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Part Two - Balance Sheet
Assets
23.
Cash and Deposits in Banks (4/97)
a.
"Cash" will include banknotes and coins held in cash by the banking corporation.
b.
A banking corporation having a representative office abroad, will include in the note
"Cash and Deposits in Central Banks" balances held by that representative office in the
central bank in the country in which the representative office operates. A banking
corporation which has no deposits with a central bank abroad will call the sub-clause
"Cash and deposits in the Bank of Israel".
c.
The note "Deposits with Commercial Banks" is to include deposits with banks (within
the meaning of that term in the Banking Law) and commercial banks abroad that accept
current deposits from the public.
d.
The note "Deposits in Banks" is to include deposits in banking corporations designated
for the grant of credit, as well as deposits with respect to which the reporting banking
corporation holds negotiable certificates of deposit issued by the bank in which the
deposits have been made.
In special banking corporations, where such item constitutes mainly deposits in banks
designated for the grant of loans to the Government, this item should be presented
separately in the body of the balance sheet and called: "deposits in banks designated for
the grant of credit to the Government".
e.
Deposits in banks in respect of which a right of offset or other restriction in respect of
liabilities of subsidiary companies and/or others towards such banks have been granted
are not to be included in this item. Such deposits are to be included in the appropriate
credit item.
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24.
Securities
a.
In this paragraph, investment securities (apart from investments in companies held as
detailed in paragraph 32), are to be included.
At the time of acquisition, a banking corporation will classify the securities it purchased
into one of the three following portfolios each of which will be managed separately:
a held-to-maturity debt securities portfolio, available-for-sale securities portfolio and a
trading securities portfolio, as hereinafter defined.
On each reporting date, the management of the banking corporation will re-examine the
suitability of the classification amongst the portfolios.
A banking corporation should report, in the body of the balance sheet, its investments in
available-for-sale securities and trading securities, separately from similar assets
measured according to another measurement system. In order to achieve this, the banking
corporation should present in one item in the balance sheet the aggregate amount of the
fair value amounts and of amounts which are not fair value, and provide disclosure in
brackets of the fair value amount included in the aggregate amount.
a1.
Disclosure should be given to securities as set forth in the specimen note in the Exhibit.
In addition, a banking corporation should examine, taking into account materiality
considerations, whether it is required to provide more extensive details with regard to a
certain type of security, based on materiality and the risks of the securities. In this
examination, a banking corporation should take into account the following factors:
b.
(1)
Sector of activity
(2)
Date of creation
(3)
Geographical concentration
(4)
Credit quality
(5)
General characteristics
"Held-to-maturity debt securities" mean debt securities which the banking corporation
has a positive intent and ability to hold until the maturity date. Debt securities are not to
be classified as held to maturity if, according to the debt security contract, it is
prepayable or otherwise extinguishable in that the banking corporation that holds the
debt security will not substantially cover all of its registered investment.
The intention of the management must take account, inter alia, of past experience.
For this purpose, maturity - includes early maturity on the part of the issuer.
(1) A banking corporation will not classify a debt security as a held-to-maturity debt
security where it intends to hold the debt security for only an indefinite period.
Accordingly, by way of example, a debt security will not be classified as a held-tomaturity debt security where it is possible to predict the sale thereof as a response
to the following changes:
(a) Changes in market interest rates (including risk-related changes concerning
the early redemption of the debt security);
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(b)
(2)
(3)
Liquidity requirements (such as following withdrawals of deposits or
increased demand for loans);
(c) Changes in the availability of or return on alternative investments;
(d) Changes in, sources of financial and in their terms;
(e) Changes in currency risks.
Notwithstanding the foregoing, in the circumstances set out below, a banking
corporation may change its intention to hold a particular debt security until
maturity without any doubt arising with respect to the intent to hold other debt
securities to maturity in the future. A sale or transfer of a debt security in respect
of any of the circumstances set forth below will not be regarded as contradicting
its initial classification as a held-to-maturity debt security - the following being the
circumstances:
(a) Anticipating a material deterioration of the issuer's payment ability;
(b) A change in the tax laws which would cancel or reduce or grant favourable
status, for tax purposes, of income from interest on a debt security (This
group will not include changes in marginal interest rates applicable to
income from interest.);
(c) A basic change in the banking corporation resulting from a merger,
acquisition or in the course of a restructuring (such as a liquidation of a
commercial segment) as a result thereof - in order to maintain the existing
exposure to interest risk or in order to preserve consistency with credit risk
policy - a need exists to sell or transfer securities from the held-to-maturity
portfolios;
(d) A change in the statutory or regulatory requirements leading to a material
change in the type of investments permitted or in the maximum permitted
investment in certain classes of securities;
(e) A material increase in the regulatory capital requirements leading to a
reduction in the commercial unit through a sale of held-to-maturity
securities;
(f)
A material increase in the risk weighting of debt securities taken into
account for the purpose of calculating risk assets;
(g) Isolated, non-recurring and exceptional incidents in the reporting
corporation not reasonably foreseen as materializing.
The entire balance in the held-to-maturity portfolio will be reclassified to the
available-for-sale portfolio where a sale or transfer of a debt security has been
effected from such portfolio with a material deviation to the corporation's
statement regarding its intention to hold such debt securities until their maturity, or
where a system of such sales emerges. In such a case, the management of the
banking corporation may not reclassify securities to the held-to-maturity portfolio,
unless it is able to indicate suitable changes in the circumstances enabling its
intentions concerning classification of securities to be related to with a large
degree of faith.
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(4)
c.
d.
e.
f.
g.
A sale of a debt security which is classified as a held-to-maturity debt security in
the circumstances set out below, may be regarded as maturity for the purpose of
that stated in this paragraph:
(a) A sale of a debt security from the held-to-maturity portfolio where three
months or less remain until the maturity date, or until the exercise date or
until the date of exercising an option for early redemption held by the issuer
(and on the condition that the exercise of the option is probable) and on
condition that changes in interest rates in the market no longer constitute a
material factor in determining the fair value of the debt security;
(b) A sale of the debt security has been effected after the banking corporation
has already collected a substantial part (at least 85%) of the principal
purchased through early redemption or through fixed periodic instalments
(in a variable interest-bearing debt security - in periodic instalments).
Trading securities mean securities which have been purchased and are, in principle,
being held with the object of selling the same in the near future (and, accordingly, are
being held for short periods), and securities that the banking corporation has elected to
measure at fair value via the statement of profit and loss according to the fair value
option (see paragraph 20). Activity for trading is generally expressed in brisk activity of
buying and selling and the purpose thereof is generally to generate profits from trading differences between ask and bid prices, differences between wholesale and retail prices,
short-term changes in prices, etc.
In the trading securities portfolio, equity securities that do not have a readily
determinable fair value will not be included.
"Available-for-sale securities" mean securities which have not been classified as held-tomaturity debt securities or as trading securities.
On the acquisition date of securities, the management of the banking corporation must
document the purpose of the acquisition. In relation to debt securities which have been
classified as held-to-maturity debt securities, the management will document its intention
to hold such debt securities until maturity, with reference to its ability to realize such
intent. On each reporting date, the management will examine the classification and
document the results thereof.
Disclosure will be given to the following detailed information:
(1) the basis for fixing the cost of the security sold or the amount reclassified from
equity capital from accumulated other comprehensive income to the statement of
profit and loss (i.e., on a FIFO basis or according to moving average method).
(2) the registered balance of the debt of:
(a) impaired debt securities accruing interest income
(b) impaired debt securities accruing non-interest income
(c) unimpaired debt securities accruing interest income and that are past due by
90 days or more
(d) unimpaired debt securities accruing interest income and that are past due for
30 to 89 days.
For the purpose of this paragraph and paragraphs 25-27(a):
"securities" - do not include derivative instruments subject to the provisions of Part A-1
Derivative Instruments and Hedging Activities. With regard to a security in which a
derivative instrument is embedded and which is subject to the abovementioned
provisions,
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the host contract (as described in Part A-1) will be subject to the requirements of this
paragraph and of paragraphs 25-27(a);
"debt securities" - including state loans, redeemable preferential shares, convertible
capital notes, perpetual debt securities and subordinated notes;
"payable bond" - a bond on which interest is payable at least once a year;
"accruing bond" - a bond being otherwise than a payable bond;
"maturity date" - the final redemption date;
"equity securities" - including options which have been purchased for buying or selling
shares and including units in mutual funds;
"cost" - calculated according to the moving weighted average method or the first-in firstout method;
"amortized cost of debt securities" - the nominal value plus interest and linkage
differentials or exchange rate differentials accrued thereon, less a proportionate share of
the discount or together with a proportionate share of the premium;
For this purpose:
(1) The abovementioned proportionate share will be calculated according to the
effective interest method pursuant to the period between the acquisition date and
the maturity date on a daily basis and adjusted according to the rate of increase of
the index or exchange rate, from the acquisition date through the balance sheet
date;
(2) With regard to debt securities redeemable in instalments, the abovementioned
proportionate share will be allocated to each partial redemption according to the
ratio which the nominal value redeemable bears to the aggregate nominal value of
the debt security;
(3) For the purpose of calculating the discount (or the premium) in a payable bond, the
amount of the accrued interest on the acquisition date, plus the linkage
differentials and exchange rate differentials on the interest, is to be deducted;
(4) In an accruing bond the abovementioned proportionate share will also be adjusted
according to the interest rate and terms of the accrual thereof as specified in the
debt security;
"Unrealized holding gain or loss of a security" - will be determined according to the
difference between the fair value of a security and the amortized cost thereof (in relation
to equity securities - the cost) as of the reporting date;
For this purpose:"Amortized cost" - means after the effect of impairments treated as mentioned in
paragraph 26A;
"Fair value of an equity security" - except for the effect of dividend declared but not yet
paid;
"Equity securities that do not have a readily determinable fair value" - including equity
securities which, at the time of their purchase, are blocked from realization for a period
exceeding one year from the reporting date (as distinct from equity securities serving as
collateral).
