BANKING UNIT BANKING DIRECTIVES PUBLICATION OF AUDITED FINANCIAL STATEMENTS OF CREDIT INSTITUTIONS AUTHORISED UNDER THE BANKING ACT 1994

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1 BANKING UNIT BANKING DIRECTIVES PUBLICATION OF AUDITED FINANCIAL STATEMENTS OF CREDIT INSTITUTIONS AUTHORISED UNDER THE BANKING ACT 1994 Ref: BD/07/2002

2 PUBLICATION OF AUDITED FINANCIAL STATEMENTS OF CREDIT INSTITUTIONS AUTHORISED UNDER THE BANKING ACT 1994 INTRODUCTION 1. In terms of Section 4 of the Banking Act 1994 ('the Act') the Competent Authority ('the Authority') as appointed under Section 3 (1) of the Act may make Banking Directives as may be required for carrying into effect any of the provisions of the Act. The Authority may amend or revoke such Banking Directives. The Banking Directives and any amendment or revocation thereof shall be officially communicated to banks and the Authority shall make copies thereof available to the public. 2. The Publication of Audited Financial Statements of Credit Institutions Directive ('the Directive') is being made pursuant to Section 30 of the Act: "Every bank shall, not later than four months from the closing of its financial year or at any other time as may be exceptionally authorised by the Competent Authority: (a) (b) (c) forward to the Competent Authority and the Central Bank, deleted, exhibit in a conspicuous position in each of its offices and branches in Malta and keep so exhibited throughout the year, a copy of its audited financial statements drawn up in accordance with a Banking Directive. SCOPE AND APPLICATION 3. The Directive applies to all credit institutions licensed under the Banking Act With the scope of narrowing areas of differences in accounting and reporting concepts between banks and of enhancing the value of the accounts to those who use them, the Directive aims: (a) to establish a standard format for the publication of annual financial statements for licensed banks based on the European Union Council Directive (86/635/EEC) of December 1986 on the Annual Accounts and Consolidated Accounts of Banks and other Financial Institutions (Appendix 1) as amended by the European Union Council Directive (2001/65/EC) of September 2001, and European Union Council Directive (89/117/EEC) of February 1989 on the obligations of branches established in a Member State of credit institutions and - 1 -

3 financial institutions having their head offices outside that Member State regarding the publication of annual documents; (b) (c) to outline the Authority's views and interpretations of the provisions of Section 30 of the Act; to enhance transparency in the credit institutions public disclosures thus facilitating assessment of credit institutions by the public. 5. The Directive also takes into account local legislation and current international accounting practices. SUBMISSIONS TO THE AUTHORITY AND THE CENTRAL BANK 6. Section 30 (a) of the Act requires a credit institution to forward a copy of its audited financial statements to the Authority and the Central Bank of Malta. 7. The Authority expects that the copy submitted as in Article 6 above, accompanied by the Declaration under Appendix II, should include all statements under Articles 9 to 11 of this Directive and must: (a) (b) either bear the original signatures of the bank's auditor, the bank's Chairman and other officials signing the accounts as the case may be; or be authenticated by the company secretary where such signatures are not the originals. 7A. In terms of Section 20(1) of the Banking Act 1994, licensed institutions shall submit to the Authority any information which it may reasonably require in the exercise of its duties under the Act. In this respect, apart from the submission of audited financial statements as required by Section 30 of the Act, credit institutions are also required to submit a copy of the auditors management letter and the institution s reply thereto, within six (6) months from the closing of its financial year. PUBLICATION OF AUDITED FINANCIAL STATEMENTS 8. Deleted. 8A. Deleted. 8B. Deleted. 9. The Authority expects that the full published audited financial statements as drawn up in accordance with Articles 22 to 23 of this Directive shall be made up of the: BD/07/

