Use of IFRS for Banking Prudential Reporting

NBB_2016_41 – October 12, 2016 Communication – Page 1/4 boulevard de Berlaimont 14 – BE-1000 Brussels tel. +32 2 221 38 12 – fax + 32 2 221 31 04 company number: 0203.201.340 RPM Brussels www.bnb.be Communication Brussels, October 12, 2016 Reference: NBB_2016_41 your correspondent:
Michel Colinet tel. +32 2 221 37 17 – fax +32 2 221 31 04 michel.colinet@nbb.be Use of IFRS for Banking Prudential Reporting Scope Belgian credit institutions.
Financial services groups headed by a regulated Belgian institution (hereinafter financial holdings) and financial services groups headed by a Belgian mixed financial holding company (hereinafter mixed holdings).
Branches established in Belgium of credit institutions established in a third country or another Member State participating or not participating in the Single Supervisory Mechanism (SSM).
Summary/Objectives
This communication addresses the possibility of using the IFRS framework as a basis for establishing harmonized prudential reporting on an individual basis (statutory/solo). The communication is addressed to the aforementioned institutions and their approved auditors.
Structure
This communication comprises two parts:
(a) The communication, for information, of the decision of August 10, 2016 by the ECB to authorize, pursuant to Article 24.2 of the CRR, on a case-by-case basis and under certain conditions, the use of IFRS for prudential reporting. This decision will concern Significant Institutions (SI).
(b) The communication by the Bank of its intention to extend to Less Significant Institutions (LSI) the same policy of authorization, on a case-by-case basis and under the same conditions, of the use of IFRS for prudential reporting.

Communication – Page 2/4 NBB_2016_41 – October 12, 2016 Madam, Sir,
Article 24.1 of the CRR 1 provides that "the valuation of assets and off-balance-sheet items shall be performed in accordance with the applicable accounting framework." Article 99 of the CRR and the regulations of the European Commission adopted pursuant to this provision specify the requirements for prudential and financial information reporting (reporting) by credit institutions.
For Belgian credit institutions, the combination of these two provisions results in the obligation to report COREP and FINREP in IFRS at the consolidated level and COREP in Belgian accounting standards (BGAAP) at the individual level (= statutory or solo).
A FINREP report is also required at the individual level since the entry into force of the ECB Regulation on FINREP (ECB Regulation (EU) 2015/534 of the European Central Bank of March 17, 2015 concerning the reporting of prudential financial information (ECB/2015/13)). As indicated in circular NBB_2016_06 regarding the implementation of this ECB Regulation, Belgian credit institutions must report FINREP on an individual basis in accordance with Belgian national accounting standards (BGAAP). The ECB has recently decided that it will accept to authorize, on a case-by-case basis and subject to certain conditions, (significant) institutions that request it to use IFRS as a basis for establishing prudential and financial reporting, FINREP and COREP. For Belgian credit institutions, this concerns the reports required at the solo level (individual basis), since IFRS are already applied at the consolidated level. This decision by the ECB was taken following a public consultation on an "Addendum to the ECB Guide on options and discretions available in Union law". The final version of this Addendum was published by the ECB on its website on August 10, 2016:
https://www.bankingsupervision.europa.eu/legalframework/publiccons/html/index.en.html .
This communication only concerns the accounting framework to be used for certain prudential reports, since these are required pursuant to the CRR or ECB Regulations. This communication does not create new reporting obligations.
1 Footnote: Regulation (EU) No 575/2013 of the European Parliament and of the Council of June 26, 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012.

NBB_2016_41 – October 12, 2016 Communication – Page 3/4 Point 10 of the aforementioned ECB Addendum states the following:
“10. VALUATION OF ASSETS AND OFF-BALANCE-SHEET ITEMS – USE OF IFRS FOR PRUDENTIAL PURPOSES (Article 24(2) of the CRR) The ECB has determined not to exercise in a general manner the option set out in Article 24(2) of the CRR, which allows competent authorities to require credit institutions to effect, for prudential purposes, the valuation of assets and off-balance-sheet items and the determination of own funds in accordance with the International Accounting Standards, also in cases where the national applicable accounting framework requires the use of n-GAAP (see also Article 24(1) of the CRR). Banks can therefore continue reporting to the supervisor according to their national accounting standards. However, the ECB will assess applications to use International Accounting Standards for prudential reporting (also in cases of applicability of n-GAAP under the national accounting framework) pursuant to Article 24(2) of the CRR. To that end, the ECB would expect that:
(1) the application should be submitted by the legal representatives of all the legal entities within any banking group that will actually apply the International Accounting Standards for prudential reporting as a consequence of the request being granted; (2) for prudential purposes the same accounting framework will apply to all reporting entities within a banking group, in order to ensure consistency between subsidiaries established in the same Member State or also in different Member States. For the purposes of this exercise, a banking group is a group composed of all the significant supervised entities included in the group defined in the significance decision applicable to the requesting entities. (3) a statement should be submitted by the external auditor, certifying that the International Financial Reporting Standards (IFRS) data reported by the institution as a consequence of the application being granted are in line with the applicable IFRS endorsed by the European Commission. This statement must be submitted to the ECB along with the reporting data which the auditor certifies at least once a year. The use of IFRS for prudential reporting requirements will apply permanently to all relevant prudential reporting requirements after the credit institution has been notified of the ECB decision granting the application. The ECB may consider the application of a transitional period, as appropriate and on a case-by-case basis, for the full implementation of the above-mentioned conditions.” Concurrently with the publication of the Addendum, the ECB published a feedback statement on the consultation it had previously conducted on this document. This feedback statement contains useful clarifications, notably:

