Update to Transitional Directives Regarding the Measurement of Interest Income

Bank of Israel Supervision and Policy of Banks Fax: 03-5661110 Tel: 03-5640520 P.O.B 61004, Tel Aviv

2 Cheshvan 5774 October 17, 2013 Circular No. 2401-06

To: Banking Corporations, Credit Card Companies

Subject: Update to Transitional Directives Regarding the Measurement of Interest Income (Reporting Instructions)

Introduction

1. Circular No. 2325-06 was published on 29.12.2011, establishing the format of the Profit and Loss Statement in accordance with the adoption of International Financial Reporting Standards (IFRS) by banking corporations and the measurement of interest income.
2. Circular No. 2343-06 was published on 25.7.2012, setting the date from which Directive 310-20 shall apply, starting from 1.1.2014.
3. In light of inquiries from banking corporations to enable the implementation of Directive 310-20 with prudence and efficiency, and after consultation with the Accounting Standards Advisory Committee and the Accountants Association of Israel, there is a need to update the transitional directives on this subject. Accordingly, I have established the following transitional directives for the year 2014 regarding banking business:

Amendments to the Directives 4. Page 672-4 will be updated as specified below. 5. Page 672-4.1 will be added as specified below.

Effective Date 6. The transitional directives set forth in this circular shall apply from 1.1.2014 onwards. 7. A banking corporation or an accountant who has difficulty implementing this circular should contact Mr. Eido Galil, Head of Reporting Unit. Specific Guidelines

Update to the Reporting Instructions Document 8. The following updates are made to the "Reporting Instructions" document, in the pages marked "*":

Insert Page | Remove Page *(2/13) [1] 672-3 | (2/13) [1] 672-3 (10/13) [2] 672-4 | (2/13) [1] 672-4 (10/13) [1] 672-4.1 | ------- *(9/13) [3] 699-108 | (9/13) [3] 699-108 (10/13) [1] 699-109 | -------

• This page was reprinted due to the double-sided printing transition following the update; it is identical to the existing text.

With respect, David Zakin Supervisor of Banks

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Page (10/13) [2] of "Reporting Instructions" issued by the Supervisor of Banks Page 672-4 (Transitional Directives 2012)

International Accounting Standard No. 28 Concerning Investment Companies Included in Core Banking Business Topics Despite the aforementioned International Accounting Standard No. 28 concerning "Investment Companies," a banking corporation may, for practical reasons, not make accounting adjustments for the years 2011, 2012, and 2013, provided that the accounting policy applied through an included real company relates to topics relevant to core banking business and that the accounting policy of the included company is consistent with these topics. The banking corporation acting accordingly shall disclose this pursuant to this section.

Clarification regarding Section 16: a. This section applies only to a real included company that prepares its financial statements in accordance with International Financial Reporting Standards. b. For topics in core banking business – where the reporting instructions have not yet been adopted – the international financial reporting standards.

Regarding the Format of the Profit and Loss Statement in Accordance with the Adoption of International Financial Reporting Standards by Banking Corporations and the Measurement of Interest Income 18. The directives set forth in the aforementioned circular regarding the format of the Profit and Loss Statement in accordance with the adoption of International Financial Reporting Standards by banking corporations and the measurement of interest income shall apply retroactively from the first quarter of 2012 onwards. The amendments related to the adoption of International Financial Reporting Standards by banking corporations and the measurement of interest income shall apply from 1.1.2014 onwards for transactions created from then on. A banking corporation shall provide disclosures in quarterly and semi-annual financial reports for the years 2014 and 2015 regarding the impact of the implementation of this section on net interest income, excluding non-interest income and profit.

a. Prepayment fee income treated as accounting before 1.1.2014 shall continue to be treated as such until 31.12.2013, according to the reporting instructions in effect. b. A banking corporation shall determine whether a modification of loan terms constitutes a restructuring of debt. If the change is deemed immaterial according to the quantitative test specified in Section 10.7.11, it may: a. Determine an accounting policy for loans where currency changes occurred, considering the change as immaterial. b. Use reasonable estimates for other loans, ensuring prudent determination of present value calculations without involving complex calculations. The banking corporation shall maintain documentation showing that the accounting treatment is prudent. If it is possible to use reasonable estimates to determine that the change is immaterial, the provisions of Section 10 shall apply. c. A banking corporation shall handle origination fees for credit allocations as required in Section 10.7.3 of the reporting instructions. It may: a. Assume that the probability of exercising the commitment to extend credit is insignificant. b. Recognize a relative portion of the credit allocation fee at each utilization date, based on a straight-line basis over the period calculated from the utilized portion of the credit facility, plus a prudent additional amount ensuring reasonable prudence similar to loan repayments. c. Without regard to the extent of the commitment to extend credit expiring, recognize profit from the credit allocation fee for the unused portion of the credit facility at the time the commitment expires.

Application of the Directive Regarding Measurement of Impairment Losses and Provisions for Credit Risk, Disclosure of Bad Debts 19. From 1.1.2012 onwards, a banking corporation is required to eliminate indexation differences accrued on the principal of "credit" loans, except for debts classified as impaired since 1.1.2012, regarding paid but not yet impaired debts.

Transfers of Services and Settlement of Financial Assets and Liabilities 20. See Section 6.2.2 of the "Igguch" report (Chaymovitz Committee). A banking corporation applying these directives transferred financial assets in a securitization transaction recorded as a sale and recognized the deferred rights retained in the transaction. These rights shall be treated initially after recognition as follows:

1. The balance sheet balance of the deferred rights shall be amortized using the straight-line method over a period not exceeding 36 months from the date of their creation (1/36 deducted at the end of the first month, 1/35 deducted at the end of the second month).
2. At each reporting date, there is a need to examine whether there is a write-down in the value of the deferred rights.

1 See EITF 99-20 "recognition of interest income and impairment on purchased and retained beneficial interests in securitized financial assets"

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Page (10/13) [1] of "Reporting Instructions" issued by the Supervisor of Banks Page 672-4.1 (Transitional Directives 2012)

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Page (10/13) [1] of "Reporting Instructions" issued by the Supervisor of Banks Page 699-109 Updates Key

Update to Transitional Directives Regarding the Measurement of Interest Income (Circular No. 2401-06 dated 17/10/2013) (Interest)

Insert Page | Remove Page *(2/13) [1] 672-3 | (2/13) [1] 672-3 (10/13) [2] 672-4 | (2/13) [1] 672-4 (10/13) [1] 672-4.1 | ------- *(9/13) [3] 699-108 | (9/13) [3] 699-108 (10/13) [1] 699-109 | -------

• This page was reprinted due to the double-sided printing transition following the update; it is identical to the existing text.