Circular 2015/1 Accounting banks

Frequently Asked Questions (FAQs) Circular 2015/1 Accounting banks (status: 22 July 2015) 1. How are provisions originally created for undrawn credit facilities to be handled if the credit facility has since been (partially) drawn? Provisions for off-balance-sheet transactions are created and released via Item 7 Changes to provisions and other value adjustments and losses; value adjustments for default risks are in principle created and reversed via Item 1.6 Changes in value adjustments for default risks and losses from interest operations. If an originally undrawn credit facility for which provision was made has since been drawn and if provisioning is still required, recording must in principle be carried out gross, i.e. the provision must be released via Item 7 and the value adjustment created via Item 1.6. Gross recording is required because provisions must generally be created for off-balance-sheet transactions. Value adjustments can only be created for assets. The creation of a provision for undrawn credit facilities must be economically necessary in all cases and must also meet the criteria set out in margin no. 518 et seqq. For credit facilities (with corresponding credit facility limits) whose use is typically subject to frequent and large fluctuations (e.g. current account credit facilities) and for which provisioning is required, the following alternative method of recording is available: initial and subsequent creation of a provision is carried out in its entirety (i.e. value adjustments for the actual use and provisions for the undrawn part of the credit facility) via Item 1.6. If facility utilisation changes, a reclassification without income effect is carried out between value adjustments and provisions. When they are no longer required, reversals of value adjustments and releases of provisions must also be made via Item 1.6. If this option is used, this must be stated in the accounting and valuation principles. Reclassifications without income effect are to be reported in the Reclassifications column of Table 16 Presentation of value adjustments and provisions, reserves for general banking risks and changes therein during the current year. This alternative may be applied in all types of financial statements. 2. What is the difference between the fair value option (FVO) in FINMA Circ. 15/1 and the FVO as applicable in the international accounting standards recognised by FINMA? The FVO in FINMA Circ. 15/1 (margin no. 372 et seqq.) is to be interpreted more narrowly than under IFRS and US GAAP. This is reflected in the fact that the conditions in margin nos. 373 375 must all be met. The background to the creation of the new FVO was Question 20a of the FAQs on FINMA Circ. 08/2 Accounting banks in relation to self-issued structured products. The FVO in FINMA Circ. Laupenstrasse 27, 3003 Bern Tel. +41 (0)31 327 91 00, Fax +41 (0)31 327 91 01 www.finma.ch

15/1 was thus essentially introduced to prevent an accounting mismatch when recording self-issued structured products. When drafting FINMA Circ. 15/1, it was never the intention to provide for a FVO similar to that in IFRS or US GAAP. The FVO is in principle not an alternative to using hedge accounting. 3. When using an international standard are the options provided for in margin nos. 424, 443 and 503 recognised by FINMA at group level in the statutory single-entity financial statements applicable to all banks that fall within the scope of consolidation of a financial group? The use of methods for calculating liquidation values (margin no. 424), hedge accounting (margin no. 443), and recognition in the balance sheet and disclosure of the economic impact of pension schemes using a dynamic method (margin no. 503) are generally subject to stricter and more exhaustive rules in the international standards recognised by FINMA than in the Swiss Accounting Rules for Banks (ARB) set out in FINMA Circ. 15/1. This means that the options referred to can be used by all banks applying the ARB that fall within the scope of consolidation of a financial group using an international standard recognised by FINMA. However, the relevant provisions of the international standard recognised by FINMA must be applied in full, i.e. including the relevant disclosure requirements in the Notes. The accounting and valuation principles of the banks concerned must contain a corresponding statement regarding the application of rules set out in the international standards recognised by FINMA. 4. Are employee participation schemes that are fulfilled using equity instruments of a group company to be treated as true or virtual equity instruments? If employee participation schemes are fulfilled using equity instruments of another group company (e.g. parent company), they are virtual equity instruments. 5. Can a subsequent valuation of employee participation schemes based on equity instruments issued by another group company be dispensed with if the bank has granted compensation awards and covered its obligation, and therefore knows what the definitive costs will be? As soon as the bank has obtained cover in the form of equity instruments from another group company and therefore no more valuation differences are to be expected, subsequent valuation of such virtual equity instruments can be dispensed with. To avoid an accounting mismatch, no subsequent valuation of the equity instruments purchased to cover the obligation is required either. This rule also applies if the obligation is partially covered by equity instruments from another group company. 2/6

