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Commission Regulation (EC) No 1725/2003 of 29 September 2003 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council

Content

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Scope

1. This Standard should be applied in the financial statements of banks and similar financial institutions (subsequently referred to as banks).

2. For the purposes of this Standard, the term "bank" includes all financial institutions, one of whose principal activities is to take deposits and borrow with the objective of lending and investing and which are within the scope of banking or similar legislation. The Standard is relevant to such enterprises whether or not they have the word "bank" in their name.

3. Banks represent a significant and influential sector of business worldwide. Most individuals and organisations make use of banks, either as depositors or borrowers. Banks play a major role in maintaining confidence in the monetary system through their close relationship with regulatory authorities and governments and the regulations imposed on them by those governments. Hence there is considerable and widespread interest in the well-being of banks, and in particular their solvency and liquidity and the relative degree of risk that attaches to the different types of their business. The operations, and thus the accounting and reporting requirements, of banks are different from those of other commercial enterprises. This Standard recognises their special needs. It also encourages the presentation of a commentary on the financial statements which deals with such matters as the management and control of liquidity and risk.

4. This Standard supplements other International Accounting Standards which also apply to banks unless they are specifically exempted in a Standard.

5. This Standard applies to the separate financial statements and the consolidated financial statements of a bank. Where a group undertakes banking operations, this Standard is applicable in respect of those operations on a consolidated basis.

Background

6. The users of the financial statements of a bank need relevant, reliable and comparable information which assists them in evaluating the financial position and performance of the bank and which is useful to them in making economic decisions. They also need information which gives them a better understanding of the special characteristics of the operations of a bank. Users need such information even though a bank is subject to supervision and provides the regulatory authorities with information that is not always available to the public. Therefore disclosures in the financial statements of a bank need to be sufficiently comprehensive to meet the needs of users, within the constraint of what it is reasonable to require of management.

7. The users of the financial statements of a bank are interested in its liquidity and solvency and the risks related to the assets and liabilities recognised on its balance sheet and to its off balance sheet items. Liquidity refers to the availability of sufficient funds to meet deposit withdrawals and other financial commitments as they fall due. Solvency refers to the excess of assets over liabilities and, hence, to the adequacy of the bank's capital. A bank is exposed to liquidity risk and to risks arising from currency fluctuations, interest rate movements, changes in market prices and from counterparty failure. These risks may be reflected in the financial statements, but users obtain a better understanding if management provides a commentary on the financial statements which describes the way it manages and controls the risks associated with the operations of the bank.

Accounting policies

8. Banks use differing methods for the recognition and measurement of items in their financial statements. While harmonisation of these methods is desirable, it is beyond the scope of this Standard. In order to comply with IAS 1 Presentation of Financial Statements and thereby enable users to understand the basis on which the financial statements of a bank are prepared, accounting policies dealing with the following items may need to be disclosed:

(a) the recognition of the principal types of income (see paragraphs 10 and 11);

(b) the valuation of investment and dealing securities (see paragraphs 24 and 25);

(c) the distinction between those transactions and other events that result in the recognition of assets and liabilities on the balance sheet and those transactions and other events that only give rise to contingencies and commitments (see paragraphs 26 to 29);

(d) the basis for the determination of impairment losses on loans and advances and for writing off uncollectible loans and advances (see paragraphs 43-49);

and

(e) the basis for the determination of charges for general banking risks and the accounting treatment of such charges (see paragraphs 50 to 52).

Some of these topics are the subject of existing International Accounting Standards while others may be dealt with at a later date.

Income statement

9. A bank should present an income statement which groups income and expenses by nature and discloses the amounts of the principal types of income and expenses.

10. In addition to the requirements of other Standards, the disclosures in the income statement or the notes to the financial statements shall include, but are not limited to, the following items of income and expenses:

Interest and similar income;

Interest expense and similar charges;

Dividend income;

Fee and commission income;

Fee and commission expense;

Gains less losses arising from dealing securities;

Gains less losses arising from investment securities;

Gains less losses arising from dealing in foreign currencies;

Other operating income;

Impairment losses on loans and advances;

General administrative expenses;

and

Other operating expenses.

11. The principal types of income arising from the operations of a bank include interest, fees for services, commissions and dealing results. Each type of income is separately disclosed in order that users can assess the performance of a bank. Such disclosures are in addition to those of the source of income required by IAS 14, segment reporting.

12. The principal types of expenses arising from the operations of a bank include interest, commissions, losses on loans and advances, charges relating to the reduction in the carrying amount of investments and general administrative expenses. Each type of expense is separately disclosed in order that users can assess the performance of a bank.

13. Income and expense items shall not be offset except for those relating to hedges and to assets and liabilities that have been offset in accordance with IAS 32.

14. Offsetting in cases other than those relating to hedges and to assets and liabilities that have been offset as described in IAS 32 prevents users from assessing the performance of the separate activities of a bank and the return that it obtains on particular classes of assets.

15. Gains and losses arising from each of the following are normally reported on a net basis:

(a) disposals and changes in the carrying amount of dealing securities;

(b) disposals of investment securities; and

(c) dealings in foreign currencies.

16. Interest income and interest expense are disclosed separately in order to give a better understanding of the composition of, and reasons for changes in, net interest.

17. Net interest is a product of both interest rates and the amounts of borrowing and lending. It is desirable for management to provide a commentary about average interest rates, average interest earning assets and average interest-bearing liabilities for the period. In some countries, governments provide assistance to banks by making deposits and other credit facilities available at interest rates which are substantially below market rates. In these cases, management's commentary often discloses the extent of these deposits and facilities and their effect on net income.

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