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Agenda

Bridging the gap between IFRS and regulatory accounting by Ludger Hanenberg, BaFin REPARIS Workshops Session 2: Adoption of IFRS in the Banking Sector Vienna, March 14, 2006 . Agenda. 1. The issue Relevant effects of IAS/IFRS Concept of “prudential filters” Conclusion. The issue .

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Agenda

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  1. Bridging the gap between IFRS and regulatory accountingby Ludger Hanenberg, BaFinREPARIS WorkshopsSession 2: Adoption of IFRS in the Banking SectorVienna, March 14, 2006 REPARIS, Vienna, March 14, 2006 | 08.08.2014 | Seite 1

  2. Agenda • 1. The issue • Relevant effects of IAS/IFRS • Concept of “prudential filters” • Conclusion REPARIS, Vienna, March 14, 2006 | 08.08.2014 | Seite 2

  3. The issue • Regulatory capital requirements in the light of IAS/IFRS introduction • Classification of capital in accordance with the Basel Capital Accord: Tier I, Tier II, Tier III capital • i.a. particular requirements regarding „revaluation reserves“ (or unrealised gains) • Annual financial statement (balance sheet, incomestatement) as basis for calculation of regulatory capital • Numerous countries: Concept of “traditional“ cost accounting rules is broadly in line with the concept of the Basel capital requirements (in particular regarding the recognition of unrealised gains) REPARIS, Vienna, March 14, 2006 | 08.08.2014 | Seite 3

  4. The issue II • EU regulation of 2002 requires IAS/IFRS consolidated annual financial statements for listed companies from 2005 • Consequence: Starting with 2005 listed banks are obliged to apply IAS/IFRS consolidated financial statements • Consequence: IAS/IFRS rules will have impacts on the calculation of regulatory capital due to conceptual reasons and as the result of the application of certain Standards REPARIS, Vienna, March 14, 2006 | 08.08.2014 | Seite 4

  5. Relevant effects of IAS/IFRS • Conceptual reasons • IASB concept of “decision usefulness” will lead to a clear investor orientation of accounting • other targets like creditor protection or calculation of a distributable profit are no longer important • Standards • Several Standards are based on a broad use of “fair value” measurement or revaluation procedures • Consequence: recognition of fair values in P/L or recognition of revaluation effects direct in equity (revaluation reserves) • This will influence directly the calculation of regulatory capital REPARIS, Vienna, March 14, 2006 | 08.08.2014 | Seite 5

  6. Prudential filter • Basel statements • 3 press releases: June 8, 2004, July 20, 2004 and December 15, 2004 • Concept • Adjustment of potential IAS/IFRS impacts on regulatory capital (in particular concerning unrealised gains) as a recommendation to national supervisors • Target: Maintaining the Basel capital concept REPARIS, Vienna, March 14, 2006 | 08.08.2014 | Seite 6

  7. Prudential filter – Overview • Exclusion of cumulative gains/losses of cash flow hedges which are recognised directly in equity from the definition of Tier I and Tier II capital • No recognition of gains/losses arising from the change in an institution’s own credit risk as a result of applying the fair value option to its liabilities in regulatory capital • Exclusion of unrealised gains/losses on loans designated as available for sale from the regulatory definition of Tier I and Tier II capital REPARIS, Vienna, March 14, 2006 | 08.08.2014 | Seite 7

  8. Prudential Filter II - Overview • Partial recognition of unrealised gains on available for sale equity securities in Tier II capital (example 55 % haircut) • Decision whether to treat unrealised gains/losses on available for sale debt securities in the same manner as on loans or equity securities • Consistent treatment of gains/losses resulting from cash flow hedges for an available for sale instrument or a forecast transaction • Own used and investment properties (IAS 16/40): partial recognition of unrealised gains on own used and investment properties in Tier II capital (similar as for available for sale equity securities) REPARIS, Vienna, March 14, 2006 | 08.08.2014 | Seite 8

  9. Prudential filter III -Overview • Fair value option: Report on the impact of the use of the fair value option • Fair value option guidance (draft): „Supervisors expect banks to conduct their fair value option activities for portfolios of financial assets and liabilities and individual financial assets and liabilities in a manner that is consistent with applicable accounting standards and that addresses prudential concerns. The primary prudential concern is that banks implement strong risk management and controlsto ensure that the effect of using the fair value option is understood, managed, monitored and reported in a sound manner. An important related concern is that unrealised gains or losses on items designated as at fair value should not alter regulatory capital in a way that would be unsound. “ REPARIS, Vienna, March 14, 2006 | 08.08.2014 | Seite 9

  10. Conclusion • advantage: application of IAS/IFRS for supervisory purposes is possible with a limited number of adjustments • “Prudential filters“ are an instrument to maintain a certain capital concept in a changing accounting environment • First attempt to bridge the different purposes of financial and prudential reporting REPARIS, Vienna, March 14, 2006 | 08.08.2014 | Seite 10

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