RESULTS OF THE SURVEY ABOUT HARMONIZATION OF NOTES TO THE FINANCIAL STATEMENTS

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1 RESULTS OF THE SURVEY ABOUT HARMONIZATION OF NOTES TO THE FINANCIAL STATEMENTS Level of compliance of the Recommendations Mª Antonia Santos Sanz Head of the Accounting and Financial Statements Division XIII Meeting on Central Bank accounting CEMLA Madrid, 30th May 1st June 2012

2 INDEX Introduction Monitoring: Formal recommendations Content recommendations Conclusions 2

3 INDEX Introduction Monitoring: Formal recommendations Content recommendations Conclusions 3

4 INTRODUCTION. GOALS The goal is to INCREASE THE TRANSPARENCY of the CEMLA Central Banks. With the aim of increasing the transparency, a HARMONIZING PROCESS of the content of the notes to the annual financial statements started in To continue with the process, the Committee needs to monitor the level of accomplishment of the ISSUED RECOMMENDATIONS in order to further develop the content of these notes. 4

5 BACKGROUND SEPT 06 NOV 06 The participants in the X Meeting on Central Bank Accounting and Budgetary Matters unanimously supported the recommendations aimed at increasing the transparency through a harmonizing process of the content of the notes to the annual financial statements. It was deemed appropriate that, after a prudential period from the emission of the Recommendation, its fulfilment should be monitored and, in the case of positive results, the Committee should further develop the content of these notes, taking into consideration the recommendations established by the IAS/IFRS. On November 20th 2006, CEMLA s Accounting and Budgeting Aspects Committee published the text of The First Official Recommendations. OCT 08 DIC 08 YEAR 09/ 10 The participants of the XI Meeting, boosted by the recommendation by the CEMLA Board of Governors, decided to expand the contents of the 2006 Recommendation, promoting the production of comparable and high quality homogeneous information. On December 31st 2008 the Accounting and Budget Committee approves the draft of the New Recommendations, increasing their number from 5 to 14 recommendations Execution and analysis of the surveys on the 2008 annual accounts. YEAR 11/ 12 Execution and analysis of the surveys on the 2010 annual accounts. 5

6 STATEMENTS AND INITIATIVES REGARDING THE NOTES IASB IAS 1.- Presentation of Financial Statements (paragraph 10) A complete set of financial statements will comprise, among others, notes containing a summary of significant accounting policies and other explanatory notes. IAS 1.- Presentation of Financial Statements (paragraphs 112 & 113) The notes shall: (a) present information about the basis of preparation of the financial statements and the specific accounting policies used in accordance with paragraphs ; (b) disclose the information required by IFRSs that is not presented elsewhere in the financial statements; and (c) provide information that is not presented elsewhere in the financial statements, but is relevant to an understanding of any of them An entity shall, as far as practicable, present notes in a systematic manner. An entity shall cross-reference each item in the statements of financial position and of comprehensive income, in the separate income statement (if presented), and in the statements of changes in equity and of cash flows to any related information in the notes. IAS 8.- Accounting Policies, Changes in Accounting Estimates and Errors The objective is to prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies & estimates & corrections of errors. IFRS 7.- Financial Instruments: Disclosures (paragraphs 21-26) Specific information requirements for financial instruments are established according to accounting policies, hedge accounting and Fair Value. 6

7 INDEX Introduction Monitoring: Formal recommendations Content recommendations Conclusions 7

8 MONITORING. SURVEY CONDUCTED 1. The recommendations are classified in terms of formal and content recommendations. 2. It has been made a comparison between the results of the surveys for 2010 and 2008 annual CATEGORIES FORMAL CONTENT 1 st, 2 nd, 3 rd, 7 th, 8 th 4 th, 5 th, 6 th, 9 th, 10 th, 11 th, 12 th, 13 th, 14 th 8

