Accounting Framework for Eurosystem Banks

Transcription

1 Accounting Framework for Eurosystem Banks Beverley Standen European Central Bank EGIAN Conference 27 November 2013

2 Outline of the presentation 1. Background 2. Eurosystem financial reporting 3. Eurosystem accounting principles and rules 4. Main differences to IFRS 5. ECB financial result under IFRS 6. IFRS developments and impact on central banks 7. Other information 2

3 1. Background Overview of legal framework The Statute of the ESCB (Articles 15 and 26) describes the reporting commitments and authorises the Governing Council to standardise accounting and reporting rules Guideline of 11 November 2010 on the legal framework for accounting and financial reporting in the ESCB, ECB/2010/20 Relevant for Eurosystem financial reporting purposes Decision of 11 November 2010 on the annual accounts of the ECB, ECB/2010/21 Non-core operations governed by local law or IFRS 3

4 1. Background Factors considered for developing Eurosystem accounting rules included: Material un-hedged exposure to foreign currency and interest rate risk Different local arrangements governing profit distribution No mechanism for automatic coverage of NCB losses by governments Assets not necessarily readily tradable due to their nature (e.g. gold) or due to policy considerations Harmonised basis for calculating monetary income required Financial independence of a central bank 4

5 1. Background Public interest in Eurosystem s financial reporting has considerably grown in the context of the financial crisis Central banks are accountable vis-à-vis the public for: the effective pursuit of monetary policy objectives the use of public resources Financial reporting is a communication vehicle to: contribute to transparency inform markets on the Eurosystem s operations In addition, statistical reporting and other publications interrelate with the Eurosystem s financial reporting 5

6 2. Eurosystem financial reporting Due to the conduct of a single monetary policy Eurosystem financial statements are prepared as if all euro area central banks were one entity i.e. consolidated (legal requirement according to the Article 26.3 of the Statute of the ESCB) Prerequisites: Harmonisation of accounting rules and reporting formats Procedures for ensuring reliable and timely NCB and ECB data Benefits: Provision of meaningful information to the public Standardised reporting format basis for the calculation and reallocation of monetary income 6

7 2. Eurosystem financial reporting Main features of Weekly Financial Statement: Reports assets and liabilities of the Eurosystem vis-à-vis third parties Distinguishes: foreign currency items from euro-denominated items monetary policy operations from autonomous liquidity factors positions vis-à-vis euro area from those vis-à-vis non-euro residents positions vis-à-vis financial sector from those vis-à-vis general government Thereby mirrors the various functions of central banks: institutions that define and implement monetary policy => aim: price stability issuer of banknotes and promoting smooth operation of payment systems official holders of States foreign reserves bankers of commercial banks banks of respective States 7

8 2. Eurosystem financial reporting Main features of Weekly Financial Statement: Applies a cash-flow oriented approach with a quarterly update to reflect economic values: during the quarter, transactions are reported at transaction values at quarter-end, following revaluation, balances are shown at market prices and rates (exception of items at -amortised- cost) An accompanying explanatory note provides further information 8

9 3. Eurosystem accounting principles and rules Basic accounting principles Prudence, particularly linked to income recognition Economic reality and transparency Materiality Going concern Accruals principle Consistency and comparability Post-balance sheet events 9

10 3. Eurosystem accounting principles and rules Classification of financial instruments Marketable securities other than held-to-maturity Marketable equity instruments Off-balance-sheet instruments Marketable securities held-to-maturity (HTM) Non-marketable securities Illiquid equity shares and other equity shares held as permanent investment Loans 10

11 3. Eurosystem accounting principles and rules Measurement of financial instruments and items in foreign currencies Non HTM securities (on ISIN-by-ISIN basis), marketable equity instruments and off-balance sheet instruments are presented at market values on a quarterly basis HTM securities and non-marketable securities are presented at amortised cost subject to impairment Illiquid equity shares and other equity shares held as permanent investment are presented at cost subject to impairment Loans are presented at nominal value (or cost) Items denominated in gold are revalued at their market euro value (price and currency revaluation not distinguished) Foreign exchange assets/liabilities (on currency-by-currency basis) are translated at market rates 11

12 3. Eurosystem accounting principles and rules Income recognition rules Realised gains and losses taken to P&L, calculated by reference to the average cost Unrealised gains credited to revaluation accounts that serve as first line of defence to absorb future valuation losses Unrealised losses taken to P&L if they exceed previous revaluation gains in the corresponding revaluation account no netting is allowed of unrealised losses on any one security or any one currency or in gold holdings against unrealised gains in other securities or currencies or gold Premiums and discounts are part of interest income and amortised over remaining life of securities 12

13 3. Eurosystem accounting principles and rules Advantages of asymmetric treatment of unrealised results Results in automatic creation of financial buffers in favourable times Reduces risk of capital erosion by avoiding distribution of unrealised gains which may subsequently reverse May offset the potential adverse impact of Eurosystem- specific factors like balance sheet risks and non-flexible profit distribution rules Contributes to financial strength/independence 13

14 3. Eurosystem accounting principles and rules Provisions equivalent to reserves The possibility to set up general provisions depends on the national laws applicable for the NCBs. The ECB and a number of NCBs have set up such provisions The ECB has set up a provision against foreign exchange rate, interest rate, and gold price risks in 2005 scope extended to include credit risk in 2009 can be used to cover realised and unrealised losses stemming from predetermined risks size reviewed annually, taking a number of factors into account maximum allowed level equal to paid-up capital less any amount transferred already to the general reserve importance has increased over the last years due to the increase of the credit risk on the balance sheet of the ECB. The same is true for NCBs 14

