S.I. No. 720/2004 - European Communities (Credit Institutions) (Fair Value Accounting) Regulations 2004


STATUTORY INSTRUMENTS

S.I. No. 720 of 2004

European Communities (Credit Institutions) (Fair Value Accounting) Regulations 2004


I, Brian Cowen, Minister for Finance, in exercise of the powers conferred on me by section 3 of the European Communities Act 1972 (No. 27 of 1972), for the purpose of giving effect to Directive 2001/65/EC of the European Parliament and of the Council of 27 September 20011 , hereby make the following regulations:

1.       (1)      These Regulations may be cited as the European Communities (Credit Institutions) (Fair Value Accounting) Regulations 2004.

(2)      These Regulations come into operation on 1 January 2005.

2.       (1)      In these Regulations “Principal Regulations” means the European Communities (Credit Institutions: Accounts) Regulations 1992 ( S.I. No. 294 of 1992 ).

(2)      A word or expression that is used in these Regulations (including provisions inserted into the Principal Regulations by these Regulations) and is also used in Directive 2001/65/EC of the European Parliament and of the Council of 27 September 20011 has, unless the contrary is indicted, the same meaning in these Regulations as it has in that Directive.

3.       Regulation 11 of the Principal Regulations is amended -

(a)      in paragraph (d), by deleting “and” at the end of that paragraph,

(b)      in paragraph (e), by substituting “subsidiary, and” for “subsidiary.”, and

(c)      by inserting after paragraph (e) the following:

“(f)     in relation to the company's use of financial instruments and where material for the assessment of its assets, liabilities, financial position and profit or loss -

(i)      the company's financial risk management objectives and policies, including its policy for hedging each major type of forecasted transaction for which hedge accounting is used, and

(ii)      the company's exposure to price risk, credit risk, liquidity risk and cash flow risk.”.

4.      Regulation 15 of the Principal Regulations is amended by substituting -

(a)      in paragraph (1)(a), “€3,000” for “ £1,000”,

(b)      in paragraph (2) -

(i)      “3 months” for “12 months”, and

(ii)      “€3,000” for “ £1,000”, and

(c)      in paragraph (4) -

(i)      “3 months” for “12 months”, and

(ii)      “€3,000” for “ £1,000”.

5.       Paragraph 41 of Chapter II of Part I of the Schedule to the Principal Regulations is amended, by substituting for subparagraph (3) the following:

“(3)     Investments of any description falling to be included under Assets items 7 (Participating interests) or 8 (Shares in group undertakings) of the balance sheet format and any other securities held as financial fixed assets may be included:

(a)      at a market value determined as at the date of their last valuation,

(b)      at a value determined on any basis which appears to the directors to be appropriate in the circumstances of the company, or

(c)      at fair value determined in accordance with paragraphs 46A to 46D,

but in the case of (b) or (c) particulars of the method of valuation determined and the reasons for its determination shall be disclosed in a note to the accounts.”.

6.       Part I of the Schedule to the Principal Regulations is amended by inserting after paragraph 46 the following:

“Valuation at fair value.

46A.  (1)      A company is permitted to make a valuation at fair value of financial instruments (including derivatives) at fair value.

(2)      For the purposes of this Schedule commodity-based contracts that give either contracting party the right to settle in cash or some other financial instrument are considered to be derivative financial instruments, except when -

(a)      they were entered into and continue to meet the company's expected purchase, sale or usage requirements,

(b)      they were designated for such purpose at their inception, and

(c)      they are expected to be settled by delivery of the commodity.

(3)      Subparagraph (1) applies only to liabilities that are -

(a)      held as part of a trading portfolio, or

(b)      derivative financial instruments.

(4)      Valuation according to subparagraph (1) does not apply to -

(a)      non-derivative financial instruments held to maturity,

(b)      loans and receivables originated by the company and not held for trading purposes, and

(c)      interests in subsidiaries, associated undertakings and joint ventures, equity instruments issued by the company, contracts for contingent consideration in a business combination as well as other financial instruments with such special characteristics that the instruments, according to what is generally accepted, should be accounted for differently from other financial instruments.

(5)      Assets and liabilities which qualify as hedged items under a fair value hedge accounting system, or identified portions of such assets or liabilities, may be valued at the specific amount required under that system.

