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AUSTRALIAN FINANCIAL INSTITUTIONS AUDITORS ASSOCIATION APRA APS 310 Reporting June 2006

AUSTRALIAN FINANCIAL INSTITUTIONS AUDITORS ASSOCIATION APRA APS 310 Reporting June 2006. APRA APS 310 Topics . Introduction AGS 1008 Materiality AIFRS –changes to D2A 1 Jul 06 Other changes . APRA APS 310. 11B APRA to monitor prudential matters The functions of APRA include:

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AUSTRALIAN FINANCIAL INSTITUTIONS AUDITORS ASSOCIATION APRA APS 310 Reporting June 2006

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  1. AUSTRALIAN FINANCIAL INSTITUTIONS AUDITORS ASSOCIATION • APRA APS 310 Reporting • June 2006

  2. APRA APS 310 Topics • Introduction • AGS 1008 • Materiality • AIFRS –changes to D2A 1 Jul 06 • Other changes

  3. APRA APS 310 • 11B APRA to monitor prudential matters • The functions of APRA include: • the collection and analysis of information in respect of prudential matters • the encouragement and promotion of the carrying out .. of sound practices in relation to prudential matters; and • the evaluation of the effectiveness and carrying out of those practices.

  4. APRA APS 310 • APRA needs to be assured of the accuracy and integrity of the information provided to be confident that its judgements about the ADI’s • management practices and • compliance with prudential requirements are • well-informed and soundly based. • Arrangements with an ADI’s external auditors operate to enhance the credibility of the information provided.

  5. APRA APS 310 • Report under APS 310 • observed all the prudential standard requirements ..set for the ADI • statistical and financial data provided by the ADI to APRA are reliable; • ADI has complied with statutory banking requirements, conditions etc. • potential to prejudice materially the interests of depositors.

  6. APRA APS 310 • AGS 1008 • October 2002 • Clarifies the requirements after consultation with APRA by AARF

  7. APRA APS 310 • Opinion 1 - matters to be observed in AGS 1008 • Capital Adequacy levels • Minimum Liquidity levels • Impaired loans, prescribed provisioning • Large exposure limits • Equity relationship - levels and deductions • Other bi lateral requirements

  8. APRA APS 310 • AGS 1008 • it has been agreed with APRA that there is no expectation that the auditor expresses • assurance on the adequacy of the risk management systems, • nor to detect all compliance errors or irregularities in relation to all descriptions of high level controls pertinent to risk management systems descriptions supplied to APRA

  9. APRA APS 310 • Opinion 2 D2A return Materiality Guide • High Importance matters in D2A forms • Statement of Financial Position • Interest Income and Interest Expense • Other Operating Income • Capital Adequacy • Prescribed Provisioning • Large Exposures

  10. APRA APS 310 • Why review ? • New requirements under IFRS • Revised definitions for Eligible residential Mortgages • Suggestions that the AGS is out of date to meet APRA needs

  11. APRA – Changes in 2006 /7 • AIFRS impact on D2A reports from 1 July 2006 • Securitisation • Effective interest rate fees and Transactions costs • Loan provisions

  12. APRA APS 310 Reporting AIFRS major issues 2006 • AIFRS impact on D2A reports from 1 July 2006 • Software conversion costs • Lease make good provisions • Equity relationships • Business Combinations • Capital raising

  13. APRA APS 310 Reporting Changes in 2006 /7 • Securitised assets – • APRA has de‑coupled the assessment of securitised assets for capital adequacy purposes from the AIFRS accounting treatment of these assets.

  14. APRA – Changes in 2006/7 • Capital adequacy APS111 [12] states • Current year earnings shall include • negative goodwill (= current AASB3) • the unwinding of any discount on credit loss provisions • full value of upfront fee income (IFRS effective rate reversed)

  15. APRA APS 310 Reporting Changes in 2006 /7 • Capital deductions from Tier 1 capital • Intangible assets • Software • Transaction costs [APRA regards these as intangible assets] • Goodwill

  16. APRA – Changes in 2006/7 • Deductions from Tier 1 • ADI employer-sponsored defined benefit superannuation fund surplus , • share of undistributed profit or loss in an associate (in Tier 2) • unrealised fair value gains on , • any amounts included in the General Reserve for Credit Losses which have not already been deducted from retained earnings or current year earnings.