15 4. Main differences to IFRS Differences in rules largely due to the specific nature of central banks The Eurosystem accounting framework: relies on nearly the same basic accounting assumptions and principles emphasises the prudence principle to build financial buffers protecting against the impact of future adverse market developments is fundamentally different from IFRS in relation to: income recognition general provisions 15

16 4. Main differences to IFRS Eurosystem IFRS Classification HTM/non-HTM marketable/nonmarketable securities, marketable/other equity, loans, OBS instruments HTM, FVTPL, Loans and receivables, AFS (IAS 39); Financial assets/liabilities measured at amortised cost or fair value (IFRS 9) Measurement -Amortised- cost subject to impairment, market price, Nominal value Amortised cost (subject to impairment) or fair value Impairment Incurred loss model (currently not a difference) Incurred loss model (expected loss model in the future) 16

17 4. Main differences to IFRS Issue Eurosystem IFRS Provisions Income recognition Components General provisions permitted (subject to national legislation) Asymmetric approach of recognising unrealised gains and losses Cash flow statement, statement of changes in equity and OCI not required General provisions not allowed Fair value changes recognised symmetrically in profit and loss account or equity Cash flow statement, statement of changes in equity and OCI required Layout Geared to monetary policy related analysis General-purpose 17

18 4. Main differences to IFRS Issue Eurosystem IFRS Hedge accounting Disclosure Limited to the (a) hedging of the interest rate risk of securities, and (b) hedging of the positions in SDRs with the underlying basket currencies (non-euro) Harmonised for common items (recommended) Possible for (a) cash flow hedge, (b) fair value hedge, (c) net investment hedge Comprehensive disclosures required by IFRS 18

19 5. ECB financial result under IFRS Study to compare ECB financial result under the Eurosystem accounting rules and the IFRS To get IFRS figures, the ECB profit was adjusted, inter alia, for: general risk provision revaluation effects of securities and currencies Other assumptions included: 80% of annual profit is distributed to shareholders losses not covered by General Reserve Fund are covered by the monetary income of the NCBs Net result under the IFRS: would be more volatile would lead to higher amounts distributed to the shareholders Outcome would be different if monetary income of NCBs was not available 19

20 5. ECB financial result under IFRS ECB financial result: overall more volatile under the IFRS Average impact 2.5 billion per year (either gain or loss) from currency revaluation Impact of security price revaluation and risk provision less material but substantial in individual years 20

21 5. ECB financial result under IFRS Profit distribution, billion ECB IFRS ECB average profit distribution would be higher under IFRS Mainly during years when weakened vis-à-vis foreign currencies Average profit distribution over the reference period would have increased by 1.5 billion to 2.0 billion 21

22 5. ECB financial result under IFRS NCBs would be called up more frequently to cover ECB losses 5 times under IFRS vs. 2 times under the ECB Accounting Rules The average loss coverage in the reference period would increase by 0.6 billion to 0.7 billion under the IFRS 22

23 5. ECB financial result under IFRS ECB financial buffers would be significantly lower under IFRS revaluation accounts would include only unrealised gains on gold general risk provision would not be allowed General reserve fund would not suffice to compensate these effects 23

24 6. IFRS developments and impact on central banks (i) Classification and measurement (IFRS 9) Financial instruments can be valued at fair value or amortised costs (reduces complexity by allowing less categories) Valuation at amortised cost based on entity s business model (focus on collecting contractual cash flows) Implications for central banks Central banks hold securities for monetary policy purposes If IFRS 9 would be applied, central banks might have to apply fair value accounting, as it is questionable if criteria for amortised cost are met (is central banks business model to collect the contractual cash flows of monetary policy related securities?) 24

25 6. IFRS developments and impact on central banks (ii) Impairment for instruments at amortised cost (expected loss model) Trigger events no longer relevant for building up an allowance account (similar to a general provision) Entities will -likely- start building up the allowance account at an earlier stage compared to the incurred loss model Implications for central banks Ability to make forward-looking provisions might be seen as valuable for central banks However Limited to credit risk Building a forward-looking provision could have adverse signalling consequences unless implemented as a standard measure 25

26 Questions 26

27 7. Other information: Weekly Financial Statement format 27

28 7. Other information: Positions eliminated at consolidation Positions eliminated at consolidation A9.1 (NCBs) Participating interest in the ECB L15.1 (ECB) Capital (only contributions of Eurosystem NCBs) A9.2 (NCBs) Claims equivalent to the transfer of foreign reserves A9.3 (ECB) Claims related to the issuance of ECB debt certificates A9.4 (NCBs/ECB) Net claims related to the allocation of euro banknotes in Eurosystem A9.5 (NCBs/ECB) Other claims within the Eurosystem (including TARGET balances) L10.1 (ECB) Liabilities equivalent to the transfer of foreign reserves L10.2 (NCBs) Liabilities related to the issuance of ECB debt certificates L10.3 (NCBs) Net liabilities related to the allocation of euro banknotes in Eurosystem L10.4 (NCBs/ECB) Other liabilities within the Eurosystem (including TARGET balances) 28

29 7. Other information: Overview of the Eurosystem s main accounting rules 29

30 7. Other information: Overview of the Eurosystem s main accounting rules (2) 30

31 7. Other information: Overview of the Eurosystem s main accounting rules (3) 31

32 7. Other information: references to the Eurosystem accounting and reporting rules Please see also: Article Financial Reporting in the Eurosystem published in the April 2012 Monthly Bulletin Guideline of 11 November 2010 on the legal framework for accounting and financial reporting in the ESCB (ECB/2010/20) 68.pdf 32