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25.
Held-to-Maturity Debt Securities (10/02)
a.
b.
c.
26.
Held-to-maturity debt securities will be measured according to their amortized cost as of
the reporting date.
In the notes to the financial statements, disclosure will be provided of every sale or
transfer from/to the held-to-maturity portfolio.
The disclosure will include the carrying (balance sheet) value of the debt securities that
have been sold or transferred, the net gain or loss comprised in equity capital under
accumulated other comprehensive income in respect of the all the derivatives that hedged
the forecasted purchase of the debt securities held to maturity, the realized or unrealized
gain or loss resulting from the transaction and details of the circumstances that led to the
decision to enter into the transaction.
The disclosure will be given in relation to each period in respect of which the results of
the operations are presented.
Held-to-maturity debt securities are to be classified as set forth in the specimen note in
the Exhibit. Details of their balance sheet value, details of amortized cost, balance of
unrecognized holding gains or losses from adjustments to fair value, and gross gains and
losses comprised in equity capital in accumulated other comprehensive income in respect
of all derivatives that hedged a forecasted purchase of held-to-maturity debt securities as
of the balance sheet date are to be presented in the note.
Available-for-Sale Securities (10/02)
a.
b.
c.
Equity securities having a readily determinable fair value and debt securities - will be
included in the balance sheet at their fair value at the reporting date.
Unrealized gains or losses from adjustments to fair value will not be included in the
statement of profit and loss and will be reported net, less appropriate reserve for taxes, in
a separate item in the equity capital within the framework of accumulated other
comprehensive income to be called "adjustments in respect of the presentation of
available-for-sale securities at fair value" until the realization thereof, except as stated in
the next paragraph.
All or part of the unrealized gains or losses from adjustments to fair value in respect of
an available-for-sale security, designated as defined in a fair value hedge, will be
recognized in the statement of profit and loss for the duration of the hedged period, in
accordance with Part A-1 - Derivative Instruments and Hedging Activities.
Equity securities that do not have a readily determinable fair value - will be measured in
the balance sheet at and disclosure given in respect of the amount thereof.
Available-for-sale securities will be classified as set out in the specimen note in the
Exhibit. The note should present the aggregate of the fair value, total gains in respect of
securities with net gains included in equity capital in accumulated other comprehensive
income and total losses in respect of securities with net losses included in equity capital
in accumulated other comprehensive income and the cost (in debt securities - amortized
cost) as of the balance sheet date.
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26A. Impairment of Value of a Security (10/02) (10/07)
With respect to each security classified in the available-for-sale portfolio or the held-tomaturity portfolio, separately, the management of the banking corporation will determine
whether a reduction in the fair value below cost (in debt securities - the amortized cost), is an
other than temporary impairment. If a security is a hedged item under a fair value hedge, the
"cost" (in debt securities – the "amortized cost") will reflect the effect of adjustments of its
balance sheet balance which was made pursuant to Part A1, Derivative Instruments and
Hedging Activities).
For example, where it is probable that the banking corporation will be unable to collect all the
sums according to the terms of a debt security and with respect to which, at the acquisition
date, there was no reduction in value, this will be deemed to be an other than temporary
impairment.
If the reduction in fair value is deemed to be an other than temporary impairment, the cost (in
debt securities - the amortized cost) of the specific security will be reduced to the fair value and
this serve as a new basis for cost. The amount of the reduction will be included in the
statement of profit and loss (i.e., it will be treated as a realized loss).
The new cost basis will not be amended, even if subsequently there is an increase in the fair
value. Such an increase in the fair value of a security that has been classified to the availablefor-sale portfolio will be included in equity capital under accumulated other comprehensive
income as mentioned in paragraph 26A, there similarly being included in this item a reduction
in fair value which occurred subsequent to the determination of the aforementioned new cost
basis and which is not an other than temporary impairment.
It is clarified that securities are not subject to the accounting treatment provided in
paragraph 18A of the Public Reporting Directives.
27.
Trading Securities
a.
Trading securities - will be included in the balance sheet at fair value at the reporting
date. Unrealized holding gains or losses from adjustments to fair value will be posted to
the statement of profit and loss.
b.
Trading securities will be classified as set forth in the specimen note contained in the
Exhibit.
27A. Transfer between Portfolios (10/02)
Transfers of securities between portfolios will be effected according to fair value. On the
transfer date, unrealized holding gains or losses will be treated as follows:
(a) On transfers of securities from the trading portfolio - unrealized holding gains or losses
on the transfer date and already posted to the profit and loss will remain intact.
(b) In transferring a security to the trading portfolio - part of the loss as yet unrealized from
adjustments to fair value as of the transfer date and which were not previously
recognized in earnings, will be immediately posted to earnings, and be classified to the
appropriate item of losses from sales of securities from the portfolio from which the
transfer was effected.
Part of the gain as yet unrealized from adjustments to fair value as of the adjustment date
and which was not previously recognized in earnings will be presented in equity capital
under accumulated other comprehensive income, as mentioned in paragraph 26a, until
the security is realized.
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(c)
(d)
(e)
On transfers of debt securities to the available-for-sale portfolio from the held-tomaturity portfolio - gain or loss as yet unrealized from adjustments to fair value as of the
transfer date will be posted to equity capital as a separate item in accumulated other
comprehensive income as mentioned in paragraph 26a.
On transfers of a debt security to the held-to-maturity portfolio from the available-forsale portfolio - unrecognized gain or loss from adjustments to fair value as of the transfer
date will continue to be presented in equity capital under a separate item in accumulated
other comprehensive income as mentioned in paragraph 26a., but be reduced to gain and
loss over the remaining lifespan of the debt security as an adjustment in yield
consistently with the mode of reducing premium or discount.
Transfers of debt securities to and from the held-to-maturity portfolio will be rare.
Transfers or sales of debt securities from the held-to-maturity portfolio are permitted in
respect of changes in circumstances detailed in paragraph 24b. (2).
Having regard to the character of the trading portfolio, transfers from and to the trading
portfolio will be rare.
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28.
Credit to the Public (4/97) (2/07)
a.
Loans to the public, deposits in banks in respect of which a right of offset or other
restriction in respect of the liabilities of subsidiaries and others towards such banks,
overdrafts in current accounts of the public, debit balances of the public resulting from
credit card transactions and assets leased to the public under a financing lease (as defined
in Intl Accounting Standard No. 18 Leasing), are to be included in this item.
b.
This item is to include customer obligations vis-à-vis the banking corporation for
acceptances by the banking corporation on bills of exchange and documentary credits.
Advance payments made by the customer should be deducted from this item. Where the
banking corporation has purchased its own acceptance, the customer liability for such
acceptance will be represented in the "credit" item in a note.
c.
Separately stated in the body of the balance sheet will be the following:
1)
The balance of the recorded debt of the credit to public.
2)
The balance of the allowance for credit losses in respect of credit to the public, and
3)
The net balance of the debt of the credit to the public.
d.
Cancelled.
e.
Cancelled.
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29.
General Allowance for Credit Losses
1.
A banking corporation is required to make an allowance for credit losses at the appropriate
level in order to cover estimated credit losses in relation to its credit portfolio. Further, a
banking corporation is required to make, as a separate liability account, an allowance at an
appropriate level in order to cover estimated credit losses related to off-balance sheet
instruments, such as commitments to extend credit and guarantees. "Estimated credit losses" in
relation to the credit portfolio means an estimate of the current amount of the credit portfolio
which it is expected that the banking corporation will not be able to collect, given the facts and
circumstances at the valuation date; i.e., estimated credit losses represent the amount of net
write-offs which are likely to be realized with regard to a loan or group of loans given the facts
and circumstances at the valuation date. These estimated credit losses must fulfil the tests for
accruing contingent losses (i.e., recording an expense against the allowance) as provided in
U.S. generally accepted accounting principles.
The general allowance for credit losses in respect of debts and in respect of off-balance sheet
instruments will include the following components:
a.
Amounts stipulated by paragraph 29A – Accounting treatment of impairment of debt.
b.
Amounts stipulated by paragraph 29B – Allowance for credit losses evaluated on a group
basis.
c.
Amounts stipulated by paragraph 29E – Allowance for credit losses in respect of offbalance sheet instruments.
For additional regulations regarding the method of determining the allowance for credit losses
and the required documentation, see Appendix J. For questions and answers and examples on
the subject of impaired debts, credit risk and allowance for credit losses, see Appendix K.
2.
29A. Accounting Treatment of Impairment of Debt*
1.
Not included.
2.
Not included.
3.
Not included.
* Note: The numbering of the sub-paragraphs in this paragraph corresponds to the numbering in the US Accounting
Standard, as amended by ‘SFAS 114 Accounting by Creditors for Impairment of a Loan, an amendment of FASB Statements
Nos. 5 and 15, 5.93 – (hereinafter – Standard 114)
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Definitions and Scope
4.
Not included.
5.
This paragraph stipulates the accounting treatment of banking corporations for the impairment
of a debt by detailing the way in which the allowances for credit losses connected to problem
debts should be determined. In addition, this paragraph deals with the accounting treatment of
banking corporations for all debts that have been restructured in a problem debt restructuring,
pursuant to which the conditions of the debt were changed, including restructurings including
receipt of assets as a part payment of a debt, except for restructurings of debts in this paragraph
to which sub-paragraphs 6(b) - 6(d) do not apply and restructuring of housing loans in respect
of which a minimum allowance for credit losses is made according to the extent of arrears
method, as stated in the Appendix to the Proper Conduct of Banking Business Regulation
No. 314 "Problem Debts in Housing Loans in a Mortgage Bank".
