Circular 2008/2 "Accounting – banks"

(status: 19 March 2012)

1. Manner of publication of annual financial statements
2. Manner of publication of interim financial statements
3. Additional individual statements / first-time preparation
4. Statutory individual statements in line with the true and fair view principle / reserves for own shares
5. Information in Table B: impaired loans
6. Hedging derivatives: macro hedges
7. Loans I
8. Loans II
9. Loans III
10. Loans IV / value adjustments of interest payments
11. Personnel expenses for the issuing of own shares
12. Extraordinary expenses and income I
13. Extraordinary expenses and income II
14. Table Q I
15. Table Q II
16. Supervisory reporting
17. Revocation of Article 5 of the Swiss Federal Law on Banks and Savings Banks (Banking Act, BA; SR 952.0) / application of Article 671 Swiss Code of Obligations (companies limited by shares) or Article 860 (cooperatives)
18. Payments related to depositor protection
19. Creditworthiness-related variations in the value of fixed-rate debt instruments in the "financial investments" item
20. Switches between trading positions and financial investments
20a. Valuation of own issued structured products
21. Implementation of Articles 663bbis and 663c para. 3 of the Swiss Code of Obligations (see SFBC Newsletter No. 48 (2008) from 18 December 2008)
22. How is negative interest to be dealt with?
23. Whom can I contact if I have further questions?

1. Manner of publication of annual financial statements

• Preparation and publication of annual financial statements produced by listed banks with no consolidated financial statements that do not prepare a combined individual financial statement (statutory and in line with the true and fair view principle) and therefore prepare and publish a statutory individual financial statement as well as an additional individual financial statement in line with the true and fair view principle (see margin no. 1e): 
• Is it possible to publish an annual report including only the additional individual financial statement (true and fair) and have the statutory statement in a separate document. The annual report will be distributed to clients in priority whereas the statutory individual statement will be provided only upon their explicit request? 

Yes – if the individual financial statement has been prepared according to the true and fair view principle and the auditor has certified that it has been properly prepared.
However, the annual report must indicate that the statutory individual financial statement has been published separately and is also available.

The published annual report must contain the management report of the board of directors (Art. 663d of the Swiss Code of Obligations [OR; SR 220]).

Article 26 para. 4 of the Banking Ordinance (BO; SR 952.02) stipulates that three copies of the annual report are to be submitted to the SNB and FINMA. In concrete terms, this means that these bodies must receive three copies of each financial statement produced.

2. Manner of publication of interim financial statements

• Which interim financial statements are to be published if, in addition to the statutory individual financial statement, the bank also produces an additional individual statement in line with the true and fair view principle? 

It is permitted to publish only the additional individual financial statement (true and fair). 

3. Additional individual statements / first-time preparation

• When statements are being produced for the first time, is it possible to forego prior-year figures for the income and cash flow statements? 

The specification of prior-year figures is essentially stipulated as a requirement and is customary. If determining the prior-year figures for the additional individual statement in line with the true and fair view principle entails an excessive amount of time and effort, then the prior-year figures for the last statutory statement should be given or the statutory individual statement should be integrated in full into the annual report. 

4. Statutory individual statements in line with the true and fair view principle / reserves for own shares

• If a bank decides in favour of a true-and-fair-view statutory individual statement (and does not produce consolidated financial statements), the question of how its own shares should be handled arises. Do these then have to be deducted from equity capital and how can this be reconciled with company law requirements, which actually forbid doing so? 

While the publication of such an individual financial statement where own shares are deducted does not constitute normal practice under the Swiss Code of Obligations, it does not actually violate any provisions under the Code. The Code of Obligations provides implicitly for the capitalisation of shares and, if the necessity arises, explicitly for allocation of this asset item to a special reserve created through the conversion of freely available reserves.

Whereas the combined financial statement makes provision for published figures to be different, the negative position in equity capital – not including own shares held for trading – may not be greater than the free reserves (own shares held for trading are not covered by Article 659 of the Swiss Code of Obligations). All banks – regardless or not of whether a statutory individual statement has been produced on a true-and-fair-view basis – are subject to the acquisition restriction set out in Article 659 of the Swiss Code of Obligations. This does not apply, however, to own shares held for trading, according to FINMA's interpretation.