46B.  (1)      The fair value referred to in paragraph 46A shall be determined by reference to -

(a)      a market value, for those financial instruments for which a reliable market can readily be identified. Where a market value is not readily identifiable for an instrument but can be identified for its components or for a similar instrument, the market value may be derived from that of its components or of the similar instrument, or

(b)      a value resulting from generally accepted valuation models and techniques, for those instruments for which a reliable market cannot be readily identified. Such valuation models and techniques shall ensure a reasonable approximation of the market value.

(2)      Those financial instruments that cannot be measured reliably by any of the methods described in subparagraph (1), shall be measured in accordance with paragraphs 24 to 38.

46C.  (1)      Notwithstanding paragraph 19(a), where a financial instrument is valued in accordance with paragraph 46B, a change in the value shall be included in the profit and loss account. However, such a change shall be included directly in equity, in a fair value reserve, where -

(a)      the instrument accounted for is a hedging instrument under a system of hedge accounting that allows some or all of the change in value not to be shown in the profit and loss account, or

(b)      the change in value relates to an exchange difference arising on a monetary item that forms part of a company's net investment in a foreign entity.

(2)      A change in the value on an available for sale financial asset, other that a derivative financial instrument, may be included directly in equity, in the fair value reserve.

(3)      The fair value reserve shall be adjusted when amounts shown therein are no longer necessary for the purposes of subparagraphs (1) and (2).

46D.  Where valuation at fair value of financial instruments has been applied, the notes on the accounts shall disclose -

(a)      the significant assumptions underlying the valuation models and techniques where fair values have been determined in accordance with paragraph 46B(1)(a),

(b)      per category of financial instruments, for fair value, the changes in value included directly in the profit and loss account as well as changes included in the fair value reserve,

(c)      for each class of derivative financial instruments, information about the extent and the nature of the instruments, including significant terms and conditions that may affect the amount, timing and certainty of future cash flows, and

(d)      a table showing movements in the fair value reserve during the financial year.”.

7.      Chapter III of Part I of the Schedule to the Principal Act is amended -

(a)      in paragraph 75(2), by inserting the following sentence:

“This includes the extent to which the calculation of the profit or loss is affected by the fair valuation of financial instruments.”, and

(b)      after paragraph 72, by inserting the following:

“Where fair valuation has not been applied.

72A. Where fair valuation has not been applied in accordance with paragraphs 46A to 46D -

(a)      for each class of derivative financial instruments -

(i)      the fair value of the instruments, if such a value can be determined by any of the methods mentioned in paragraph 46B(1),

(ii)      information about the extent and the nature of the instruments, and

(b)      for financial fixed assets covered by paragraph 46A, carried at an amount in excess of their fair value and without use being made of the option to make a value adjustment in accordance with paragraph 31(2) -

(i)      the book value and the fair value of either the individual assets or appropriate groupings of those individual assets,

(ii)      the reasons for not reducing the book value, including the nature of the evidence that provides the basis for the belief that the book value will be recovered.”.

8.      Paragraphs 31(1), 32, 33, 34, 45 and 46 of Part I of the Schedule to the Principal Regulations do not apply with respect to assets and liabilities that are valued in accordance with paragraphs 46A to 46D (inserted by Regulation 6 of these Regulations) of Part I of the Schedule to the Principal Regulations.

GIVEN under my Official Seal,

This 18th day of November 2004.

/images/seal.jpg

Brian Cowen

_____________

Minister for Finance

EXPLANATORY NOTE

(This note is not part of the instrument and does not purport to be a legal interpretation).

The purpose of these Regulations is to give effect to Directive 2001/65/EC of 27 September 2001 which deals with the valuation rules for the annual and consolidated accounts of banks and other financial institutions.

These Regulations allow banks and other financial institutions in the EU to prepare their consolidated financial statements in accordance with generally accepted accounting principles. The impetus for this is the harmonisation of the capital markets in the EU and the desire to have a consistent set of accounting principles used in the consolidated financial statements (“group accounts”) of all EU banks and financial institutions.

1 O.J. No. L283, 27.10.01, p.28.

1 O.J. No. L283, 27.10.01, p.28.