9 INDEX Introduction Monitoring: Formal recommendations Content recommendations Conclusions 9

10 FORMAL RECOMMENDATIONS. MONITORING Recommendation 1ª 1- Are the financial statements clearly identified so they can be distinguished from any other information published? 2- Is the following information clearly stated in the financial statements? Name of the central bank. Date of the financial statements or the period covered. Date on which they were prepared. The approving authority. Currency of the presentation. Level of aggregation. Rounding-out used to present the figures in the financial statements. Average Data Yes; 85% No; 15% 2ª Are the annual financial statements accompanied by narrative descriptions that permit the correct understanding of the statements? Yes; 93% No; 7% 10

11 FORMAL RECOMMENDATIONS. MONITORING Recommendation 3ª 4 Are the sources from which the accounting polices emanate, or in which the policies and criteria are established, mentioned in the Notes to the annual financial statements? 7ª 5 If the bank has adopted the International Financial Reporting Standards (IFRS), do the Notes include an explicit and unreserved declaration of its compliance? 11-Are the annual financial statements presented in accordance with the format authorized in which the figures of the closing period and those of the previous one are shown? Balance Sheet; Profit and Loss Account; Statement of changes in net equity; Cash Flow Statement 1. Average Data Yes; 96% No; 95% Yes; 80% Yes; 5% No; 4% No; 9% N/A; 11% 12- Do the annual accounts include cross references that make it possible to unmistakably identify the items with their explanatory notes? Balance Sheet; Profit and Loss Account; Statement of changes in net equity; Cash Flow Statement 1. Yes; 63% No; 27% N/A; 11% 1.- It includes the average data of the four financial statements: Balance Sheet, Profit and Loss Account, Statement of changes in net equity and Cash Flow Statement. 11

12 FORMAL RECOMMENDATIONS. MONITORING Recommendation Average results 8 th 13 Is the presentation and classification of the items in the financial statements continued from one fiscal year to another? Yes; 68% No; 32% 14 -When presentation or classification changes are made, is the following information reported? The nature of the reclassification. The amount of each heading or group of items reclassified. The reason for the reclassification. Yes; 78% No; 22% Average of FORMAL RECOMMENDATIONS (1 st, 2 nd, 3 rd, 7 th and 8 th ) yes; 76% No; 20% N/A; 4% 12

13 FORMAL RECOMMENDATIONS. CONCLUSIONS HIGH COMPLIANCE The 1st Recommendation had an 85% compliance rate. ( %) The 2nd Recommendation reached a 93% compliance rate. ( %) The 3rd Recommendation had a compliance rate of 96 % regarding the mention of the accounting policies sources ( %) The 7th Recommendation was widely complied with in the aspects related to the Balance Sheet and the Income Statement. The 8th Recommendation presented a high level of compliance in those aspects related to the maintenance of the presentation and classification of items from one year to another (Yes; 68%) ASPECTS TO IMPROVE The 3rd Recommendation (related to the IFRS) 71% of Central Banks apply the IFRS, only 5% of which explicitly declare that they fully comply with the IFRS. The average compliance of the 7th Recommendation was negatively affected by the inclusion of questions regarding the Statement of changes in net equity and the Cash Flow Statement, where the recommendation is not applicable in many cases (N/A; 11%) The 8th Recommendation (structural changes) 32% of Central Banks have modified the structure but only 78% of them have communicated the reclassification. 13

14 INDICE Introduction Monitoring: Formal recommendations Content recommendations Conclusions 14

15 CONTENT RECOMMENDATIONS. FOURTH 4 th Do the Notes contain sufficient descriptions of the policies, accounting criteria and assessment standards used in drawing up the annual financial statements? RESULTS 2008 RESULTS 2010 Yes, totally; 81% Yes, totally; 82% No; 15% Yes, partially; 4% Yes, partially; 11% No; 7% The compliance with the recommendations is high (82%) and in line with previous years NOTE: There has been an increase in the rate of Central Banks that partially comply with the recommendation, from 4% in 2008 to 11% in