4 i. Directors Report; ii. Statement of Directors' Responsibilities; iii. Auditors Report; iv. Income Statement; v. Balance Sheet; vi. Statement of Changes in Equity; vii. Cash Flow Statement; viii. Accounting Policies and other Explanatory Notes. 10. In the case where a credit institution is listed on the Malta Stock Exchange the publication of the financial statements should include all other financial information required for publication under the listing requirements of the Malta Stock Exchange Act, Cap A credit institution may, if it so decides, also publish five year summary figures. 12. All publication requirements under Articles 9, 10 and 11 above are included under Part D of Appendix 1 under a model set of accounts. EXHIBIT OF AUDITED FINANCIAL STATEMENTS 13. Section 30(b) of the Act requires a credit institution to exhibit, and keep so exhibited throughout the year, a copy of its audited financial statements in a conspicuous position in each of its offices and branches in Malta. 14. In the Authority's view such exhibit should as a minimum include items (i) to (v) under Article 9 of this Directive. This should be accompanied by a note to the effect that a full set of the published audited accounts is kept and is made available to any person interested in viewing the whole set. BRANCHES OF OVERSEAS INSTITUTIONS 15. Article 29 of the Directive on Application for a Licence under the Act (BD/01) states that a licence issued to an institution incorporated outside Malta to operate its business of banking through a branch in Malta is deemed to have been granted to that institution as a whole. 16. In this respect, the requirements of this Directive shall be deemed as having been satisfied upon the institution incorporated outside Malta having met the requirements under Section 30 of the Act by: (a) (b) (c) forwarding to the Competent Authority and the Central Bank; deleted; exhibiting in a conspicuous position in each of its offices and branches in Malta and keep so exhibited throughout the year BD/07/

5 a copy of its audited financial statements, which as a minimum should include the statements listed in Article 9 of this Directive, within a period agreed to with the Authority. 17. The Authority may, if it deems it appropriate, either require the overseas institution to include with its audited accounts as in Article 16 any other information relevant to its activities in Malta and/or require the branches in Malta to publish separately abridged or full branch audited accounts together with other financial or non-financial information relevant to its own activities in Malta. EXCEPTIONAL AUTHORISATIONS 18. In terms of Section 30 of the Act, if for valid reasons an authorised institution is not able to carry out its obligations under that Section within four months from the closing of its financial year, it should apply to the Authority to carry out such obligations at any other time as the Authority may authorise. 19. Similarly, in the Authority's view, if for any valid reason, an authorised institution needs to publish any part of its financial statements in a format other than that specified in the Directive, it has to apply to the Authority for authorisation for such deviations. 20. When a credit institution is applying for authorisation under Articles 18 or 19 above it has to give all details and reasons for such application and should allow appropriate time for the Authority to consider such application. 21. It is at the Authority's discretion to approve such applications and, when approval is given, this shall be for exceptional cases only. FORMAT OF PUBLISHED FINANCIAL STATEMENTS 22. Appendix 1 to this Directive defines the required format for the publication of financial statements. It is divided into five parts (A-E) as defined in Part A of the Appendix. Compliance to this Appendix is pursuant to the conditions as laid down in Section 168 of the Companies Act A. As stated in Appendix 1, in terms of subsection (3) of Section 2 of the Companies Act 1995 credit institutions are expected to ensure adherence to International Accounting Standards as may be issued from time to time by the International Accounting Standards Board (IASB). 23. Where the financial statements of a credit institution are drawn up in a currency other than the Maltese Lira in terms of Section 187 (2) of the Companies Act 1995, then that credit institution should state on its balance sheet the exchange rate applicable between the currency used and the Maltese Lira. BD/07/

6 OFFENCES AND PENALTIES 24. Any person who commits an offence in terms of this Directive as provided for under Section 35 of the Act is liable to such penalties as may be prescribed pursuant to the said Section. BD/07/

7 PART A - INTRODUCTION Appendix I is divided into five parts. Parts B and C set out the Balance Sheet and Income Statement formats respectively and each is followed by a detailed explanation of the constituents of these formats. Part D is a model set of accounts for a fictitious credit institution - 'Bank Limited'. The specimen form would cover a local credit institution and the holding company for a banking group. The financial statements comply with statutory rules, applicable International Accounting Standards, local listing requirements and acceptable current accounting practice. They do not, however, cover every conceivable eventuality, but they aim to cover the information likely to be encountered in the accounts of a typical credit institution. The 'Accounting Policies and other Explanatory Notes (hereinafter referred to as 'notes') forming part of the model set of financial statements of 'Bank Limited' as shown in Part D, include various subdivisions of items listed in the formats of the balance sheet (Part B) and the income statement (Part C). In order to keep the commentary of such formats as concise as possible, the breakdown of such items is not included in the commentary. However, such subdivisions must be considered as forming part of the Directive to be followed by each bank in preparing its financial statements. There is nothing to prevent a credit institution from giving more details on the face of the accounts (including the notes thereto) than those required. Any item can be subdivided on the face of the financial statements instead of disclosure in the notes if an institution so wishes. Extra lines may be inserted in any appropriate position to cater for items not covered by the formats. Credit institutions have a choice of methods of dealing with amounts not falling into any prescribed item in the formats: they can either create an extra line or they can include them under the 'catch-all' items for example 'other assets' and 'other liabilities' etc. The choice must be based on the materiality of the amount in question. Main and sub-items in the formats may be omitted if there is no amount to be shown under them. Main and sub-items may also be combined if the amounts are immaterial. The financial statements must be prepared in accordance with International Accounting Standards issued by the International Accounting Standards Board (IASB). A - 1