5. Information in Table B: impaired loans

• Does the table contain all non-performing loans? 

No, certain elements can be overdue and yet not considered as impaired, as the collateral pledged (measured on the basis of liquidation values) covers the non-performing loans. Those positions or partial positions that can no longer be recovered are considered impaired. A value adjustment for credit losses has to be created for the portion that can no longer be recovered. Table B thus contains impaired loans (for principal and/or interest) and off-balance-sheet items for which value adjustments or provisions have been created.

6. Hedging derivatives: macro hedges

• To what extent does a macro hedge correspond to a hedging transaction? Is the level of effectiveness subject to any special criteria? 

The bank must define internal effectiveness criteria.
The range applied and the manner in which any ineffective portions of the hedge transactions have been dealt with are to be specified in the notes to the financial statements. 

7. Loans I

• What does the term "homogeneous credit portfolios" (margin no. 18a) mean? 

Using general individual value adjustments is only permitted for credit portfolios composed exclusively of a large number of small receivables where an individual assessment of each position is not possible. Homogenous in this sense means a high level of correlation between the individual positions in respect of a) the intended purpose of the loan and b) the "risk behaviour" of the individual positions. In this respect, the examples specified in the Bank Accounting Guidelines cover most portfolios which correspond to the features set out above.

8. Loans II

• Does the term "liquidation value" refer to a present value calculation (i.e. the value after deduction of refinancing costs as specified in margin no. 244)? 

The Bank Accounting Guidelines are based on the following approach: the estimated market value minus various deductions, including the deduction of refinancing costs identified (on the basis, for example, of average borrowing costs) for the estimated holding period until disposal. This figure will be roughly in line with the present value. It is left up to the banks to decide whether to fully apply the methods of internationally recognised accounting standards respectivey as an alternative, also to the statutory individual statements.

9. Loans III

• When is a general value adjustment still permissible? When is it mandatory? 

General value adjustments are always permitted if there is a well-founded economic basis for creating and reversing them. If this is not the case, then it is a matter of hidden reserves which must be recognised and treated as such. If a general value adjustment is not created and this results in a probable overvaluation of assets, then the creation of such adjustments is even deemed necessary. A particular indication here could be that certain positions have resulted in losses for which appropriate individual value adjustments had not been created.

One of the bullet points under margin no. 149 (explanatory notes on the methods used for identifying default risks and measuring the need for creating value adjustments) requires appropriate disclosure in the accounting and valuation policies. There must also be detailed disclosure of the system used to identify and calculate general value adjustments. If no such adjustments are created, then this fact must also be disclosed.

10. Loans IV / value adjustments of interest payments

• How should interest payments which were overdue in the prior year, subsequently not considered as income and then finally paid in the reporting year be dealt with? 

Past due interest (and non-collected interest; see margin no. 106) have to be calculated on a gross basis. Value adjustments of interest payments that are subsequently freed up may be used to create new value adjustments for payments of principal (any such new value adjustments created would then have to be shown in Table E on a gross basis, if the financial statement is established in line with the true and fair view principle) or be released via extraordinary income.

In the individual financial statements (statutory individual statements based on the principle of presenting as reliable an assessment as possible of the bank's financial position), it is also possible for value adjustments for past due interest that have been freed up to be converted into hidden reserves (see margin no. 31).

11. Personnel expenses for the issuing of own shares

If the bank transfers the shares from its own holdings, the benefit granted must be charged to personnel expenses.

If the shares come directly from a share issue, however, there is no need to book through profit or loss (as the preferential price generally results in a lower premium).

For individual financial statements in line with the true and fair view principle please note: if the market value of the shares is lower than the acquisition cost at the time the shares are assigned, only the difference between the market value and the consideration received has to be booked through profit or loss. The difference between the market value and the acquisition cost is offset via the capital reserves.

12. Extraordinary expenses and income I

• How to interprete the term "non-recurring"? 