  17. APRA – Changes in 2006/7 • Deductions from Tier 1 • Equity investments in non-subsidiary entities that are not operating in the field of finance in excess • Over 0.25% the ADI’s Tier 1 capital before deductions, or • Aggregate 5%

  18. APRA – Changes in 2006/7 • Capital Adequacy Tier 2 • General Reserve for Credit Losses • 45 per cent of pre-tax revaluation reserves • Property • Securities • 45 per cent of the post-acquisition reserves of associates - ADI’s share of undistributed profits

  19. APRA – Changes in 2006/7 • IMPAIRMENT PROVISIONS • AGN 220.3 is the minimum

  20. APRA – Changes in 2006/7 • APS 220 [40] Specific Provisions include • AIFRS individual impairment provisions • AIFRS Collective provisions • Must be allocated to a provision or reserve APS 220 [44] • Additional amounts to meet AGN 220-3 Prescribed provisions

  21. APRA – Changes in 2006/7 • Provisionsin excess of APRA • Where an ADI establishes AIFRS provisions in excess of those prescribed in AGN 220.3, the ADI must continue to include any excess provisions as • part of its specific provisions or • General Reserve for Credit Losses • as appropriate [ AGN 220.3 [2]]

  22. APRA – Changes in 2006/7 • Reversion to Deemed Costs from Fair Value • Any unrealised gains resulting from the first-time adoption of the “cost model” for owner-occupied property • must be included at full value in Upper Tier 2 capital, subject to regular impairment testing.

  23. APRA – Changes in 2006/7 • AGN 112-1 • Eligible ResidentialMortgages

  24. APRA – Changes in 2006/7 • AGN 112-1 Eligible ResidentialMortgages Appendix C • Revisions to policies • New tests to qualify • Auditors to assess impact on • Balance sheet • Capital adequacy • Prescribed provisioning

  25. APRA APS 310 Reporting • Eligible ResidentialMortgages – policies • assess the ability of borrowers to meet repayments. • verification procedures to substantiate critical application data • Criteria defining when contractual loan repayments are substantially met

  26. APRA APS 310 Reporting • Eligible ResidentialMortgages – policies • Justify valuation used in lieu of a formal valuation • procedures to be followed for revaluing properties where concern as to values • Determining marketability of a residential property [zoning, other factors ] • Consider also AGN 220.2 [cl 14 – 30]

  27. APRA APS 310 Reporting • Eligible ResidentialMortgages 50% risk weight applies • If loan does meets all of the above qualifying features / policies the • loan must not exceed 80% LVR or • 100% Mortgage insurance

  28. APRA APS 310 Reporting • Eligible ResidentialMortgages 50% risk weight applies • If loan does not meet any of the above qualifying features / policies BUT where the • loan must not exceed 60% LVR or is • 100% Mortgage insurance

  29. APRA APS 310 Reporting • Eligible ResidentialMortgages 50% risk weight applies • If loan fails tests over (only) • assessing the ability of borrowers to meet repayment obligations. • verification procedures to substantiate critical application data • if 36 months continuous repayments have been met. This satisfies the tests and LVR 80% can apply.

  30. APRA APS 310 Reporting • Eligible ResidentialMortgages Procedures for • verifying income documentation (repayment capacity of the borrower). • All material income sources and employment details of the borrower must be assessed ..prior to loan approval, and • documented as part of the loan origination and approval process.

  31. APRA APS 310 Reporting • Audit risks • Policies updated (adequate?) • Proper loan assessments • Accurate codes / classifications • Maintenance of the codes • Accurate reporting

  32. APRA APS 310 Reporting • New Capital raising • Shares issued less % debt to trust • Recognise as Liability under AIFRS? • Subordinated debt less % Debt to trust • Recognise as Liability • Shares - APRA treatment as Tier 1 capital

  33. APRA APS 310 Reporting • APRA has de‑coupled the definition of capital instruments eligible for Tier 1 capital from Australian accounting standards. • certain instruments that could be classified as liabilities under IFRS to be included in capital

  34. APRA – Changes in 2008 • Operations risk – waiting final standards • Proposed to be aligned with lower Mtg risk rate

  35. APS 114 Draft Calculation of Operational risk capital • The operational risk capital requirement for the retail/commercial banking area of business is calculated by: • multiplying 3.5 per cent, of total gross outstanding loans and advances by a factor of 15 per cent, to produce a result • Repeat for last 6 half yearly results • Take the average

  36. APS 114 Draft Calculation of Operational risk capital • Operational Capital - all other activity area of business • net income earned over a six month period for last 6 observations • multiplying net income by 18 per cent • average result for the six observations.

  37. APRA – Changes in AGS 1008 • Possible considerations • Outsourcing? • Business continuity? • Revisit audit scope re adequacy of policies?

  38. AFIAA QUESTIONS ?

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