8 PART B - BALANCE SHEET FORMAT AND COMMENTARY THE BALANCE SHEET ASSETS 1. Balances due from Central Bank of Malta 2. Cheques in course of collection 3. Treasury bills [and other bills eligible for refinancing with Central Bank of Malta] 4. Financial assets held-for-trading 5. Investments 6. Loans and advances to banks 7. Loans and advances to customers 8. Investments in associated companies 9. Shares in subsidiary companies 10. Intangible fixed assets 11. Tangible fixed assets 12. Deferred tax asset 13. Other assets 14. Subscribed capital called but not paid 15. Prepayments and accrued income Total Assets LIABILITIES 1. Financial liabilities held-for-trading 2. Amounts owed to banks 3. Amounts owed to customers 4. Debt securities in issue 5. Other liabilities 6. Accruals and deferred income 7. Provisions for liabilities and charges 8. Subordinated liabilities 9. Minority interests 10. Called up share capital 11. Share premium account 12. Hedging reserve 13. Other reserves 14. Revaluation reserve 15. Profit and Loss account 16. Unrealised fair value reserve 17. Dividend reserve Total Liabilities B - 1

9 MEMORANDUM ITEMS 1. Contingent liabilities 2. Commitments COMMENTARY ON THE BALANCE SHEET FORMAT AND MEMORANDUM ITEMS Each numbered paragraph corresponds to the relative item in the Balance Sheet Format. The subdivision of the Balance Sheet items as shown in the notes in Part D - Accounts of Bank Limited, form an integral part of the Directive. Consequently such subdivisions shall be incorporated in the accounts. I. ASSETS 1. Balances due from Central Bank of Malta [a] Cash and balances with Central Bank of Malta Cash shall comprise all currency including foreign notes and coins. Only those balances which may be withdrawn without notice and which are deposited with the Central Bank of Malta shall be included in this item. All other claims on the Central Bank of Malta must be shown under Asset item 1 [b] - Reserve deposit with Central Bank of Malta, or Assets item 6 - Loans and advances to banks, as applicable. [b] Reserve deposit with Central Bank of Malta As the name implies this item shall include the reserve deposit held with the Central Bank of Malta. In addition, the notes shall state that this deposit is in terms of Section 37 of the Central Bank of Malta Act, Cap Cheques in course of collection This item shall comprise cheques and other items in course of collection. 3. Treasury bills [and other bills eligible for refinancing with Central Bank of Malta] [a] Treasury bills and similar securities Treasury bills and similar securities shall comprise treasury bills and similar debt instruments issued by public bodies which are eligible for refinancing with the Central Bank of Malta. Any treasury bills or similar debt instruments not so eligible shall be included under Assets item 4 Financial assets held-for-trading or Assets item 5 [a] - Debt and other fixed income instruments. B - 2

10 [b] Other eligible bills Other eligible bills shall comprise bills, including private sector bills, purchased to the extent that they are eligible for refinancing with the Central Bank of Malta. 4. Financial assets held-for-trading A financial asset is held-for-trading if acquired or originated principally for the purpose of generating a profit from short-term fluctuations in price or dealer s margin. Any financial asset that forms part of a portfolio where there is an actual pattern of profit-taking is also classified as held-for-trading. Trading assets include debt securities and equity securities acquired by the institution with the intention of making a short-term profit. Derivatives are always categorised as held-for-trading (unless they are accounted for as hedges). All trading assets, including derivatives, are to be measured at fair value, with the resultant adjustment being passed through the income statement. 5. Investments [a] Debt and other fixed income instruments This item shall comprise transferable debt securities and any other transferable fixed income securities issued by banks, other undertakings or public bodies. Debt securities and other fixed income securities issued by public bodies shall however only be included in this item if they may not be shown under Assets item 3 - Treasury bills and other bills eligible for refinancing with Central Bank of Malta, and Assets item 4 Financial assets held-for-trading. Where an authorised institution holds its own debt securities, these shall not be included under this item but shall be deducted from Liabilities item 4 - Debt securities in issue. Securities bearing interest rates that vary in accordance with specific factors, for example the interest rate on LIBOR or on the Euromarket, shall also be regarded as fixed income securities to be included under this item. Preference shares should be included here if, as is usually the case, the dividend entitlement is fixed. Under this heading, debt and other fixed income instruments can be classified as either held-to-maturity or as available-for-sale. Held-to-maturity fixed income instruments for which the institution has the positive intent and ability to hold to maturity, continue to be accounted for at amortised cost in accordance with International Accounting Standard 39. Available-for-sale debt securities, on the other hand, comprise of debt and other fixed income instruments which are neither held- fortrading nor as held-to-maturity. A one-time choice for the recognition of unrealised gains or losses on available-for-sale assets needs to be made, involving the determination as to whether the changes in fair values are to be included in the B - 3