This paragraph applies to any debt whose contractual balance (excluding the deduction of
accounting write-offs not involving a legal waiver, unrecognized interest, allowances for credit
losses and collateral) is NIS 1 million or more, and to all other debts that are identified for the
purposes of evaluation, whether they are secured or not. This paragraph does not apply to:
(a) Large groups of smaller-balance and homogeneous debts, whose impairment has been
examined on a group basis. These debts are likely to include, but are not limited to, credit
card debts, and consumer instalment loans;
(b) Debts measured at fair value or the lower of cost or fair value;
(c) Leasing transactions;
(d) Debt securities, as defined in paragraph 24G in the Public Reporting Directives.
(e) Housing loans in respect of which a minimum all for credit losses using the extent of
arrears method, as stated in the Appendix to the Proper Conduct of Banking Business
Regulation No. 314 "Problem Debts in Housing Loans in a Mortgage Bank".
This paragraph does not provide how a banking corporation should identify other debts that it is
appropriate to assess the chances of their collection 1. In order to make this decision, a banking
corporation must apply its normal credit audit procedures. This paragraph does not refer to the
date on which a banking corporation writes off an impaired debt (see paragraph 29D below),
and does not refer to the way in which it is appropriate that a banking corporation values the
overall propriety of the allowance for credit losses. In addition to the all made pursuant to this
paragraph, a banking corporation is required to continue to recognition an allowance for credit
losses necessary to comply with the requirements of paragraph 29B below.
6.
7.
1
Footnote 1 to Standard 114: Sources of useful information for the purpose of identifying debts for evaluation outlined in
the AICPA Guide relating to Auditing the Allowance of Credit Losses of Banks (AICPA – Auditing Procedure Study)
include a specific materiality test; audit reports of regulatory authorities; internal reports, such as watch lists, reports on
arrears, overdraft listings, and reports on insiders' debts; reports to management on the total amounts of debt of a debtor,
past experience with regard to losses according to type of debt; debt portfolios in which there is a lack of current financial
data regarding debtors and guarantors; debtors subject to difficulties, such as operating losses, little working capital,
insufficient cash flows, or interruptions in business activity; debts secured by collateral which is not easily tradable or is
sensitive to a deterioration in realizable value; debts of debtors in sectors of activity or in states suffering from economic
instability; and loan documentation and compliance exception reports.
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Recognition of Impairment
8.
A debt will be classified as impaired, when, on the basis of current information and events, it is
probable that a banking corporation will not be able to collect all of the amounts due to it
according to the contractual terms of the debt agreement. For the purpose of this paragraph and
for the purpose of paragraph 29B, the meaning of the collection of all amounts according to the
contractual terms of the debt agreement is that both the interest payments and the principal
payments pursuant to the contract will be collected on the date stipulated in the debt agreement.
With regard to a debt which has been restructured in a problem debt restructuring, "the
contractual terms of the debt agreement" relate to the contractual terms stated in the original
debt agreement, and not the contractual terms stated in the restructured agreement. This
paragraph does not detail how a banking corporation should determine that it is probable that it
will not be able to collect all of the amounts due to it according to the contractual terms of a
debt agreement. In order to make this decision, a banking corporation must apply its normal
loan review procedures. This paragraph should not be implemented only because of a
significant delay or insignificant lack in the amount of instalments. A debt will not be classified
as impaired during a period in which there is a delay in payment, if the banking corporation
expects to cover all of the amounts due to it, including accrued interest at the contractual
interest rate in which there is a delay. Accordingly, a debt on demand, or another debt without a
declared repayment date, will not be classified as an impaired debt if the banking corporation
expects to collect all of the amounts, including accrued interest at the contractual in rate during
the period in which the debt existed. For further clarifications, on the matter of classification of
a debt as an impaired debt, see paragraph 30 below.
9.
A debt whose terms have been changed in a problem debt restructuring is usually already
identified as an impaired debt before a formal restructuring takes place, as the condition set
forth in sub-paragraph 8 is fulfilled before a formal restructuring has taken place. Nevertheless,
if the debt is not within the scope of this paragraph, in accordance with sub-paragraph 6(a), it is
possible that the banking corporation has not accounted for this debt pursuant to this paragraph
before the debt was restructured. The banking corporation must implement the provisions of
this paragraph with regard to this debt when it undergoes a restructuring, unless before the
restructuring and thereafter, a minimum allowance for credit losses is made in respect thereof
using the extent of arrears method as stated in the Appendix to the Proper Conduct of Banking
Business Regulation No. 314 "Problem Debts in Housing Loans in a Mortgage Bank".
10.
The use of the term "probable" for the purposes of this paragraph is consistent with the use
made of this term in U.S. Accounting Standard No. 5 "Accounting for Contingencies". In
accordance with this standard, probable is the range of probability as to a future event or events
will happen that will verify the fact of an asset's loss or impairment or of the creation of a
liability. The range varies from probable to remote, as detailed in paragraph 47.B. (g) in the
Public Reporting Directives. There is no inconsistency between the terms for accrual in
paragraph 8 of the U.S. Accounting Standard No. 5 and the principle of conservatism in
accounting. These conditions are not intended to be so stringent as to actually demand virtual
certainty before a loss will be accrued. The conditions require only that it will be probable that
an asset is impaired or a liability is incurred and it will be possible reasonably to estimate the
amount of the loss.
Next page – 662-6.3
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Measurement of Impairment
11.
Measurement of impairment of a debt requires the use of discretion and estimates, and the
actual results can differ from these estimates. Banking corporations are required to develop
practical measurement methods in accordance with their circumstances. Sub-paragraphs 12 – 16
below discuss these methods of measurement.
12.
For certain impaired debts, there are risk features which are unique to an individual debt, and
with regard to them, the banking corporation should implement the measurement method
outlined in paragraphs 13 – 16 below on a single debt basis. However, certain impaired debts
are likely to have risk features which are shares with other impaired debts. A banking
corporation is allowed to aggregate these debts and may use historical statistics, such as
average period of collection and average amount collected, as well as composite effective
interest rate, as a means of measuring the impairment of these debts.
13.
When it is determined that a debt is impaired, according to its definition in sub-paragraph 8
above, a banking corporation should measure the impairment based on the present value of the
expected future cash flows, discounted at the effective interest rate of the debt. If so, for
practical considerations, a banking corporation may measure impairments based on the
observable market price of the debt. With regard to a debt that is collateral dependent, the
impairment will be measured in any event based on the fair value of the collateral. Regardless
of the measurement method, a banking corporation should measure impairment based on the
fair value of the collateral, when the banking corporation determines that a foreclosure is
expected. A banking corporation can choose a measurement method on a loan-by-loan basis. In
measuring impairment, a banking corporation will take into account an estimate of selling costs
on a discounted basis, if it is expected that these costs will reduce the cash flows available for
repayment or other settlement of the debt. In the present value of the expected future cash flows
(or alternatively, the observable market price or the fair value of the collateral) is lower than the
recorded balance of the debt1, a banking corporation should recognize the impairment by
making an allowance for credit losses against a parallel debit in the item, expenses in respect of
credit losses or by the adjustment of an existing allowance for credit losses in respect of the
impaired debt against a parallel debit or credit in the item, expenses in respect of credit losses.
If a banking corporation bases the measurement of a debt's impairment on a present value
amount, the banking corporation will calculate the present value amount on the basis of an
estimate of the expected future cash flows from the impaired debt, discounted at the effective
interest rate of the debt. The effective interest rate of the debt is the intrinsic rate of return in a
1
Footnote no. 2 to Standard 114. See definition of recorded balance of debt under Definitions.
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in a debt, (i.e., the contractual rate of interest adjusted for the premium, discount or net deferred
commissions or net deferred costs, charged to the balance of the debt pursuant to the Public
Reporting Directives, which existed at the date on which the debt was created or acquired) 1.
The effective rate of interest of a restructured debt in a debt restructuring will be based on the
original contractual interest rate and not on the rate denominated in a restructuring agreement.
If the contractual interest rate of a debt is variable on the basis of changes that take place in an
independent factor. such as an index or rate (for example, the prime rate, LIBOR rate, etc.), the
effective interest rate of a debt can be calculated on the basis of the factor as it varies over the
life of the debt2 or can be fixed according to the rate in force at the date on which the debt
complies with the condition for recognition of the impairment according to paragraph 8 above.
The choice of the banking corporation will be implemented in a consistent manner for all debts
where their contractual interest rate is variable based on the changes that occur in an
independent factor. In determining the effective interest rate or in estimating the expected
future cash flows, forecasts with regard to changes in the factor should not be included.
15.
If a banking corporation bases the measurement of impairment of a debt on the calculation of
present value, the estimate of the future cash flows will be the banking corporation's best
estimates based on reasonable assumptions and forecasts which can be established. In
developing an estimate of the expected future cash flows, all available evidence, including an
estimate of selling costs, should be brought into account, if these costs are expected to reduce
the cash flows available for repayment or other settlement of the debt. The weight given to any
evidence will adjust to the extent in which it may be objectively verified. If a banking
corporation estimates a range of an amount or of the timing of potential cash flows, in
determining the best estimate of expected future cash flows, the reasonableness of the potential
results should be brought into account. For the purposes of measuring the impairment of an
impaired debt, all available information should be taken into account, including current
"environmental factors", such as sectoral, geographical, economic and political factors which
are relevant to the ability to collect the impaired debt and which indicate the fact that it is
expected that the asset is impaired at the date of the financial statements.
16.