• The ECB has decided to apply an “all or nothing” approach within a banking group. This approach means that the use of IFRS will only be authorized if all entities (parent/subsidiaries) of an SSM banking group commit to reporting prudential information on an IFRS basis. The authorization request must therefore concern all SSM entities of the same group. However, the ECB foresees the possibility of applying a transitional period to satisfy the “all or nothing” obligation.
• The ECB has not explicitly defined the reports for which the use of IFRS would be authorized. Given the legal basis on which the authorization is granted (Article 24 of the CRR), this should at least include the reports required by Commission Implementing Regulation (EU) No 680/2014 of April 16, 2014 defining implementing technical standards with regard to the prudential information to be provided by institutions, pursuant to Regulation (EU) No 575/2013 of the European Parliament and of the Council. Concretely, this should therefore concern at least FINREP and COREP reports (including own funds, liquidity, leverage, asset encumbrance, concentration and losses from loans secured by real estate collateral reports).
  Since the ECB is the competent authority for Significant Institutions (SI), it will rule on any potential requests from Belgian SI to prepare prudential reports on an IFRS basis.
  Since Belgian credit institutions are already subject to IFRS for consolidated-based reporting, the authorization request must only cover prudential reports required on an individual basis.

Communication – Page 4/4 NBB_2016_41 – October 12, 2016 Regarding specifically the solo FINREP (on an individual basis), institutions benefiting from the authorization must report the tables or data required by ECB Regulation 2015/534 2 for groups and entities applying IFRS, following the “FINREP for IFRS” templates in Annex III of the aforementioned Implementing Regulation (EU) No 680/2014 3. It should be noted that institutions preparing their annual accounts in BGAAP and who decide, with the agreement of the ECB (or the Bank - see below), to use IFRS for prudential reporting cannot be considered as “IFRS first time adopters” within the meaning of IFRS1 (First Time Adoption of IFRS) since this concept and the related procedures only concern entities preparing complete annual accounts in IFRS. The conformity attestation from an external auditor requested by the ECB will be issued by the approved auditor of the institution through the reports required pursuant to Article 225, paragraph 1, point 2° a) and/or b) of the Law of April 25, 2014 on the status and supervision of credit institutions (or Article 326, §2, 2° a) and/or b) for branches). The approved auditor’s report must contain an express mention regarding the conformity of IFRS reporting with valuation rules based on IFRS standards as adopted by the European Commission. Institutions benefiting from the aforementioned authorization must continue to prepare their statutory annual accounts as required by the Companies Code, as well as Schema A based on Belgian national accounting standards (BGAAP). Unless otherwise specified, the same applies to other individual-based (solo) reports required by the Bank in a specific national framework (e.g., trading activities, mortgage credits …).
2. Decision of the Bank (LSI)
In order to ensure equal treatment of all concerned Belgian credit institutions, the Bank has decided to extend the pre-described policy of the ECB to Less Significant Institutions (LSI).
The Bank is therefore willing to authorize, on a case-by-case basis and according to the same conditions and procedures as those indicated above, Belgian LSI to use IFRS for the establishment of the same prudential reports required on an individual basis.
A copy of this communication is sent to the approved auditor(s)/reviewer(s) of your company.
We ask you to accept, Madam, Sir, the expression of our distinguished sentiments.
Jan Smets
Governor
2 Namely: a complete, simplified, or very simplified FINREP declaration, or the “FINREP data points”.
3 The templates in Annex IV of Regulation (EU) No 680/2014 (FINREP Templates for national accounting frameworks) referred to in circular NBB_ 2016_06 will only be reported by institutions not benefiting from the authorization to use IFRS.