16 CONTENT RECOMMENDATIONS. FIFTH 5 th Do the Notes include relevant information to understand the following financial statements? Balance Sheet, Profit and Loss Account, Statement of changes in net equity, Cash Flow Statement 1 Always; 79% BALANCE SHEET Sometimes; 15% Always; 54% PROFIT AND LOSS ACCOUNT Sometimes ; 39% Always; 38% AVERAGE 1 Someti mes; 30% Never; 20% Never; 7% Never; 7% N/A; 12% a. The recommendation is widely complied with concerning the Balance Sheet (79%) b. However, there is room for improvement concerning the information provided on the Profit and Loss Account (54), Statement of changes in net equity (18%),and the Cash Flow Statement (4%). 1.-Including average results of the forth financial statements: Balance Sheet, Profit and Loss Account, Statement of changes in net equity, Cash Flow Statement 16

17 CONTENT RECOMMENDATIONS. SIXTH 6 th i - Do the Notes include information about any change in the accounting estimates that may have caused effects in the current fiscal year or which are expected to cause them in a future fiscal period? ii - When an error in a previous fiscal year is declared, is the following information disclosed? Nature of the error. The amount of the adjustment. If it is not possible to calculate said adjustment in a particular previous period, are the reasons for not being able to do so reported together with a description of how and when the error was corrected? iii-do the Notes include information about relevant conditions after the date of the balance? N/A; 84% AVERAGE RESULTS a) For most of the Central Banks participating in the survey, the recommendations were not directly applicable. No; 2% Yes; 14% b) Monitoring by the Central Banks concerned has been good, 85% with a slight improvement on 2008 (80%) 17

18 CONTENT RECOMMENDATIONS. NINTH 1/2 9 th Questions Average results 15 - Do the Notes to the financial statements include a description of the meaning of the item being referred to? Balance Sheet, Profit and Loss Account, Statement of changes in net equity, Cash Flow Statement 1 Never; 34% N/A; 11% Always; 26% 16 - Does each explanatory note include, whenever applicable, detailed information about the composition of the referred item? 16.1 Main components of the item: Balance Sheet/Profit and Loss Account 16.2 Exchange rates used to evaluate year-end foreign currencies 16.3 Currencies in which assets liabilities are invested 16.4 Gold stock in troy ounces or in metric tones 16.5 Price applied for the valuation of gold at the end of the year 16.6 Fees for participation in international institutions or organizations (IMF, BIS, etc.) 16.7 Breakdown by maturity of assets/liabilities 16.8 Percentage yield on assets and remuneration of liabilities 16.9 Explanation of various government securities included in the balance Explanation of why the provisions have been constituted Information on the constitution of reserves Information on the distribution of profits and losses Sometimes ; 15% N/A; 9% No; 29% Sometimes; 29% N/A; 11% Yes; 47% Always; 5% 17 - Do the Notes provide an explanation about the causes of variation of the item compared with the previous year, if it is relevant? Balance Sheet, Profit and Loss Account, Statement of changes in net equity, Cash Flow Statement 1 Never; 62% Sometimes ; 22% 1.- Including average results of the forth financial statements: Balance Sheet, Profit and Loss Account, Statement of changes in net equity, Cash Flow Statement 18

19 CONTENT RECOMMENDATIONS. NINTH 2/2 Average compliance data for the 9 th Recommendation, points 15, 16 and 17. RESULTS 2008 RESULTS 2010 Sometimes; 20% Yes; 24% Sometimes; 22% Yes; 26% N/A; 14% N/A; 10% No; 42% No; 42% a) The compliance with the recommendation remains stable in 2010 b) The compliance rate is still relatively low. c) The room for improvement is significant, specially regarding the provision of information on the changes which have taken place since the previous statement. 19