Following the initial measurement of impairment, if there is a significant change (increase or
decrease) in the amount or timing of expected future cash flows from an impaired debt, or if the
actual cash flows differ significantly from the previously forecasted cash flows, a banking
corporation will re-calculate the impairment such that it will apply the procedures set forth in
sub-paragraphs 12-15 above, and adjust the allowance for credit losses. Similarly, a banking
corporation that measures impairment based on the observable market price of an impaired debt
or on the fair value of the collateral of an impaired debt, the collection of which is contingent
on the collateral, will adjust the credit loss allowance when there is a significant change
(increase or decrease) in one of these bases.
However, at no date, will the net balance of the debt exceed the recorded balance of the debt.
1
Footnote no. 3 to Standard 114: Not included.
2
For example, if, according to the contract, the debt bears variable interest at Prime + 1%, the effective interest rate at each
reporting date will be Prime at the reporting date + 1%.
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Income recognition
17.
This paragraph does not specify the way in which a banking corporation is required to
recognize, measure or present interest income in respect of an impaired debt. Certain
accounting methods for income recognition can cause a situation in which the recorded debt
balance of an impaired debt is lower than the present value of the expected future cash flows
(or alternatively, the observable market price of the debt or the fair value of the collateral). In
such a case, despite the fact that the debt will meet the definition of an impaired debt pursuant
to sub-paragraph 8 above, an additional impairment will not be recognized. These accounting
methods include recognition of interest income according to the cost-recovery method, the
cash-basis method, or a certain combination of these methods. The recorded debt balance of an
impaired debt is likely to be lower than the present value of the expected future cash flows (or
alternatively, the observable market price of the debt or the fair value of the collateral) as a
result of the fact that the banking corporation has written off part of the debt. For the directives
regarding an accounting write-off of a debt and the recognition of income in respect of impaired
debts, see paragraph 29D and 30 below.
18.
Cancelled in original.
19.
Cancelled in original.
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29B. Allowance for credit losses prepared on a collective basis
1.
In respect of housing loans, as defined in the Appendix to the Proper Conduct of Banking
Business Regulation No. 314 "Problem Debts in Housing Loans in a Mortgage Bank", a
minimum specific allowance will be calculated according to the extent of arrears method, as set
forth in this appendix. A banking corporation that is not a mortgage bank will also calculate a
minimum specific allowance according to the extent of arrears method, in accordance with
principles stipulated in the said appendix. In addition, a banking corporation may calculate a
minimum specific allowance according to the extent of arrears method as stated above even in
respect of all other housing loans, as defined in the Appendix to the Proper Conduct of Banking
Business Regulation No. 451 "Procedures for Granting Housing Loans", in which there is a
monthly or quarterly repayment. It is clarified that, in accordance with the appendix, the
making of allowances according to the extent of arrears in no way exempts the banking
corporation from making additional allowances for credit losses in respect of housing loans,
when there are circumstances that indicate the fact that an allowance according to the extent of
arrears is insufficient. See Appendix L to the Public Reporting Directives for additional
regulations regarding the calculation of a credit loss allowance in respect of housing loans and
the disclosure of those loans.
2.
In respect of groups of debts noted in paragraph 29A.6 (a) and in respect of debts which have
been individually examined pursuant to paragraph 29A and found to be unimpaired, except for
debts as stated in sub-paragraph 1 above in respect of which a minimum specific allowance is
calculated according to the extent of arrears, an allowance will be calculated in accordance with
the principles laid down in U.S. Accounting standard No. 5. See Appendix 10 for additional
regulations with regard to the method of determining the allowance and the documentation
requirements. It is clarified that a provision as aforesaid should not be calculated in respect of a
debt security, according to their definition in paragraph 24.G and in respect of derivative
instruments.
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29C. Additional requirements with regard to the presentation and disclosure of credit loss
allowances
1.
Balances of credit loss allowances in respect of balance sheet debts will reduce the balance
sheet balances of the assets in respect of which the allowances were made. The balance of the
credit loss allowance in respect of credit to the public will be presented separately in the body
of the balance sheet. The balance of the credit loss allowance in respect of off-balance sheet
instruments will be presented within other liabilities. The item, expenses in respect of credit
losses in the statement of profit and loss will include the expenses in respect of credit losses
incurred in all of the debts and off-balance sheet credit instruments.
2.
A banking corporation should note that the credit loss allowance reflects the banking
corporation's estimate with regard to expected credit losses included in its credit portfolio and
in off-balance sheet credit instruments. In addition, the banking corporation's accounting
policies for determining the amount of the credit loss allowance should be comprehensively and
clearly described, at a sufficient level of detail to explain and outline the systematic analysis
and procedural discipline that the banking corporation has applied. Banking corporations
develop various components in their allowances in order to estimate (1) losses based on
specific assessments of a known loss in single debts (2) an estimate of unidentified losses in
respect of groups of debts and/or groups of ranked debts. Each component of the allowance
should be outlined (see format of Note 4), and briefly explained, beyond a note of the fact that
the allowance is "sufficient", how the banking corporation's methodical process has been
implemented in order to determine the amount of each specific component. If debts are grouped
according to groups or according to any type of ranking in order to assess probable losses that
have not been identified, the basis for the grouping should be noted, and the method according
to which the rates of losses in those groups should be described. The basis according to which
the effect of environmental factors, such as changes and trends in the economic situation,
arrears and losses on the rates of loss should be noted,
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29D. Classification and Accounting Write-down, Charge Off of a Debt
1.
The amounts of debt considered to be uncollectible and of low value should be written down so
far so that leaving them as assets is not justified. This does not mean that the debt has
absolutely no value, but that it is neither practical nor desirable to defer an accounting writedown of this debt (or a part of the debt) which, in principle, has no value, even though a partial
collection is possible in the future. A debt (or part thereof) in respect of which the banking
corporation has made long-term efforts to collect for should not be left in the financial
statements.
For this purpose, it is clarified that an impaired debt that is still not appropriate to be (wholly or
partly) written down is characterized by the fact that there is a high probability that borrower
will not repay the debt (or part thereof) according to the terms of the contract. However, there is
no certainty with regard to the prospect of collection and realization of the loss. When the
probability of a loss becomes almost certain such that the prospect of the debt (or part of the
debt) being collected in the future becomes very small, if at all, it is appropriate to write down
the debt (or the part thereof). A bank should classify a debt that is expected to result in a very
significant loss as impaired, and not write down the debt (or part thereof), only if it identifies
specific events that are likely to reinforce the debt whose outcome has not yet been determined,
in respect of which it is appropriate to defer the accounting write-down. Such events are likely
to include a merger, an acquisition, a liquidation, capital completions, the receipt of additional
collateral, the completion of the revaluation of collateral, and a refinancing. As a rule, events
whose outcome has not yet been determined are supposed to become clear within a relatively
short time-period (usually less than two years). Although there are occasional cases in which it
is appropriate to continue to present an asset in the balance sheet even after this time-period,
the bank should refrain from the method by which it does not write-down debts (or parts of
debts) when the specific event expected does not occur, from an expectation of other events
that will occur in the future. If the bank's only possibility of collecting the debt (or part thereof)
is through legal writs that will take a long time, or though other long-term procedures, the bank
should write down the debt (or part thereof).
2.
As a rule, each part of the recorded balance of the debt whose collection is contingent on
collateral which is in excess of the fair value of the collateral, which is identifiable as an
uncollectible amount, should be written down immediately against the balance of the credit loss
allowance.
3.
When a banking corporation wholly or partially writes down a debt which is uncollectible, the
banking corporation creates a new cost basis for the debt. As a consequence, when a new cost
basis is created through an accounting write-down, this cost basis cannot "increase" in the
future. A previous accounting write-down should not be cancelled after the banking corporation
has reached the conclusion that there has been an improvement in the prospects of recovering
the amount that has been written down, even if the bank gives the debt a new account number
or the debtor signs a new document.
4.
Accounting write-downs and collections of amounts which have been written down in the past
should be recorded against the balance of the allowance for credit losses.
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Credit losses in respect of off-balance sheet credit instruments will be deducted from the
balance of the allowance for credit losses in respect of off-balance sheet credit instruments in
the period in which the contingent liability in respect of the off-balance sheet instrument
materializes.
5.
Debts in respect of which the allowance is valued on a collective basis, as stated in paragraph
29B above, except for housing loans in respect of which a minimum allowance for credit losses
was made according to the extent of arrears method as stated in the Appendix to the Proper
Conduct of Banking Business Regulation No. 314 "Problem Debts in Housing Loans in a
Mortgage Bank", and except for debts that have been examined in accordance with paragraph
29A above and found to be impaired, will be written down when the banking corporation
identifies specific credit losses, but not later that the time-frames outlined below. It is clarified
that the regulations set forth below relate to all the debts as aforesaid, including closed-end
debts, debts in current accounts or current loan accounts and other open-end debts. The entire
amount of the recorded balance of the debt should be written down (subject to that stated below
with regard to secured debts), and not just the amount in arrears or over-limit. When the
banking corporation's past experience with these debts reflects high losses and low collections,
it is necessary to adopt more conservative criteria.
a.
b.
Debts that are not secured and debts secured by collateral that is not a residential
dwelling:
1)
These debts will be classified as substandard debts when they become debts in
arrears of 90 days or more.
2)
These debts will be written down when they become in arrears of 150 days or
more1.
3)
If a debt is secured by collateral which is not a residential dwelling, and the seizure
of the collateral begins and is secured, the part of the recorded balance of the debt
which in excess of the value of the collateral (net of selling costs) may be written
down, instead of writing down the entire balance of the debt.