11 income statement in the period in which they arise, or deferred to equity and recycled into the income statement on disposal or when the asset becomes impaired. [b] Equity and other non-fixed income instruments This item shall comprise: - shareholdings in companies which may not be included under Assets item 8 - Investments in associated companies or under Assets item 9 - Shares in subsidiary companies; - variable yield securities such as unit trust units; and - preference shares which carry the right to participate in profits. Where material amounts of other variable-yield securities are included, the caption must be expanded to read 'Equity shares and other variable yield securities'. A one-time choice for the recognition of unrealised gains or losses on available-forsale assets needs to be made, involving the determination as to whether the changes in fair values are to be included in the income statement in the period in which they arise, or deferred to equity and recycled into the income statement on disposal or when the asset becomes impaired. 6. Loans and advances to banks Loans and advances to banks, regardless of their actual designations, shall comprise all loans and advances to domestic or foreign banks made by the bank arising out of banking transactions. Deposits or any other money market placements with banks fall within the definition of loans and advances. However loans and advances to banks represented by debt securities or other fixed income securities shall be included under Assets item 4 Financial assets held-for-trading or Assets item 5 [a] - Debt and other fixed income instruments. 7. Loans and advances to customers Loans and advances to customers, regardless of their actual designations, shall comprise all types of assets in the form of claims on domestic and foreign customers other than banks. However loans and advances represented by debt securities or other fixed income securities shall be included under Assets item 4 Financial assets heldfor-trading or Assets item 5 [a] - Debt and other fixed income instruments, but not under this item. 8. Investments in associated companies This item shall comprise shareholdings in enterprises in which the investor has significant influence. If an investor holds, directly or indirectly through subsidiaries, 20% or more of the voting power of the investee, it is presumed that the investor does have significant B - 4

12 influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly or indirectly through subsidiaries, less than 20% of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence. In consolidated financial statements, an investment in an associate should be accounted for under the equity method except when the investment is acquired and held exclusively with a view to its disposal in the near future, in which case, it should be accounted or under the cost method. In the separate financial statements investments in associated companies shall be carried at cost or revalued amounts. 9. Shares in subsidiary companies This item shall comprise investments in enterprises controlled by the credit institution. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one half of the voting power of an enterprise unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control also exists even when the parent owns one half or less of the voting power of an enterprise when there is: - power over more than one half of the voting rights by virtue of an agreement with other investors; - power to govern the financial and operating policies of the enterprise under a statute or an agreement; - power to appoint or remove the majority of the members of the board of directors or equivalent governing body; or - power to cast the majority of votes at meetings of the board of directors or equivalent governing body. In the parent's separate financial statements, investments in subsidiaries shall be carried at cost or revalued amounts. 10. Intangible fixed assets Intangible fixed assets are non-monetary assets without a physical substance but which are identifiable and controlled by the bank as a result of past events, and from which future economic benefits are expected to flow. 11. Tangible fixed assets This item shall comprise: - land and buildings; B - 5

13 - payments on account and assets in the course of construction; - plant and machinery; and - fixtures and fittings, tools and equipment. These shall be disclosed in the notes the amount included in this item with respect to land and buildings occupied by the company for its own activities. 12. Deferred tax asset The tax asset resulting from any temporary differences between tax written down values and book values of assets, tax losses, and unabsorbed capital allowances are to be included under this item on the face of the balance sheet. 13. Other assets 'Other assets' is the catch-all item. Material constituents of 'other assets' must be disclosed in the notes. 14. Subscribed capital called but not paid This item shall comprise amounts due from sundry shareholders for cash payable on any allotment and/or call on shares. 15. Prepayments and accrued income This item shall comprise prepayments and accrued income. It should be noted that accrued interest should be included here and not added to the asset items from which it is derived. II. LIABILITIES 1. Financial liabilities held-for-trading Trading liabilities owed by the institution with the intention of making a short-term profit are to be measured at fair value with the resultant adjustment being passed through the income statement. Derivative financial assets and derivative financial liabilities are always deemed held-for-trading unless they are designated at effective hedging instruments. 2. Amounts owed to banks This item shall comprise all amounts arising out of banking transactions owed to other domestic or foreign banks by the reporting bank, regardless of their actual designations. However, liabilities in the form of debt securities and any liabilities for which transferable certificates have been issued shall be included under Liabilities item 4 - Debt securities in issue, and not under this item. B - 6