According to a Federal Council Dispatch on company law, extraordinary items are those which do not "recur". It follows then that business events which are part of regular business and occur only irregularly but on a repeated basis are not extraordinary (e.g. visits to trade fairs every 4 years). The same applies to unusually large items in so far as they stem from normal business activities (e.g. write-down of major client assets). (Source: Swiss audit manual "HWP" 2009, volume 1, section 6.3.2., page 74).

13. Extraordinary expenses and income II

• Example: A bank issues its statutory individual financial statements on the basis of the true and fair view principle. It also regularly produces a full semi-annual interim income statement. It is now possible that reversals from value adjustments that have been freed up are credited to extraordinary income in the semi-annual interim income statement and new value adjustments become necessary in the second half of the year.

  Question: Do figures have to be reported on a gross basis (the freed value adjustments in the semi-annual interim financial statements remain in extraordinary income) or is it possible to report them net (net expense under the item for value adjustments, losses and provisions; net income under extraordinary income)? 

If full interim statements have been published, it is not possible to rework figures and cancel components of extraordinary income. Figures must be stated on a gross basis.

14. Table Q I

• Treatment of investment clients' credit obligations: are the loans to be deducted from the assets shown in Table Q? 

The question remains open with regard to borrowings involving self-managed collective investment instruments. In all other respects, assets should be stated without debt being taken into account.

15. Table Q II

• Can fiduciary investments carried out by foreign branches be considered twice (or by subsidiaries if Table Q is produced at group level)? 

No.

16. Supervisory reporting

• What is the basis used for the SNB and supervisory reporting by banks and securities dealers that produce statutory individual financial statements and additional true-and-fair-view statements? 

The statutory individual statements.

17. Revocation of Article 5 of the Swiss Federal Law on Banks and Savings Banks (Banking Act, BA; SR 952.0) / application of Article 671 Swiss Code of Obligations (companies limited by shares) or Article 860 (cooperatives)

No, that is not possible. Under the Bank Accounting Guidelines, the prin-ciple is that tangible fixed assets must be capitalised if they are used for a period that goes beyond one accounting period (see margin no. 28-3). A similar principle applies to intangible assets (see margin no. 28a-4). Depreciation must therefore be recognised in the income statement.

Retirement benefit costs must likewise be recognised in the income statement (margin no. 125).

18. Payments related to depositor protection

• How should payments made necessary within the framework of the depos-itor protection scheme be recognised? 

The payments made in connection with the depositor protection scheme correspond to exposures which have been taken over indirectly. They should be capitalised (amounts due from banks). Value adjustments should be made on the basis of an evaluation of the borrower's creditworthiness and charged to the item for valuation adjustments, provisions and losses. Full value adjustments are also possible in individual, non true-and-fair-view financial statements. In such cases, the portion that is not classified as being economically necessary corresponds to a hidden reserve and should be treated accordingly. 

19. Creditworthiness-related variations in the value of fixed-rate debt instruments in the "financial investments" item

Such creditworthiness-related value adjustments (in this case, impairments in value) in financial investments valued using the accrual method can be posted in "other ordinary expenses" as well as in the item for value adjustments, provisions and losses (in the same way as creditworthiness-related impairment losses on loans to customers). The following points are important to observe, however: 

• The bank's accounting principles must in any event specify how financial investments are reported and how value adjustments are recognised. In the case referred to here, the accounting principles have to stipulate that impairment losses for financial investments accounted for using the accrual method are recognised via the item for value adjustments, provisions and losses. 
• Should there then be a reversal of the impairment losses for these financial investments, this would naturally be recognised in the same way as a reversal of an impairment loss on loans to customers. 

20. Switches between trading positions and financial investments

• Are such switches allowed? How is the transfer price defined? 

Switches between trading positions and financial investments or participating interests are possible. They should take place using the market value valid at the time the decision to switch is taken.

20a. Valuation of own issued structured products 

(included on 3 December 2010)

• When valuing hybrid instruments (structured products), FINMA Circular 2008/2 "Accounting – banks" margin no. 28e requires that the derivative is isolated from the underlying contract if three conditions have been cumulatively fulfilled (no close link between the embedded derivative and the underlying contract; the hybrid instrument as a whole does not satisfy the requirements for recognition in the balance sheet and corresponding treatment in the income statement at fair value; the embedded derivative as a separate instrument fulfils the definition of a derivative instrument.) 