Debts secured by a residential dwelling (as aforesaid, except for housing loans in respect
of which a minimum allowance for credit losses is made in accordance with Appendix to
the Proper Conduct of Banking Business Regulation No. 314):
1)
1
Debts in which the ratio between the debt to the value of the mortgaged asset
‘according to the share of the balance sheet – Loan-To-Value) is higher that 60%
will be classified as substandard debts, when they become debts in arrears of 90
days or more. Debts that are well secured by residential dwelling, in which the
For operational purposes, when an accounting write-down is required according to this paragraph, it should be effected
no later than the end of the month in which the related period has elapsed. Any payment received after the period has
elapsed, but before the month in which the period has elapsed, may be taken into account for the purpose of making a
decision as to whether the balance of the debt is still appropriate for an accounting write-down.
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the ratio between the debt and the value of the asset is equal to or less than 60%,
are usually classified based solely on the state of arrears. However, debts secured
by a second-ranking mortgage (home-equity loans) when the first-ranking
mortgage is not in favour of the banking corporation, will be classified as
substandard loans when they become debts in arrears of 90 days or more, even if
the ratio between the debt and the value of the asset is equal to or less than 60%.
2)
6.
A current valuation of the value of the collateral should be made no later that the
date on which the debts become in arrears of 180 days or more. The part of the
recorded balance of the debt in excess of the value of the collateral (net of selling
costs) should be written down.
c.
Debts of individuals in bankruptcy should be written down no later than 60 days from the
date of publication of the receiving order by the court, or in another period stated in other
parts of this paragraph, whichever is earlier. Debts of corporations should be written
down no later than 60 days from the date on which the order to liquidate the corporation
is given by the court or a receiver for the assets of the corporation is appointed, or in
another period stated in other parts of this paragraph, whichever is earlier. This is so,
unless the banking corporation can clearly demonstrate that the expected collection of the
debt is likely to occur, and it holds documentation clearly supporting this conclusion.
With regard to debts secured by collateral, it is possible to write down only the part of
the recorded balance of the debt which is in excess of the fair value of the collateral (net
of selling expenses). Any debt balance which has not been written down will be
classified as a substandard debt until the time that the debtor re-establishes its ability and
will to pay within a period of at least six months.
d.
Debts which were created fraudulently (fraudulent loans) will be written down no later
than 90 days from the date of discovering the fraud, or in another period stated in other
parts of this paragraph, whichever is earlier.
e.
Because the debts the allowance in respect of which is made on a collective basis are
usually relatively small debts, the evaluation of the credit quality of these debts on the
basis of an overall credit analysis of each single debt is not effective and is expensive for
the banking corporation and the control and audit factors. Accordingly, the best index for
the credit quality of these debts is the payment performance of each debtor in accordance
with the criteria set forth above. Notwithstanding the aforesaid, if the banking
corporation possesses documentation that clearly demonstrates that a debt in arrears is
well secured and in collection proceedings, such that collection will be effected,
notwithstanding the state of arrears, there is no requirement to classify and/or write down
the debt.
For this purpose, "well secured" and "collection proceedings" – see paragraph 30.
However, for this purpose, the recommended amount of time for the purpose of
determining whether a debt is in collection proceedings is 90 days.
Disclosure should be given to the banking corporation's accounting policy regarding the
accounting write-down of debts.
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29E. Allowance for credit losses in respect of off balance sheet credit instruments
1.
A banking corporation is required to maintain an allowance that is appropriate in order to cover
expected credit losses in respect of off-balance sheet credit instruments such as commitments
for the provision of credit and customer, in accordance with principles stipulated in U.S.
Accounting Standard No. 5. A banking corporation may not wait until the off balance sheet
credit instruments are actually utilized in order to recognize a loss.
2.
Generally, banking corporations evaluate and estimate credit losses in respect of off-balance
sheet credit instruments at the same time as they estimate credit losses in respect of debts. The
process for determining and establishing estimates of loss connected to off-balance sheet credit
instruments is similar to that for determining and establishing estimates of loss connected to
debts. However, estimates of the loss connected to off-balance sheet credit instruments are not
recorded as part of the allowance for credit losses in respect of debts, but are recorded in the
item, allowance for credit losses in respect of off-balance sheet credit instruments within other
liabilities.
3.
See Appendix J for additional regulations regarding the determination of the allowance and the
documentation requirements.
30.
Impaired debts
1.
Additional interpretations with regard to the classification of a debt (including debt securities
and other assets) as an impaired debt –
a.
In any event, a debt will be classified as an impaired debt when principal or related
interest is in arrears of 90 days or more, unless it is well secured and in the process of
collection.
1.
A "well secured" debt if it is secured by (1) collateral in the form of liens on or
pledges of real or personal property, including securities whose realizable value is
sufficient to repay the debt or (2) the guarantee of financially responsible party.
2.
A debt "in the process of collection" if the collection of the debt is conducted in
due course through (1) a legal proceeding, including legal enforcement
proceedings, or (2) in the appropriate circumstances, by collection efforts not
involved in legal proceedings and which is expected to result in the near future in
the repayment of the debt or its return to an unimpaired state.
A collection process for the purpose of the definition of an impaired debt is a proceeding
that is likely to lead to the collection of the debt or its return to an unimpaired state in the
near future, as a rule, within 30 days, Accordingly, as a rule, a debt cannot remain in the
state of "in the process of collection" for a period of more than 30 days from the date on
which it becomes a debt in arrears for 90 days or more. Nevertheless, when it is
reasonably certain with regard to the collection date and amount, even if the collection
period exceeds 30 days, there is nothing to prevent relating to the debt as a debt "in the
process of collection".
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b.
A debt will be classified as an impaired debt pursuant to sub-paragraph a. with effect
from the date on which it becomes a debt in arrears of 90 days. A debt is classified as an
impaired debt will remain such until the date on which it addresses the criteria for its
return from this state as set forth in sub-paragraph f.
c.
The treatment of several debts of one debtor –
In principle, the classification of a debt as impaired must be determined on the basis of
an evaluation of the collection ability of the individual debt and the payment
performance. Accordingly, when one loan of a debtor is classified as an impaired debt, a
banking corporation is not obliged automatically to classify the other debts of that debtor
as impaired. When a banking corporation has several debts of the same debtor, and one
debt meets the criteria of an impaired debt, the banking corporation must evaluate the
other debts of that debtor in order determine whether one or more of these should also be
classified as impaired.
d.
It is not necessary to classify a debt from the types noted in paragraph 29A.6. (a) the
allowance in respect of which is made on a collective basis in accordance with paragraph
29B. as an impaired debt, and it is not necessary to discontinue accruing interest in
respect of thereof, even if principal and related interest are in arrears of 90 days or more.
However, these debts will be subject to other evaluation methods (such as credit loss
allowances) that ensure that the net profit of the banking corporation is not overstated.
Commissions in respect of lateness (delinquency fees) on these debts will included as
income on the date on which the right to receive the fees from the customer is created, on
the assumption that collection is reasonably secured.
1)
2)
A banking corporation is authorized, but not required, to discontinue accruing
interest in respect of debts as aforesaid. A banking corporation that has elected to
discontinue accruing interest in respect of debts as aforesaid will classify them as
impaired debts, and should provide disclosure to the accounting policy that has
been adopted.
Interest on arrears in payments of borrowers who received housing loans will be
included as income only on its collection. Collection on account of arrears in the
payments of housing loans will be attributed, in the absence of circumstances that
justify any other attribution, to arrears interest (to the credit of interest income –
from credit to the public) and thereafter, to the balance of the accrued arrears.
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f.
Reversal of the classification of an impaired debt.
In principle, an impaired debt can return to be classified as an unimpaired debt on
fulfilment of the following states:
(1)
2.
There are no components of principal or interest in respect of it which are due and
have yet to be paid (hereinafter - "amounts in arrears") and the banking
corporation expects repayment of the remaining principal and interest in their
entirety according to the terms of the contract (including amounts that have been
written down or provided for). For this purpose, it is clarified that when this
condition is fulfilled, the debt can return to being classified as an unimpaired debt,
even if the banking corporation has not yet collected the amount written off in the
past.
In order for this condition to be fulfilled, it is necessary for the bank to first receive
payments for repaying the amounts that are in arrears. Notwithstanding the
aforesaid, in a situation in which the debtor pays the full amount of the periodic
payments of principal and interest according to the terms of the contract, a debt
can return to being classified as an impaired debt, even if amounts remain in
arrears, if the two following criteria are fulfilled: (1) it is reasonably assured that
amounts of principal and interest that are due according to the contract (including
arrears) will be paid within a reasonable period, and (2) the debtor has made
payments according to the terms of the contract in cash or in a cash equivalent,
over a sustained period (at least 6 months). In this situation, disclosure should
continue to be provided as a debt in arrears as long as there are amounts in arrears
in respect thereof.
Recognition of interest income and accounting treatment of interest income accrued in the
past in respect of an impaired debt
a.
A banking corporation should not accrue interest income in respect of a debt that is
classified as an impaired debt, except as stated with regard to a problem debt in a
restructuring in sub-paragraph e.
b.
Accounting treatment of interest income previously accrued –
All interest income accrued and not yet collected and recognized as income in the
statement of profit and loss, on a debt defined as impaired should be cancelled, as
follows: income accrued from the beginning of the reporting year should be cancelled
against the profit and loss item "interest income" and income accrued in previous years
should be cancelled against the balance of the allowance for credit losses (The
cancellation of income accrued in previous years should be presented in a note on the
movement in the balance of the allowance for credit losses in the line "accounting writedown").
c.
The accounting treatment of cash receipts and the criteria got income recognition on a
cash basis –
1)
When a doubt exists with regard to the collection of the remaining recorded
balance of an impaired debt, all the payments that have been received will be used
to reduce the principal if it is necessary to remove this doubt.