20 CONTENT RECOMMENDATIONS. TENTH 10ª In the specific case of financial instruments, is the following information provided? i. The importance of using financial instruments for the bank. ii. The purposes determined for their use iii. The criteria followed for recognition, measurement and discontinuance iv. The methodology used to determinate the fair value v. The methodology used to account sales and purchases vi. Guarantees given or received Yes; 36% AVERAGE RESULTS No; 64% a) The average compliance rate of the recommendation has evolved since 2008 (from 27% in 2008 to 36% in 2010) but it still remains low. b) The information about criteria followed for recognition, measurement and discontinuance is widely reported (75%). c) The other questions are answered by less than 50%. d) The question about the importance of using financial instruments for the bank is only reported by 11%. e) There is considerable room for improvement 20

21 CONTENT RECOMMENDATIONS. ELEVENTH 11ª In reference to market risk and to credit risk, is the following information provided?: i. Management, measurement, coverage and risk control policies ii. Degree of exposure to market risk. iii. Credit exposure by classification, concentration and sector iv. Composition by currency and list of coverage operations v. Any change compared with the previous period that occurred in the above points Yes; 64% RISK MANAGEMENT POLICIES DEGREE OF EXPOSURE TO MARKET RISK No; 71% AVERAGE RESULTS No; 52% No; 36% Yes; 29% Yes; 30% N/A; 18% a) The compliance with the recommendation has noticeably improved since % of the participating Central Banks provide information about their risk management policies in 2010, versus 42% in b) There is still however wide room for improvement. 21

22 CONTENT RECOMMENDATIONS. TWELFTH 12ª Is the bank s relationship with the Treasury, Government or other public organizations reported in the Notes to the financial statements? If there have been transactions with said parties, has at least the following information been reported?: i. The amount of the transactions carried out and its remuneration ii. The amount of outstanding balances and their items terms and conditions iii. Value corrections made during the fiscal year on the amount included in outstanding balances Yes; 82% RELATIONSHIP WITH THE TREASURY AMOUNT OF THE TRANSACTION Yes; 64% No; 18% AVERAGE No; 20% N/A; 18% No; 18% Yes; 52% N/A; 28% a) The average compliance rate for this recommendation has noticeably improved (38% in 2008, 52% in 2010). b) The information provided about the transactions carried out with public organizations may be improved. c) The last question (iii.) is not applicable to 79% of central banks and this affects the average data 22

23 CONTENT RECOMMENDATIONS. THIRTEENTH 13ª If the central bank has sizeable operations with related parties other than those indicated in section twelve above, do the Notes report about the expenditure made during the period? Do the Notes report about any bad or non-performing debts that may exist? No; 11% AVERAGE RESULTS Yes; 23% N/A; 66% The rate of Central Banks complying with the recommendation has positively evolved, from 19% in 2008 to 23% in This recommendation has a low applicability 23

24 CONTENT RECOMMENDATIONS. FOURTEENTH 14ª Regarding the explanatory note on personnel expenses, is information included about i. wages and salaries? ii. company benefits? iii. pension plans? iv. enrolment in obligatory or voluntary company benefits plans granted by the central bank to employees? Do the Notes report about the total number of employees working for the bank? Yes; 46% AVERAGE RESULTS No; 41% N/A; 13% a) The information was provided by few central banks. b) There is considerable room for improvement on each point of the recommendation. 24

25 INDEX Introduction Monitoring: Formal recommendations Content recommendations Conclusions 25

26 CONCLUSIONS. OVERALL MARK AVERAGE RESULTS CONCLUSIONS MEDIUM LOW MEDIUM MEDIUM HIGH There is a continuous and considerable improvement in the Notes to the Annual Statements. 2. The financial information provided in the explanatory notes has high-quality compared to the previous survey. LOW HIGH 3. The level of compliance of different Central Banks of the Recommendation for harmonization of the Notes is approximately 50% 4. Some of the survey answers are difficult to quantify. 5. The application of some recommendations is low and there is considerable room for improvement a) Financial instruments (10 th R) b) Market and credit risk (11 th R) c) Operations with related parties (13 th R) d) Personal expenses (14 th R) 26

27 THANK YOU FOR YOUR ATTENTION