14 3. Amounts owed to customers This item shall comprise all amounts owed to creditors that are not banks in the same way as Assets item 7 - Loans and advances to customers. However liabilities in the form of debt securities and any liabilities for which transferable certificates have been issued shall be shown under Liabilities item 4 - Debt securities in issue, and not under this item. 4. Debt securities in issue This item shall include both debt securities and debts for which transferable certificates have been issued, including liabilities arising out of own acceptances and promissory notes. Only acceptances which a bank has issued for its own refinancing and in respect of which it is the first party liable ('drawee') shall be treated as own acceptances. The 'other' category in the notes may include short-term paper such as certificates of deposit, commercial paper and own acceptances outstanding. 5. Other liabilities 'Other liabilities' is the catch-all item. Material constituents of 'other liabilities' must be disclosed in the notes. 6. Accruals and deferred income This item shall include accruals and deferred income. This is the counterpart of Assets item 15 - Prepayments and accrued income. 7. Provisions for liabilities and charges This item shall comprise amounts retained as reasonably necessary for the purpose of providing for any liability or loss which is either likely to be incurred, or certain to be incurred but uncertain as to the amount or as to the date on which it will arise. It shall include, amongst others, provisions for taxation and for amounts payable under guarantees, acceptances and other contingent liabilities where it is probable that the reporting bank will be called upon to pay. It will not, of course, include provisions for bad and doubtful debts, because these are provisions for diminution in the value of assets, not provisions for liabilities and charges, and should be subtracted from the values of the relevant assets. 8. Subordinated liabilities This item shall comprise all liabilities in respect of which there is a contractual obligation, that in the event of winding up or bankruptcy, they are to be repaid only after the claims of other creditors have been met, whether or not a ranking has been agreed between the subordinated creditors concerned. 9. Minority interests When the reporting credit institution prepares consolidated financial statements, this item shall represent the minority interests of the group. B - 7

15 10. Called up share capital This item shall comprise all amounts, regardless of their actual designations, which are regarded as capital subscribed by the shareholders. The amounts of allotted share capital and of the paid up share capital must be shown if they are different from the called up capital. There is no requirement to distinguish ordinary share capital from preference share capital on the face of the balance sheet. Any classification is to be shown in the notes. 11. Share premium account This item shall comprise the remaining balance of any share premium received on issue of shares. 12. Hedging reserve In accordance with International Accounting Standard 39, this item comprises of fair value hedges, cash flow hedges and hedges of net investment in a foreign entity. Any changes in their fair values are passed through the hedging reserve. 13. Other reserves This item shall comprise all other reserves which are not being shown separately on the face of the balance sheet and may include both capital and revenue reserves. 14. Revaluation reserve This item comprises the revaluation surplus arising on the revaluation of tangible fixed assets and the cumulative net change in fair values of available-for-sale financial assets held by the bank (on having decided in the one-time choice to defer the fair value changes to equity and having them recycled into the income statement on disposal or when asset becomes impaired). The notes should show separately any revaluation surpluses related to different categories of assets. 15. Profit and loss account This item shall comprise any retained realised profit which is available for distribution to the shareholders. 16. Unrealised fair value reserve Any profits registered on marking to market held-for-trading or available-for-sale financial instruments which are recognised in the income statement but which have not been realised (disposal not yet carried out) should be recycled out of the profit and loss account reserve into the unrealised fair value reserve. B - 8