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2)
As long as remaining recorded balance of the debt is considered as collectible in
full, it is possible to treat part or all of the interest payments received in cash as
interest income on a cash basis. The bank's determination regarding the collection
of all the remaining recorded balance of the debt must be supported by a current
and well documented credit evaluation of the debtor's financial position and the
forecasts for repayment, including reference to the debtor's historical repayment
performance and other relevant factors.
When recognition of interest income on a cash basis is fair, the amount of income
to be recognized as interest income will be limited to the amount that would be
accrued in the reporting period on the remaining recorded balance of the debt
according to the contractual rate. The balance received in cash in excess of this
amount and which is not recorded as a reduction in the remaining recorded
balance, will be recorded as the collection of previous accounting write-downs
(including cancelled interest), until they are collected in full (a banking
corporation must have a well-defined policy that regulates the accounting
treatment of interest income and accounting write-downs) of balances receivable in
respect of accrued interest.
Interest income on a cash basis will be classified in the statement of profit and loss
as interest income, in the relevant item.
d.
Cancelled
e.
Problem debt in a restructuring –
A debt that has formally undergone a restructuring such that subsequent to the
restructuring, there will reasonable confidence that the debt will be repaid and will
perform in accordance with its new conditions will be accounted for as an impaired debt
which accrues interest income, providing the restructuring and any accounting writedown carried out on the debt are supported by a current and well-documented evaluation
of the debtor's financial position and repayment forecast pursuant to the new conditions.
Otherwise, the debt in the restructuring must continue to be accounted for as an impaired
debt not accruing interest income. The evaluation must relate to the debtor's sustained
historical repayment performance in cash and cash equivalent payments over a
reasonable period, lasting at least 6 months, before the debt returns to accruing interest
income (in returning the debt to a situation of accruing interest income, it is possible to
take into account in the sustained historical repayment performance over a reasonable
period before the restructuring). Such a restructuring must improve the collection ability
of debt in accordance with a reasonable repayment schedule and does not release the
banking corporation from responsibility for an immediate write down of all the identified
losses (see paragraph 29D).
Until a debt in a restructuring returns to accruing interest income, if at all, cash payments
received must be accounted for in accordance with the criteria set forth above. In
addition, following a formal restructuring, if a restructured debt which has returned to
accruing interest income later fulfils the criteria for the definition of an impaired debt in
relation to its new conditions, as a result of arrears or for any other reason, the debt must
be defined as an impaired debt which does not accrue interest income.
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30A. Problem debt in a restructuring
1.
A banking corporation should account for a problem debt in a restructuring pursuant to which
changes only in the terms of the debt were made – i.e., no assets were received (including rights
in the debtor's equity capital) – in accordance with paragraph 29A.
2.
A restructuring of a problem debt, which constitutes in substance a repossession or foreclosure
of assets by the banking corporation, i.e., the banking corporation receives physical possession
of the debtor's assets, even if formal repossession procedures have not taken place, or obtains in
another way one or more of the assets of the debtor in lieu of all or part of the debt, will be
accounted for as if assets were received as full or partial repayment of the debt as set forth in
paragraph 30B "Repossessed assets".
3.
A restructuring of a problem debt can also include the receipt of assets (including rights in the
debtor's equity capital) as a partial payment of a debt 1 and also changes in the terms of the
remaining debt. The accounting of such a restructuring will be effected in two stages: initially,
the assets received will be accounted for in accordance with paragraph 30B. and the recorded
balance of the debt will be amortized to the fair value net of the cost of selling the assets
received2. In the second stage, the banking corporation will measure each impairment in
relation to the remaining recorded balance of the debt in the restructuring in accordance with
paragraph 29A.
4. A restructuring of a problem debt can be involved in the replacement of a debtor's problem debt
with the debt of a new debtor (for example, another business corporation, individual or other
government), or with the addition of another debtor to the problem debtor (for example as a
joint debtor). A restructuring of this type should be accounted for in accordance with its
substance. For example, a restructuring in which, after the restructuring, the alternate or
1
Footnote no. 22 to U.S. Standard 15: Even if the stated conditions of the remaining debt, for example, the nominal rate of
interest and the repayment date, do not change as a result of receiving the assets including right in the debtor's equity
capital, the restructuring will be accounted for in accordance with this paragraph.
2
Footnote no. 23 to U.S. Standard 15: If cash is received as partial payment of a debt, the recorded balance of the debt will
be reduced by the cash amount received.
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additional debtor controlling, is controlled by, or is under joint control1 with, the original debtor
will be accounted for in accordance with the provisions of paragraph 1 above. This paragraph
will also apply to a restructuring in which the replacement or the additional debtor and the
original debtor are connected after the restructuring in an agency relationship, trust or other
relationships the substance of which designate sources or certain source flows of the original
debtor to the banking corporation, even if the payments to the banking corporation are made by
the replacement or additional debtor. However, a restructuring in which, following the
restructuring, the replacement or additional debtor has none of the relationships of the types
outlined above whatsoever with the original debtor, will be accounted for as a receipt of a
"new" debt for full or partial repayment of the original debtor's debt, in accordance with
paragraph 30B. The "|new" debt will be recorded at its fair value.
5.
1
Commissions received in the context of a change in the term of a problem debt restructuring
will be amortized from the recorded balance of the debt. Legal costs and other direct costs
incurred by the banking corporation in order that it will be able to effect a problem debt
restructuring will be included as an expense on the date on which they were incurred.
Control – according to its meaning in accounting standards, directives and professional publications adopted in
paragraph 9 of the Public Reporting Directives.
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30B. Foreclosed assets
1.
A banking corporation that has received from a debtor, as full repayment of a debt, debtors
from a third party, rights in a debtor's equity capital or other type of assets (except for longlived assets), which will be sold, according to the definition of this tem in American
Accounting Standard No. 144, will account for the assets received at their fair value at the date
of the restructuring1. When a banking corporation receives long-lived assets, such as real estate,
from a debtor as full payment of a debt, there is a controvertible assumption that the long-lived
assets are being held for sale, and the banking corporation should recognize these assets at their
fair value net of the cost of the sale. This fair value (net of the cost of the sale) becomes the
"cost" of the foreclosed asset. The amount, if any, by which the recorded balance of the debt
that has been paid exceeds the fair value (net of the cost of the sale, if required) of the assets is
the loss that the debtor should record to the balance of the allowance for credit losses at the
date of the foreclosure.
2.
If an asset is sold a short time after it is repossessed (a short time will usually be considered as
up to 90 days), and if no significant change has occurred in the market price of the asset when it
is held by the banking corporation, the estimate of the fair value (net of the cost of the sale
relating to the long-lived assets which will be sold, such as real estate) at the foreclosure date
should be replaced by the value received on the sale (net of the cost of the sale relating to the
long-lived assets which will be sold, such as real estate). The adjustments will made vis-à-vis
the loss recorded against the balance of the allowance. In cases where property is received as
full payment of a non-loan debt (e.g., a debt security), the loss will reported in the statement of
profit and loss consistently with the classification of the assets paid in the balance sheet.
3.
An asset which is received as partial payment of a debt should be accounted for as set forth
above and the recorded balance of the debt will be amortized by its fair value (net of the cost of
sale) of the asset at the foreclosure date.
4.
When assets that have been repossessed are assets in respect of which the banking corporation
has received as a lender, physical possession, even if formal foreclosure proceedings have not
yet been carried out, the secured debt will be reclassified in the balance sheet to the appropriate
item for collateral (for example, in relation to real estate, to "other assets") and will be
accounted for as set forth above.
5.
After the foreclosure, every real estate asset that has been repossessed (including any real estate
of which the banking corporation has received physical possession, even if formal
expropriation procedures have not been carried out), will be recorded at the lower of (1) the fair
value at the reporting date of the asset, net of costs of selling the asset, or (2) the cost of the
asset (according to its definition in previous paragraphs). The calculation will be made at the
level of the single asset. If the fair value at the reporting date of the real estate asset that has
been repossessed net of the costs of selling the asset is lower than the cost of the asset, the
1
Footnote No. 16 to U.S. Standard 15: In accordance with paragraphs 1 and 3 to this paragraph, the fair value of the assets
received should be used for the accounting treatment of the repayment of the debt in a restructuring of a problem debt.
These paragraphs do not preclude the use of the fair value of the repaid debt, if it is clearer from the fair value of the
assets received as a full payment of the debt ‘see paragraph 1. Nevertheless, when assets are received as partial repayment
of a debt ‘see paragraph 3, the fair value of the assets should be used in any event, so as to avoid the need to allocate the
fair value of the debt between the part repaid and the debt that still exists.
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difference will recognized as a result against an allowance for impairment in respect of the
asset. The allowance for impairment should be increased or decreased ‘to zero against the item,
expenses, in respect of changes in the fair value of the asset or in the estimate of costs of sale.
After a problem debt restructuring, a banking corporation should account for assets that it
received, which are not long-lived assets, in an identical manner to the assets that had been
purchased for cash.
6.
If a real estate assets that was repossessed is being held for sale for more than a short period,
additional impairments and gains or losses from the sale of the asset will not be reported as a
loss or as a collection in respect of the debt and will not be debited or credited to the credit loss
allowance. These impairments and gains or losses from sale or from settlement of the asset
should be reported net in the statement of profit and loss as "other income" or "other expenses"
‘see paragraphs 69.D. and 72.D.).
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30C. Disclosure of credit risk, credit to the public and allowance for credit losses
A banking corporation should include a note on credit risk, credit to the public and allowance for
credit losses, in which the disclosure required in accordance with the disclosure requirements in
paragraph 310-10 in the codification U.S. GAAP Accounting Standards Codification Topic 310:
"Receivables" (hereinafter in this paragraph - "the requirements of Topic 310-10"), on a consolidated
basis, as set forth below.
a.