6. For the rules governing employee participation schemes, why is there a discrepancy between margin no. 611 and margin no. A2-169 with regard to recording obligations? In accordance with margin no. 611, expenses related to employee participation schemes are to be recorded in the statutory single-entity financial statements against Accrued expenses and deferred income. In accordance with margin no. A2-169, amounts relating to share-based compensation in the case of true equity instruments and any differences in the fulfilment of employee participation schemes are to be recorded in the item Statutory retained earnings reserve and reported in the Presentation of the statement of changes in equity (Annex 4) to the statutory single-entity financial statements in the line Employee participation schemes / recognition in reserves. This, however, is an oversight in the regulatory provisions. Margin no. 611 thus applies, i.e. expenses are to be recorded in the statutory single-entity financial statements against Accrued expenses and deferred income. This is presented correctly in margin no. A2-125. 7. Must high quality liquid assets (HQLA) be reported as Securities eligible for repo transactions in accordance with liquidity requirements in the corresponding line of Tables 3 and 5? When reporting in these two tables, the proportion of securities eligible for repo transactions at the Swiss National Bank (SNB) and/or other central banks in the items Trading portfolios assets, Other financial instruments at fair value and Financial investments must be disclosed. The corresponding requirements of the SNB / other central banks apply. The SNB has published an Instruction sheet on collateral eligible for SNB repos (Instruction sheet no. 5 dated 7 July 2014: http://www.snb.ch/en/- mmr/reference/repo_mb26/source/repo_mb26.en.pdf) on this subject, which has been applicable since 1 January 2015. 8. Do the transitional arrangements set out in Article 957 et seqq. CO regarding the preparation of consolidated financial statements also apply to the consolidated financial statements of banks? No, the transitional arrangements set out in the Swiss Code of Obligations do not apply to the consolidated financial statements of banks. The preparation of consolidated financial statements for banks is governed by the fully revised Banking Ordinance and FINMA Circ. 15/1. Consolidated financial statements for banks are to be prepared and published for the financial year commencing on or after 1 January 2015. 9. Is there a deliberate distinction between the disclosure exemption and the publication of interim financial statements at single-entity level; in other words, does the exemption with regard to the publication of interim financial statements at single-entity level apply to all banks in the financial group? A deliberate distinction is made between the two sets of circumstances. 3/6