• Is it possible to recognise self-issued structured products that include an own debenture component in the balance sheet at fair value and value them appropriately in the income statement in order to avoid splitting them up for their valuation? 

In line with FINMA practice, own debenture bonds cannot, as a rule, be part of a trading portfolio under margin nos. 22 – 22d and therefore may not be valued and recorded at fair value (irrespective of whether they have been issued singly or as part of a structured product). The condition prescribed under the second bullet point of margin no. 28e for structured products that include an own debenture component is usually always met.

In terms of these FAQs, a structured product has an own debenture component if at the time of issuance the repayment schedule of the self-issued structured product provides for a full or partial cash repayment irrespective of whether the cash repayment is in any case effected or is replaced by another performance benefit based on an option.

If the self-issued structured products with an own debenture component are part of a trading-like strategy, they may be valued in total at fair value in the individual and group financial statements under the conditions set out below. (This concerns an exception to the condition mentioned above which is always met for structured products with own debenture components as prescribed under bullet point 2 in margin no. 28e of FINMA-Circ. 08/2 "Accounting – banks"):

• The issue proceeds are immediately used to hedge the risks of the structured products issued. Any surpluses must, as a rule, be used for trading activities and not be extensively used to refinance other business activities. Along with the corresponding hedging instruments, issued structured products with own debenture components form a group of financial assets and liabilities that are managed on a fair value basis and whose performance is measured on this basis. This should be based on a documented risk management and investment strategy which ensures correct recording, measuring and limitation of the various risks. Valuing all components of the group at fair value also results in basically avoiding so-called accounting mismatches.
• The self-issued structured products with own debenture components meet the conditions for separation under bullet points one and three in margin no. 28e of FINMA-Circ. 08/2 "Accounting – banks" (i.e. there is no close link between the economic character and risks of the embedded derivative and the underlying contract, and the embedded derivative as a separate instrument fulfils the definition of a derivative instrument.)
• Any effect of own creditworthiness on the fair value of the issued structured product must be neutralised and may not influence the income statement. (It is possible to book the effects of own creditworthiness in a compensation account.)
• The provisions under margin nos. 22 - 22d on reporting at fair value are to be respected.
• An internal directive should regulate the way in which self-issued structured products are to be valued. 

Institutions that record an overall value of self-issued structured products with own debenture components at fair value under the conditions mentioned above are to disclose the following details in the notes to the financial statement:

• description of the procedure followed for the accounting and valuation principles;
• balance sheet items that include issued structured products with own debenture components, indicating the corresponding amount (carrying amount). 

21. Implementation of Articles 663bbis and 663c para. 3 of the Swiss Code of Obligations (see SFBC Newsletter No. 48 (2008) from 18 December 2008)

a) A bank issues listed participation certificates. Its shares are not listed, however. It has decided not to disclose any information on the basis of Articles 663bbis and 663c para. 3 of the Swiss Code of Obligations on the grounds that these requirements only apply to companies with listed shares.

Do companies which only have listed participation certificates have to disclose in the notes to their financial statements the information specified in Articles 663bbis and 663c para. 3 of the Swiss Code of Obligations?

The disclosure requirements set out in Articles 663bbis and 663c para. 3 also apply to companies which only list their participation certificates.

In actual fact, Article 663bbis and the dispatch issued on 23 June 2004 (Dispatch on Amending the Swiss Code of Obligations - Transparency of compensation paid to members of boards of directors and executive management) only mention the term "shares". Article 656a of the Code of Obligations extends the principle of the applicability of the provisions of company law to holders of all participation certificates, in so far as Articles 656a-656g do not stipulate otherwise. Although holders of participation certificates do not enjoy voting or associated rights (the right to convene and participate in general meetings, the right to receive information, the right to submit motions which are subject to articles to the contrary within the articles of association), Article 656c para. 3 of the Code of Obligations confers upon them an unconditional right to submit a written request for information, access to information and for the instigation of a special audit for the attention of the annual general meeting.