A banking corporation is required to provide disclosure, as set forth below, for each credit
segment:
1.
An outline of the procedures and accounting policies used in determining the allowance
for credit losses in respect of the credit segment, including:
a)
b)
c)
A description of the factors that affected the management's judgement, including
the historical losses and economic conditions in the reporting period,
A description of the relevant risk features for each credit segment, and
the identification of any changes in relation to the previous period in procedures or
accounting policy for determining the allowance for credit losses in respect of the
credit segment, and the management's considerations for making the change.
2.
A description of the accounting policy for writing down of debts.
3.
Quantitative movement in the allowance for credit losses in respect of each credit
segment, in accordance with the format of Note 4.a.1. When material, separate disclosure
will be given to the movement in the allowance in respect of the off-balance sheet credit
instruments. This disclosure will also be provided on a consolidated basis, as well as with
regard to the banking corporation.
4.
The quantitative effect of changes identified in sub-paragraph a.1.c) above.
5.
The total of any material purchases of debts during the reporting period.
6.
The total of any material sales of debts during the reporting period.
7.
The recorded balance of the debt of debts in the credit segment, and the balance of the
allowance for credit losses in respect thereof (see Note 4.a.2)), separating between:
a)
b)
Debts reviewed on an individual basis (including debts reviewed on an individual
basis and found to be unimpaired)
Debts reviewed on a collective basis, with separate disclosure for debts where the
related allowance has calculated according to the extent of arrears
This disclosure should also be provided on a consolidated basis, as well as with regard to
the banking corporation.
8.
A description of the way in which problem debt restructurings have affected the
allowance for credit losses in respect of each credit segment, and of the way in which
restructurings that failed up to a year after the restructuring, have affected the allowance
for credit losses in respect of each credit segment.
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Page 662-11.1
b.
A banking corporation is required to provide disclosure, as set forth below, for each group of
debts:
Impaired debts
1.
With regard to each balance sheet date presented in the financial statements, the recorded
debt balance of debts that meet the definition of an impaired debt, detailing:
a)
b)
The total of the recorded debt balance of impaired debts in respect of which there
is an individual allowance for credit losses, and to the amount of this allowance.
The total of the recorded debt balance of impaired debts in respect of which there
is no individual allowance for credit losses.
Further details should be provided to the total recorded debt balance of impaired debts at
each balance sheet date presented, in respect of which the credit loss allowance is made
according the present value of cash flows and at the fair value of the collateral (including
in respect of debts for which, at the reporting date, there was no individual allowance), in
accordance with the format in Note 4.b.2.a.
2.
At each balance sheet date presented, the amount of the contractual principal not yet
collected in respect of impaired debts.
3.
For each period for which a statement of profit and loss is presented:
a)
b)
c)
d)
The average recorded debt balance of impede debts in the period.
The total interest income recognized in the reporting period in respect of the
impaired debts in the time-period in which the debts were classified as impaired.
The total interest income recognized in the reporting period in respect of the
impaired debt on a cash basis in the time-period in which the debts were classified
as impaired.
The total interest income that would be recognized in respect of impaired debts
(including problem debts in a restructuring) in the reporting period, had they
accrued interest income according to their original conditions. A banking
corporation may include this disclosure in respect of the total of all the debts and
not for every debt group.
4.
The policy according to which the banking corporation decided whether to examine
individual debts.
5.
The accounting policy of the banking corporation with regard to interest income on
impaired debts, including the method of recording cash receipts.
6.
The accounting policy regarding the classification of impaired debts, the return of an
impaired debt to an impaired state, and to an impaired and accruing state; the banking
corporation's accounting policy for determining the state of the arrears.
7.
The factors taken into account in order to decide whether a debt is impaired.
Debts in arrears
8.
At each balance sheet date presented, debts in arrears of 90 days or more, which are
unimpaired.
9.
At each balance sheet date presented, debts in arrears of between 30 days and 89 days
which are unimpaired.
Supervisor of Banks: Public Reporting Directives [1](3/12)
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Page 662-11.2
Problem debt restructurings
10.
At each balance sheet date presented, the recorded debt balance of problem debts in a
restructuring, in accordance with the format of Note 4.b.2.c. As a rule, the disclosure will
include each problem debt in a restructuring pursuant to which changes were made in the
terms of the debt, until it is paid in full.
11.
At each balance sheet date presented, the total liabilities, if any, to lend additional
sources to debtors in respect of which the problem debt restructuring was made, pursuant
to which changes were made in the terms of the debt.
Quantitative and qualitative disclosure of problem debt restructurings during the period
12.
13.
For each period for which a statement of profit and loss is presented, quantitative and
qualitative disclosure is to be provided with regard to problem debt restructurings carried
out during that period, including:
a)
A description of the changes carried out in the debts.
b)
Monetary effects of the changes.
For each period for which a statement of profit and loss is presented, if the debts in this
period have become debts in arrears of 30 days or more, and these debts have been
restructured in a problem debt restructuring, in the 12 months preceding the date on
which they became debts in arrears of 30 days or more, quantitative and qualitative
disclosure should be provided for these debt, including:
a)
b)
The types of debts that have failed.
The amount of the debts that have failed.
Disclosure regarding credit quality
14.
A banking corporation should provide disclosure that will allow users of financial
statements:
a)
b)
15.
In order to achieve this objective, a banking corporation should provide quantitative and
qualitative disclosure, for each group of debts, of the quality of the debts to the banking
corporation, including:
a)
a)
c)
16.
To understand how and to what extent the management of the banking corporation
regularly monitors the credit quality of the debts to the banking corporation.
To assess the quantitative and qualitative risks attributable to the credit quality of
the debts to the banking corporation.
A description of the indication for credit quality.
The recorded debt balance of the debts, according to the indication for credit
quality.
For each indication for credit quality, the date or range of dates on which the
information regarding this indication was updated.
If a banking corporation provides disclosure on internal ratings, it must include
qualitative information as to how these internal ratings are connected to the probability
of a loss.
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Page 662-11.3
c.
For the purpose of 30C, it is clarified that:
1.
Debts – according to its definition in the Public Reporting Directives, except for debt
securities and securities borrowed or acquired in the framework of agreements to resale.
2.
The disclosure required in paragraph 30C.a. should be provided at least for each of the
following credit segments:
(1) Commercial credit, (2) Private individuals – housing loans, (3) Private individuals –
other, (4) Banks (except the bank of Israel) and governments.
3.
The disclosure required in paragraph 30C.b. should be provided at least for each of the
following debt groups:
Activity of borrowers in Israel:
a)
Commercial credit segment –
1)
2)
3)
4)
Construction and real estate – construction
Construction and real estate – real estate activities
Financial services
Other commercial
b)
Private individuals and housing loans credit segment
c)
Private individuals credit segment – other
d)
Banks and governments credit segment –
1)
2)
e)
Banks (except the bank of Israel)
Government of Israel
Commercial credit segment 1)
2)
Construction and real estate
Other commercial
f)
Private individuals credit segment
g)
Banks and governments segment
1)
2)
Banks
Governments
4.
It is not required to provide separate disclosure of groups of debts or the credit segment
(including private individuals – housing loans), if the balance of the debts therein is less
than 1% of the total balance of the debts.
5.
Consideration should be given to whether to provide disclosure to an additional credit
segment, or additional group of debts, according to their definition in the Public
Reporting Directives and in accordance with the requirements of Topic 310-10.
6.
Within the framework of the quantitative disclosure of an indication of credit quality, a
banking corporation is to provide disclosure at least to the balance of the problem debts
in each group of debts. In addition, disclosure on the credit quality of housing loans will
also be included, as set forth in the format of the note. Consideration should be given to
disclosure should be provided for an additional indication of credit quality, according to
its definition in the Public Reporting Directives and in accordance with the requirements
of Topic 310-10
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7.
Disclosure will provided in accordance with the format in the note on credit risk, credit
to the public and credit loss allowance, Consideration should be given as to whether
additional disclosure is necessary in excess of the requirements detailed above, in order
to meet the requirements of Topic 310-10.
8.
It is not required to include the disclosure required in paragraphs 30C.b.1, 30C.b.2,
30C.b.3 and 30C.b.10 with regard to restructured debts in a problem debt restructuring
pursuant to which changes were made in the terms of the debt, in the years following the
year in which the restructuring was carried out, if the following two conditions are
fulfilled:
1)
The restructuring agreement stipulates a rate of interest that is equal to or greater
than the rate that the banking corporation was willing to receive at the time of the
restructuring in respect of a new debt with similar risk;
2)
The debt is not impaired in relation to the terms stipulated in the restructuring
agreement.
If a banking corporation chooses not provide the disclosure required in the said
paragraphs with regard to debts that meet conditions 1) and 2) above, it must implement
its choice consistently, adding an appropriate comment in the note.
9.
A banking corporation should apply to the manager of the reporting unit in the Banking
Supervision Department, when it believes that the disclosure required according to the
Public Reporting Directives exposes details of a borrower.
30D. Credit to the Public according to Size of Credit of the Borrower
a.
The Note will provide a table of credit balances to the public and off balance sheet credit
risk (after deducting specific all for credit losses), which are to be classified according to
the size groups as detailed in Note 4.C.
b.
The credit ceiling of the upper bracket relevant to the banking corporation should be
noted if it is lower than the credit ceiling of the upper bracket in the specimen format
contained in this note.
c.
The data on a consolidated basis will specify the classification of the brackets in
accordance with the aggregate credit balances received by a large borrower from all the
companies whose reports have been consolidated ("specific consolidation").