16 17. Dividend reserve Dividend proposed up till year end but not yet paid out as at that date should be transferred from the profit and loss reserve to dividend reserve. III. MEMORANDUM ITEMS Memorandum items shall include contingent liabilities and commitments which shall be shown on the face of the balance sheet, following the assets and liabilities. The contingent liabilities and commitments to be included in the memorandum items should be net of any amounts recognised as liabilities, including provisions made in respect of them. In terms of detail, the example given in the notes to the accounts should only be regarded as illustrative. For instance, in some cases it may be appropriate for a particular bank to provide a more detailed breakdown for one or more of the items listed, if it is considered that this would produce a better appreciation of its financial standing. It may also be necessary for additional information to be provided in narrative form. Where the effect of any memorandum items is not considered material, disclosure is not required. However, any individual contingent liability or commitment which is material in relation to the bank's activities should be disclosed. 1. Contingent liabilities This item shall comprise all transactions whereby the credit institution has underwritten the obligations of a third party. However, this item is intended to be comprehensive, and all contingent liabilities requiring to be quantified should be included. Where it is probable that the credit institution will be called upon to meet the obligation, the liability must be recognised as such in the balance sheet. To the extent that it is treated as a liability it should be excluded from memorandum items. Contingent liabilities should be subdivided as follows: [a] Acceptances and endorsements Acceptances other than own acceptances shall be included in this item. Liabilities arising out of the endorsement of rediscounted bills shall also be included. [b] Guarantees and assets pledged as collateral security This item shall include all guarantee obligations incurred and assets pledged as collateral security on behalf of third parties, particularly in respect of sureties and irrevocable letters of credit. B - 9

17 [c] Other contingent liabilities A 'catch-all' item whereby all contingent liabilities which are not included under items [a] and [b] above are to be included under this sub-heading. 2. Commitments This item shall include every irrevocable commitment which could give rise to a credit risk; that is, the risk that a counterparty may fail to fulfill its obligations. The amount stated should be net of any provision made for credit losses (see item 13 of the Income Statement Format). As the name implies, the first sub-item shall include commitments arising out of sale with an option to repurchase transactions, while the second sub-item - 'other commitments', will include a wide variety of transactions namely documentary credits, forward asset purchases, credit lines and other commitments to lend, uncalled share capital in other companies and underwriting facilities. IV. SPECIAL RULES 1. Claims on, and liabilities to, companies which have an associate or subsidiary relationship with the reporting credit institution. The following information must be given by way of notes to the accounts. The amount of the following must be shown for each of Assets items 3 to 5 [a], 6 and 7: [a] [b] claims on subsidiary companies; and claims on associated companies. The amount of the following must be shown for each of Liabilities items 1 to 4 and 7: [a] [b] liabilities to subsidiary companies; liabilities to associated companies. 2. Subordinated assets The amount of any assets that are subordinated must be shown either as a subdivision of any relevant asset item or in the notes to the accounts; in the latter case disclosure shall be by reference to the relevant asset item or items in which the assets are included. In the case of Assets items 3 to 5 [a], 6 and 7 in the Balance Sheet Format, the amounts required to be shown by note 1 above (claims on, and liabilities to, companies which have an associate or subsidiary relationship with the reporting bank) as sub-items of those items shall be further subdivided so as to show the amount of any claims included therein that are subordinated. For this purpose, assets are subordinated if there is a B - 10

18 contractual obligation to the effect that, in the event of winding up or bankruptcy, they are to be repaid only after the claims of other creditors have been met, whether or not a ranking has been agreed between the subordinated creditors concerned. 3. Syndicated loans Where a credit institution is a party to a syndicated loan transaction the credit institution shall include only that part of the total loan which it itself has funded. Where a credit institution is a party to a syndicated loan transaction and has agreed to reimburse (in whole or in part) any other party to the syndicate any funds advanced by that party or any interest thereon upon the occurrence of any event, including the default of the borrower, any additional liability by reason of such a guarantee shall be included as a contingent liability in Memorandum item 1, sub-item (b). 4. Sale and repurchase transactions (a) (b) (c) (d) (e) (f) Sale and repurchase transactions shall mean transactions which involve the transfer by a credit institution or customer (the 'transferor') to another credit institution or customer (the 'transferee') of assets, for example, bills, debts or transferable securities, subject to an agreement that the same assets will subsequently be transferred back to the transferor at a specified price. If the transferee undertakes to return the assets on a date specified or to be specified by the transferor, the transaction in question shall be deemed to be a genuine sale and repurchase transaction. If, however, the transferee is merely entitled to return the assets at the purchase price or for a different amount agreed in advance on a date specified or to be specified, the transaction in question shall be deemed to be a sale with an option to repurchase. In the case of the sale and repurchase transactions referred to in paragraph (b), the assets transferred shall continue to appear in the transferor's balance sheet; the purchase price received by the transferor shall be shown as an amount owed to the transferee. In addition, the value of the assets transferred shall be disclosed in a note in the transferor's accounts. The transferee shall not be entitled to show the assets transferred in his balance sheet; the purchase price paid by the transferee shall be shown as an amount owed by the transferor. In the case of the sale and repurchase transactions referred to in paragraph (c), however, the transferor shall not be entitled to show in his balance sheet the assets transferred; those items shall be shown as assets in the transferee's balance sheet. The transferor shall enter under Memorandum item 2 - Commitments, an amount equal to the price agreed in the event of repurchase. No forward exchange transactions, options, transactions involving the issue of debt securities with a commitment to repurchase all or part of the issue before maturity of any similar transactions shall be regarded as sale and repurchase transactions. B - 11

