,

NCF-03
REAL ESTATE OF FINANCIAL ENTITIES
Approval: 05/06/2024
Validity: 20/06/2024

corporate transparency of information, and on any other aspect inherent to risk management by the supervised entities. (1)

THEREFORE,

by virtue of the regulatory powers conferred by article 99 of the Financial System Supervision and Regulation Law,

AGREES to issue the following:

TECHNICAL STANDARDS FOR THE REGISTRATION OF REVALUATIONS OF REAL ESTATE OF FINANCIAL ENTITIES

CHAPTER I
OBJECT, SUBJECTS, AND TERMS

Object
Art. 1.- These Standards aim to establish the criteria that subjects obligated to register the revaluation of real estate classified as physical assets of the obligated subjects, their depreciation, and their adjustments and removal, must comply with, in accordance with applicable laws.

Subjects
Art. 2.- The subjects obligated to comply with the provisions established in these Standards are:
a) Banks constituted in the country; b) Branches of foreign banks established in the country; c) Savings and credit societies; d) Cooperative banks; e) Federations formed by cooperative banks and also by savings and credit societies; f) The Mortgage Bank of El Salvador, S.A. g) The Development Bank of the Republic of El Salvador; (1) h) The Agricultural Development Bank, insofar as it does not contradict its Creation Law; and (1) i) Investment banks. (1)

Terms
Art. 3.- For the purposes of these Standards, the terms indicated below have the following meaning:
a) Central Bank: Central Bank of Reserve of El Salvador;

NCF-03
REAL ESTATE OF FINANCIAL ENTITIES
Approval: 05/06/2024
Validity: 20/06/2024

b) Entity: Subject obligated to comply with these Standards; and c) Superintendence: Superintendence of the Financial System.

CHAPTER II
DETERMINATION OF VALUES

Revaluation book value
Art. 4.- The book value of the revaluation shall be the difference obtained by subtracting the value of the asset on the date of authorization from the revaluation value authorized by the Superintendence. For the purposes of these Standards, the value of the asset shall be the original cost plus previous revaluations.

Residual value
Art. 5.- The residual value shall be determined freely by the corresponding entity, based on the same method and criteria used for the acquisition cost.

Future depreciation
Art. 6.- The future depreciation of the revaluation shall be established based on the same method and criteria used for the acquisition cost. The amount of annual depreciation of that revaluation shall be determined by dividing the value obtained based on article 4 of these Standards by the estimated useful life on the date of revaluation plus the elapsed existence.

Update of depreciation
Art. 7.- To update the depreciation of the asset subject to revaluation, the quotient obtained in the manner established in article 6 of these Standards shall be multiplied by the number of years the asset has been in ownership, and the resulting value shall be the accounting adjustment.

CHAPTER III
ACCOUNTING APPLICATIONS

Registration of revaluation
Art. 8.- The book value of the revaluation will result in an increase or decrease in the corresponding complementary asset sub-account and an increase or decrease in the equity sub-account that records the revaluations of real estate assets.

Registration of depreciation adjustment
Art. 9.- The value determined according to article 7 of these Standards will cause a debit in the equity sub-account that records the revaluations of real estate assets and a credit in accumulated depreciation.

NCF-03
REAL ESTATE OF FINANCIAL ENTITIES
Approval: 05/06/2024
Validity: 20/06/2024

Registration of depreciation
Art. 10.- The depreciation of revalued assets will result in an increase in "Administrative Expenses" and an increase in the corresponding accumulated depreciation.

Removal by sale with gain
Art. 11.- The cash sale of a revalued asset that produces a gain will cause the following accounting applications:
a) The accounting record will have the following debits:
i) In the cash account corresponding to the sale value; ii) In depreciation for the accumulated amount on the date of sale; and iii) In the equity sub-account containing the revaluation amount. b) The credits will correspond to the following concepts:
i) In the asset sub-account containing the original cost and revaluations; and ii) In "Other Operations Income", for the value of the gain.

The financed sale of a revalued asset that produces a gain will cause the following accounting applications:
a) The accounting record will have the following debits:
i) In the asset account that records the loan for the sale value; ii) In depreciation for the accumulated amount on the date of sale; and iii) In the equity sub-account containing the revaluation amount. b) The credits will correspond to the following concepts:
i) In the asset sub-account containing the original cost and revaluations; and ii) In "Deferred Liabilities – Unearned Income Received", for the value of the gain.

The balance of this account will be amortized by debiting it with a credit to "Other Operations Income" each time it exceeds the amount of the capital plus interest owed by the debtor, by a sum equal to the difference.

Removal by sale with loss
Art. 12.- The sale of a revalued asset that results in a loss will cause the following accounting applications:
a) The accounting record will have the following debits:
i) In the asset account corresponding to the sale value; ii) In depreciation for the accumulated amount on the date of sale; iii) In the equity sub-account containing the revaluation amount; and iv) In "Other Operations Costs", for the value of the loss.

NCF-03
REAL ESTATE OF FINANCIAL ENTITIES
Approval: 05/06/2024
Validity: 20/06/2024

b) The credits will correspond to the following concepts:
Only the asset sub-accounts containing the original cost and revaluations will be credited.

Removal for other causes
Art. 13.- When the asset is removed from assets for causes other than sales to third parties, the following accounting applications will be made:
a) The accounting record will have the following debits:
i) In "Other Operations Costs", for the net value of the asset, established by subtracting accumulated depreciation from the original cost plus revaluations; ii) In accumulated depreciation, on the date of removal of the asset; and iii) In the equity sub-account containing the revaluation amount. b) The credits will correspond to the following concepts:
Only the asset sub-accounts containing the original cost and revaluations will be credited.

CHAPTER IV
OTHER PROVISIONS AND VALIDITY

Art. 14.- In no case may the surplus from revaluations be integrated into share capital, except for the profit when the respective assets that were the subject of revaluation have been realized through cash sale; if the sale was on credit, realized profit will be considered only the part that exceeds the value of the capital plus interest owed by the debtor, with prior authorization from the Superintendence, according to articles 37 of the Banks Law, 26 of the Investment Banks Law, and 20 of the Cooperative Banks and Savings and Credit Societies Law. (1)

Nor may the surplus from revaluation and profits obtained from the credit sale of revalued assets be distributed as dividends.

Sanctions
Art. 15.- Non-compliance with the provisions contained in these Standards will be sanctioned in accordance with what is established in the Financial System Supervision and Regulation Law.

Repeal
Art. 16.- These Standards repeal the "Regulation to Account for Revaluations of Real Estate of Banks and Finance Companies" (NCB-010), approved by the Board of Directors of the Superintendence of the Financial System in Session No. CD-33/1996 on June 26, 1996, and the "Standards to Account for Revaluations of Real Estate of Non-Bank Financial Intermediaries" (NCNB-004), approved by the Board of Directors of the Superintendence of the Financial System in Session No. CD-40/2001 on August 16, 2001, respectively, whose Organic Law was repealed by Legislative Decree No. 592, which contains the Financial System Supervision and Regulation Law, published in the Official Journal No. 23, Volume 390, on February 2, 2011.

Unforeseen Aspects
Art. 17.- Aspects not provided for in the regulatory matter in these Standards will be resolved by the Central Bank through its Technical Committee.

Validity
Art. 18.- These Standards will enter into force as of June 20, two thousand twenty-four.

MODIFICATIONS:
(1) Modifications to considerations I, III, IV, and V and incorporation of consideration VI, and modification in articles 2 and 14, approved by the Central Bank through its Technical Committee, in Session No. CN-09/2025, on November 10, two thousand twenty-five, with validity as of November 25, two thousand twenty-five.