The dispatch issued by the Swiss federal government in relation to Article 663bbis clearly shows that, with these requirements, the legislator's aim is to protect the right to information conferred upon holders of participating interests under Article 697 of the Code of Obligations and, thus, their private interests. These rights are compulsory for holders of participation certificates. In addition, the requirements regarding the notes to the financial statements under Article 663 ff. do not protect only shareholders' property rights and right to information, but those of holders of participation certificates as well.

b) Do the disclosure requirements prescribed in Articles 663bbis and 663c para. 3 of the Code of Obligations also apply to companies with securities listed on secondary markets?

The requirements apply to companies which have securities listed on a stock exchange or a similar structure recognised by FINMA.

c) Some companies publish the information in the parent company financial statements and others in the consolidated financial statements. Which procedure is correct?

The information must be published in the statutory individual financial statements of the company whose securities are listed. These statements must contain an appropriate reference if the information appears in the consolidated financial statements.

d) Information on the compensation paid to members of boards of directors, executive management and advisory boards was sometimes published with the words "including related parties". This meant that amounts were not broken down in detail into those received by the corporate bodies on the one hand and the related parties on the other. Is this interpretation correct?

Non-customary market practice compensation paid to related parties has to be disclosed separately. The names of those concerned do not have to be specified.

The same applies to non-customary market practice current loans to related parties.

e) The compensation paid to former members of the board of directors, executive management and advisory boards (including those who stepped down during their terms in office) was sometimes published as a lump sum. Is this legally acceptable?

Compensation paid to former members of a board of directors or advisory board has to be published separately, specifying the name and function of each individual.

In contrast, compensation paid to former members of executive management may be disclosed in one total amount. Exception: where a former member of executive management received the highest amount paid out to one individual person; in this case the name and the function of the person concerned should be disclosed. 

f) It was often the case that only the amount loaned to the member of executive management who received the highest amount of compensation was disclosed. If this person did not avail themselves of any loan, it was only the total of current loans to all members of executive management that was published. Does the highest loan amount always have to be disclosed?

The highest amount loaned to a member of executive management must be disclosed, regardless of whether this person has received the highest amount of compensation or not. This means that the executive manager who has received the largest loan does not have to be the executive manager who receives the highest level of remuneration.

g) In certain cases only the total amount of non-customary market practice current loans to former members of boards of directors, executive management or advisory boards has been published. Is this permissible?

Non-customary market practice current loans to former members of the board of directors or advisory board must be disclosed separately along with the name(s) of the individual(s) in question.

Non-customary market practice current loans to former members of executive management are disclosed in one total amount. Exception: if a former member of executive management receives a non-customary market practice loan in excess of the highest loan granted to a current member of executive management, the loan and the name of the former executive manager are to be disclosed.  

h) A number of companies have issued "negative" statements when 

• no compensation has been paid to members of the board of directors, executive management or advisory board or when no non-customary market practice compensation has been paid to related parties, and 

Is it compulsory to issue such a "negative" statement?

Such statements are recommended, as they increase the clarity of the information published.

i) Article 663c para. 3 Swiss Code of Obligations: Some companies only disclose the total amount of the participating interests held by members of executive management. Is this permissible or should the information be broken down on an individual basis? 

Participating interests, options and warrants must be disclosed for each individual member of executive management, specifying the name of the individual concerned; the interests held by parties related to him/her must also be included.

• How is negative interest to be dealt with?

When preparing the annual and interim financial statements, negative interest on the lending business is to be recognised in interest income (reduction in interest income) and negative interest on the borrowing business is consequently to be put under interest expenses (reduction in interest expenses). If these short positions are material, their impact is to be disclosed in the notes to the annual financial statements. It also needs to be pointed out that, in line with the comments of the Swiss Federal Tax Administration, the withholding tax is to be calculated on gross interest paid to clients which means that any negative interest may not be netted for this purpose. The banks are asked to take the necessary measures to ensure that these provisions are upheld.