19 PART C - INCOME STATEMENT FORMAT AND COMMENTARY INCOME STATEMENT 1. Interest receivable and similar income: [a] on loans and advances, balances with Central Bank of Malta and treasury bills [b] on debt securities 2. Interest payable 3. Dividend income 4. Fees and commissions receivable 5. Fees and commissions payable 6. Trading [profits] [losses] 7. Net [gains] [losses] on non-trading financial instruments 8. Other operating income 9. Administrative expenses 10. Depreciation 11. Amortisation of intangible assets 12. Other operating charges 13. Net impairment losses 14. Provisions for contingent liabilities and commitments 15. Share of profits of associated companies 16. [Profit] [Loss] on ordinary activities before exceptional items 17. Exceptional income 18. Exceptional charges 19. [Profit] [Loss] on ordinary activities before tax 20. Taxation 21. [Profit] [Loss] on ordinary activities after tax 22. Minority interests 23. Extraordinary income 24. Extraordinary charges 25. [Profit] [Loss] for the financial year after tax [Earnings per share] C - 1

20 COMMENTARY ON THE INCOME STATEMENT FORMAT Each numbered paragraph corresponds to the relative item in the Income Statement Format. The subdivision of the Income Statement items as shown in the notes in Part D - Accounts of Bank Limited, form an integral part of the Directive. Consequently such subdivisions shall be incorporated in the accounts. 1. Interest receivable and similar income This item shall include all income arising out of banking activities including: - income arising from assets included in Assets items 1, 3 to 5 [a], 6 and 7 in the Balance Sheet Format, however calculated. Such income shall also include income arising from the spreading on a time basis of the discount on assets acquired at an amount below, and liabilities contracted at an amount above, the sum payable at maturity. However the net amount arising from the amortisation on a time basis of discounts and premiums on investment securities shall be included under this item. If the latter is material it should be segregated and recorded separately in the notes to the accounts; - fees and commissions receivable similar in nature to interest and calculated on a time basis or by reference to the amount of the claim (but not other fees and commissions receivable); and - income resulting from covered forward contracts spread over the actual duration of the contract and similar in nature to interest. This item must be broken down on the face of the accounts between: (a) (b) interest receivable on loans and advances and balances with Central Bank of Malta; and interest receivable on debt securities. 2. Interest payable This item shall include all expenditure arising out of banking activities and is the mirror image of Item 1 - Interest receivable. It shall comprise: - charges arising out of liabilities included in Liabilities items 1 to 4 and 8 in the Balance Sheet Format, however calculated. Such charges shall also include charges arising from the spreading on a time basis of the premium on assets acquired at an amount above, and liabilities contracted at an amount below, the sum payable at maturity; - fees and commissions payable similar in nature to interest and calculated on a time basis or by reference to the amount of the liability (but not other fees and commissions payable); and C - 2

21 - charges resulting from covered forward contracts, spread over the actual duration of the contract and similar in nature to interest. 3. Dividend income Dividend income shall comprise income from equity shares, associated companies and subsidiary companies included in Assets items 5 [b], 8 and 9 in the Balance Sheet Format. 4. Fees and commissions receivable This item shall include all fees and commissions receivable from services provided by the bank to third parties, but not fees or commissions required to be included under the Income Statement Format item 1 - Interest receivable. In particular the following fees and commissions receivable shall be included (unless required to be included under interest receivable): - fees and commissions for guarantees, loan administration on behalf of other lenders and securities transactions; - fees, commissions and other income in respect of payment transactions, account administration charges and commissions for the safe custody and administration of securities; - fees and commissions for foreign currency transactions and for the sale and purchase of coin and precious metals; and - fees and commissions charged for brokerage services in connection with savings and insurance contracts and loans. 5. Fees and commissions payable This item shall comprise charges for all services rendered to the reporting bank by third parties, but not fees or commissions required to be included under the Income Statement Format item 2 - Interest payable. In particular the following fees and commissions payable shall be included (unless required to be included under interest payable): - fees and commissions for guarantees, loan administration and securities transactions; - fees, commissions and other charges in respect of payment transactions, account administration charges and commissions for the safe custody and administration of securities; - fees and commissions for foreign currency transactions and for the sale and purchase of coin and precious metals; and C - 3