The scope of the disclosure exemption has been made more restrictive than in the old Guidelines on accounting standards (FINMA Circ. 08/2). However, as a result of the amendments to the CO provisions, it now applies to all banks in the financial group. With regard to the interim financial statements, the entities to which the scope of the disclosure exemption applies have not changed. However, the old Banking Ordinance (obo) exempted the stand-alone bank from having to prepare single-entity interim financial statements, if consolidated interim financial statements had been prepared (Art. 25k para. 2 obo). Based on Article 6 para. 2 of the Banking Act and Article 31 of the fully revised Banking Ordinance, all banks are now required to prepare interim financial statements. This means the exemption now applies only to publication, and only as under the old rules to banks that prepare consolidated financial statements. 10. How must the previous-year figures be prepared when applying FINMA Circ. 15/1 for the first time, and what adjustments must be made? In principle, the previous-year figures are to be transferred to the new structure. For example, the previous item Amounts due arising from money-market instruments should be transferred to the relevant balance sheet items, according to the respective issuer. With regard to valuation, a distinction is to be made between statutory single-entity financial statements and true and fair view financial statements: In the case of statutory single-entity financial statements (reliable assessment statutory singleentity financial statements and true and fair view single-entity financial statements), no revaluations of the previous-year figures can be made. In principle, revaluations resulting from the first-time application of FINMA Circ. 15/1 are to be reported in the ordinary income statement items in the year of first use. In the case of true and fair view supplementary single-entity financial statements and consolidated financial statements, the previous year s figures must in principle be restated. The amounts of restatements for previous periods not included in the financial statements are to be reported in the equity for the earliest period presented. If restatement is not possible with a reasonable amount of effort, it may be waived; however, the reasons must be disclosed (margin no. 32). 11. How must the gross debt amount of impaired loans / receivables for which collective individual value adjustments have been made be reported? In accordance with margin no. 421, individual value adjustments for homogenous credit portfolios consisting exclusively of a large number of small loans / receivables where individual assessments cannot be carried out with reasonable effort may be calculated collectively. These are referred to as collective individual value adjustments and should not be confused with collective value adjustments, which are made as necessary to cover latent default risks. Impaired loans / receivables (for definition see margin no. 413 et seqq.) must in principle be valued individually. If the requirements in margin no. 421 are met, a collective valuation may be undertaken. However, since the loans / receivables concerned are impaired (for which collective individual value 4/6

adjustments are made), both the gross debt amount and specifically the collective individual value adjustments are to be inserted in the table Impaired loans / receivables (the adjustments are included in the column Individual value adjustments ). 12. Are Lombard loans to be deducted from the assets disclosed in Table 31 Breakdown of managed assets and presentation of their development? The wording without taking Lombard loans into account in margin no. A5-124 means that assets financed with Lombard loans are to be included in managed assets, as was already the case in FINMA Circ. 08/2. 13. When initially applying the ARB to cash flow statements, can the presentation of previousyear figures be waived or must they always be included? To prepare cash flow statements correctly, the closing and opening balances of the financial statements of the previous year are necessary, which implicitly means that the final balances of the year preceding the previous year must be taken as the starting basis. In other words, for first-time application of the ARB to the financial statements for the financial year 2015 (i.e. changing from FINMA Circ. 08/2 to FINMA Circ. 15/1), the financial statements for the financial years 2013 and 2014 must also be prepared according to ARB. To avoid any disproportionate efforts in preparing the cash flow statements, it is not necessary, however, to include previous-year figures for the financial year 2015. 14. What effect does omission of the term "general value adjustments" in Chapter IX, D "Value adjustments for default risks" have (margin no. 411 et seqq.)? The term has not been omitted, but rather rephrased. As set out in margin no. 18b in conjunction with question 9 of the FAQs about FINMA Circ. 08/2, general value adjustments were made to cover any latent risks. FINMA Circ. 15/1 also requires the recording of general value adjustments (margin no. 412) to cover such risks. The term "general value adjustments" is no longer used as they can now be made on a portfolio basis and/or individually. 15. When preparing consolidated financial statements, is it necessary to disclose information about equity components in accordance with margin no. A5-88 or can this be waived? In accordance with margin no. 312, Table 17 "Presentation of the bank's capital" is not to be included in the notes to the consolidated financial statements. However, margin no. A5-88 requires disclosure of information, some of which must also be disclosed in Table 17, thus de facto cancelling any exemption. This explains why the disclosure exemption has now been extended to margin no. A5-88 and why this information must not be included in the consolidated financial statements. 5/6

16. Are any cash collaterals to be included in the line "Total before netting agreements" of Table 4 "Presentation of derivative financial instruments (assets and liabilities)? No, it is not permitted to include cash collaterals in this line of the table, i.e. figures should be indicated on a gross basis. If they fulfil the requirements set out in margin 40 et seqq., cash collaterals can be included in the line "Total after netting agreements". 17. Whom can I contact if I have additional questions? accounting@finma.ch 6/6