22 - fees and commissions for brokerage services in connection with savings and insurance contracts and loans. 6. Trading [profits] [losses] This item shall comprise: - the net profit or loss on exchange activities, save in so far as the profit or loss is included in item 1 - Interest receivable or in item 2 - Interest payable of the Income Statement Format; - the net profit or net loss on transactions in instruments which are classified as held-for-trading; - the net profits and losses on other dealing operations involving financial instruments, including precious metals; and - other profits or losses not included in the above items. However material constituents should be disclosed separately in the notes. 7. Net [gains] [losses] on non-trading financial instruments This item shall comprise: - Fair value movements on available-for-sale financial instruments (on having decided in the one-time choice to pass the fair value movements through the income statement rather than having them deferred to equity); - The net gain or loss from the disposal of financial assets classified as available-for-sale; and - Net revaluation gains on available-for-sale assets transferred from equity (on disposal). 8. Other operating income This is the 'catch-all' item and shall include rents receivable, rentals receivable for equipment under operating leases and profit (or loss) on disposal of investment securities and profit on disposal of tangible fixed assets. Profit (or loss) on sales of investment securities should be disclosed separately in the notes. Material constituents of this item should also be disclosed separately in the notes. 9. Administrative expenses This item shall include staff costs and other administrative expenses. 10. Depreciation This item shall comprise depreciation and other amounts written off in respect of tangible fixed assets. C - 4

23 11. Amortisation of intangible assets This item shall comprise amortisation in respect of intangible assets. 12. Other operating charges This is another 'catch-all' item, and credit institutions are free to make any distinction between this caption and 'other administrative expenses' included under item 9 - Administrative expenses, that they consider appropriate. Alternatively, they could include nothing under 'other operating charges' and omit the line. Possible candidates for inclusion are charges for the hire of computers and equipment and losses on disposal of tangible fixed assets. Material items included must be disclosed separately in the notes. 13. Net impairment losses Net impairment losses comprise of the following: - Provision for bad and doubtful debts and adjustments to provision for doubtful debts: Provision for bad and doubtful debts comprise charges for amounts written off and for provisions made in respect of loans and advances shown under Assets item 6 - Loans and advances to banks and item 7 - Loans and advances to customers in the Balance Sheet Format. Adjustments to provision for bad and doubtful debts include credits from the recovery of loans that have been written off, from other advances written back following earlier write offs, and from the reduction of provisions previously made with respect to loans and advances. - Provision for impairment of financial assets: This item shall comprise amounts written off and adjustments to amounts written off in respect of treasury bills, available-for-sale and held-to-maturity financial assets, including shares in associated undertakings and shares in group undertakings and which are included in Assets items 5, 8 and 9 in the Balance Sheet Format. Where a financial asset remeasured to fair value directly through equity is impaired, and a write-down of the asset was previously recognised directly in equity, the write-down is transferred to the income statement and recognised as part of the impairment loss. Where an increase in fair value of an asset was previously recognised in equity, the increase is reversed to the extent the asset is impaired. Any additional impairment loss is recognised in the income statement. If in a subsequent period the amount of impairment loss decreases and the decrease can be linked objectively to an event occurring after writedown, the write-down is reversed through the income statement. 14. Provision for contingent liabilities and commitments This item shall comprise charges for provisions for contingent liabilities and commitments of a type which would, if not provided for, be shown under Memorandum item 1 - Contingent liabilities and item 2 - Commitments in the Balance Sheet Format. This is shown net of credits from the reduction of provisions C - 5

24 previously made with respect to contingent liabilities and commitments. However full disclosure needs to be provided. 15. Share of profits of associated companies Where the reporting bank prepares consolidated financial statements this item shall include the investor's share of the profits or losses of investments in associated companies when the equity method of accounting is adopted. Items 16 to 25 Items 16 to 25 in the Income Statement are self explanatory. They cover profit (or loss) on ordinary activities before and after tax, extraordinary income and charges, and profit (or loss) for the financial year; Where a bank prepares consolidated financial statements, the minority shareholders share of profit after tax shall also be included. Earnings per share The reporting credit institution shall disclose the earnings per share on the face of the profit and loss account. C - 6