A bank heading a banking group which comprises subsidiaries which are mortgage
banks, investment finance banks or banks outside of Israel, will set out the classification
in this table using a specific consolidation method at least with respect to those
borrowers whose credit balances exceed NIS 8,000 thousand or as they appear in any of
the five uppermost brackets, whichever is the lower, both with respect to the banking
corporation and the subsidiary companies. With respect to the remaining borrowers, the
corporation may present the credit in a single amount, whilst specifying the number of
borrowers according to the unification of levels method.
d.
In this paragraph, "borrower" is as defined in Proper Conduct of Banking Business
Regulation No. 313, "Limitations on the Indebtedness of a Borrower and a Group of
Borrowers".
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Page 662-12
31.
Credits to the Government
a.
This item will include Treasury deposits deriving from funds from savings plans and
issues of debt securities as well as the amounts of grants which the Treasury is obliged to
pay in respect of savings plans.
b.
Where the item includes credit to foreign governments, it will be called "credit to
governments", including in the note, the amount of the credit to the foreign governments.
c.
The note will contain a classification of the credit according to the specimen note in the
Exhibit. The item, "other credit" in the note, will include Treasury deposits against
foreign currency deposits.
32.
Investments in Investee Companies
a.
a1.
b.
c.
A banking corporation will implement International Accounting Standard 28
"Investments in Associates". In implementing this standard, the following will apply:
1)
In order to determine whether there in a significant effect in an investee company,
a banking corporation should apply the tests established in U.S. generally
accounting policies, providing no specific test contradicting these tests have been
established in the international financial reporting standards.
2)
A banking corporation should apply U.S. generally accepted accounting principles
for banks relating to the transition to a significant effect in a company which the
banking corporation had a previous investment and to an increase in the percentage
shareholding in associate company.
3)
In every place where there is mention in International Accounting Standard 28 to
"International Financial Reporting Standard 3", reference should be to
"International Financial Reporting Standard 3 and the Public Reporting Directives
of the Supervisor of Banks and its regulations.
A banking corporation should apply International Accounting Standard 31 "Interests in
Joint Ventures". In implementing this standard, the following will apply:
1)
Notwithstanding the aforesaid in paragraph 30 to the standard, a banking
corporation should not recognize an interest in an entity under joint control using
the proportional consolidation method.
2)
A banking corporation should prepare Note 6, Investments in Held Companies, in
accordance with its circumstances in order to fulfil the requirements of the
standard.
This item will include equity securities should be accounted for using the equity basis in
accordance with International Financial Reporting Standards, payments on account of
equity securities, options, convertible securities, subordinated capital notes and
shareholder loans in companies held and which are not held for trading. This item should
also include benefits given or received by the banking corporation from companies it
controls according to the method prescribed in paragraph 80B.
Equity securities held as mentioned above will be presented on an equity basis in
accordance with International Financial Reporting Standards. Convertible securities and
subordinated capital notes will be included according to the method prescribed with
respect to held-to-maturity debt or available-for-sale securities, depending on the
circumstances. Options will be included according to the method prescribed with respect
to equity securities held in the available-for-sale portfolio.
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d.
e.
f.
f1.
g.
The note will set forth the investment in equity securities distinguishing between the cost
of the equity securities purchased and profits, on the one hand, and other items of equity
capital accrued from the purchase date on the other; there is no obligation to detail the
investment in such equity securities in relation to an investment effected prior to 25
Teveth 5752 (1 January 1992).
The book value and the stock exchange value at the balance sheet date of investments,
having a readily determinable fair value according to the format set out in the note should
be detailed separately.
There should be set out in a note with respect to consolidated companies and associate
companies separately, goodwill deriving from the acquisition of the investments therein
provided it has not yet been fully amortized.
The original amount, rate of amortization and balance as at the balance sheet date should
be specified.
A note should provide disclosure of the banking corporation's share in the profits or
losses from ordinary operations of held companies, specifying:
(1) losses from impairment and cancellations of losses from impairment of
investments in held companies;
(2) tax expenses deducted from this item (current tax expenses and deferred tax
expenses.
The note should classify the details of the investments specified in sub-paragraph (a)
between consolidated companies and associate companies. A corporation that has
investments in held companies, and which, consequent upon the amendments to the
Banking (Licensing) Law, are earmarked for sale, should present the data respecting such
companies in a separate column or columns, as the case may be.
Particulars of principal held companies will be provided in the following two lists:
1)
Consolidated companies;
2)
Associate companies;
These lists will specify the following details with respect to each company separately:
1)
Company name;
2)
Main field of activity; with respect to a company not registered in Israel, the
country in which it is registered will be mentioned, as well as whether it has been
presented as a non-autonomous unit or as an autonomous company;
3)
That share of the capital conferring a right to receive profits (directly or indirectly
through held companies);
4)
Share of the voting rights; if the voting rights are held through other subsidiary
companies, this fact should be mentioned and the percentage of the voting rights
will be the last in the chain of holdings, in addition to the direct holding of the
parent company in the subsidiary and in the affiliated company;
5)
The investment in equity securities:
(a) according to book value;
(b) according to market value;
6)
The balance of the goodwill;
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7)
g1.
g2.
Other capital investments (convertible securities, subordinated notes and
shareholder loans);
8)
Contribution to the net profit from ordinary operations attributable to shareholders
of the banking corporation;
8a) Loss from impairment that has been recognized during the reporting period in the
statement of profit and loss;
8b) Cancellation of loss from impairment that has been recognized during the
reporting period in the statement of profit and loss; loss statement;
9)
Contribution to net profit from extraordinary operations and accumulated effect of
a change in accounting policy, attributable to shareholders in the banking
corporation;
10) Amount of dividend from a held company registered by the corporation in the
reporting year;
11) Other items which have accrued in equity capital.
12) Guarantees for the company in favour of entities outside of the group;
13) If a held company has issued certificates conferring a right to purchase equity
securities, certificates of liabilities convertible into equity securities or right to
purchase such certificates, or has received amounts on account of equity securities,
certificates or such rights, or has otherwise contracted to issue equipment
securities, then particulars of all these rights should be specified separately with
respect to each held company;
14) Together with the information on investments in investee companies which are
designated for sale, as mentioned in sub-paragraph g., information should also be
included on the accumulated equity profits (and not accrued) in respect of the
investments in the reporting period.
Details in the note should be set out in two lists:
(a) In respect of subsidiary companies when first consolidated following the
investment therein during the reported period:
(1) Aggregate amount of assets;
(2) Goodwill arising on the purchase of subsidiary companies first consolidated;
(3) Excess cost attributable created in purchasing subsidiary companies first
consolidated;
(4) Rights not conferring control in subsidiary companies when first
consolidated.
The above details should be given as of the purchase date. Details should also be
given of the net profit attributable to shareholders of subsidiaries when first
consolidated for the reported period and for the preceding period.
(b) With respect to subsidiary companies removed from consolidation following a sale
of the investment therein during the reported period:
(1) Aggregate amount of the assets as of the date of removal from the
consolidation;
(2) Contribution to net profit attributable to the shareholders of the banking
corporation for the reported period and for the preceding period.
The note should specify the amortized balances of goodwill created during the course of
the purchase of investments in consolidated companies. The details should include cost,
accumulated amortization and the amortized balance.
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h.
i.
The Supervisor is authorized to grant an exemption from the provisions of this paragraph
if, in his opinion, providing such particulars involves particular difficulties or is
undesirable; although he may impose as a condition on the exemption, specifying other
particulars concerning the companies.
For the purpose of this paragraph:
"principal company" - for the purpose of "principal investee companies", means a
company which, in the opinion of the management of the banking corporation, is a
principal company in a group, including a company in which the banking
corporation's investment is less than 1% of the equity capital attributable to the
shareholders of the banking corporation or a company in which the part
attributable to the shareholders of the company exceeds 5% of the net profit (or
loss) from ordinary operations of the banking corporation attributable to the
shareholders of the banking corporation.
"shareholder loans" - means loans, which according to their conditions are subordinated
to other claims and other loans of a capital nature;
"contribution to the net profit" - means the group's share in the net profit after the
effect of tax, of the principal held company (in this definitions paragraph company A), net of the group’s share of the share of company A in the net profit of
any other held company that has been defined as principal for the purpose of this
paragraph (hereinafter: in this definitions paragraph - “company B”).
"investment in shares on an equity basis" - means the group's investment in shares of
company A, on an equity basis (including imputed surplus cost balances and
goodwill and the effect of accumulated losses from impairment), net of the group’s
share in company A’s investment in the shares of every company B.
Notwithstanding the aforesaid, the share of the group in the investment of
company A in company B should not be deducted from the investment in company
A if, as a result of the deduction, the amount of the investment in company A
becomes materially negative. In this case, it should be noted in the statement from
the details of the investment in company A that the share of the group in the
investment of company A in the shares of company B has not been deducted and is
presented in separately separate note, and the reason therefor specified.
"investment in shares at market value" - means the group's share in the market value
of company A which is traded on an active market, net of the group’s share in
company A’s share of the market value of each company B which is traded on an
active market.
For this purpose it is clarified that:
(1) Amounts deducted as above should be included in the reporting framework of each
company B.
(2) Where relevant, disclosure will be provided that:
(a) Investment in the shares at equity value and the contribution to the net profit
of company A have been presented net of the share of the group in
investments of company A in the shares of each company B, and in the share
of company A in the net profit of each company B, respectively.
(b) Investment in shares according to market value of company A has been
presented net of the share of the group in the share of company A in the
market value of each company B which is traded on an active market, and
includes the value of each company B which is not traded
on662-15
an active
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market.
Supervisor of Banks: Public Reporting Directives [13](11/11)
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Page 662-15
33.
Buildings and Equipment
a.
This item will include the banking corporation's investment in buildings and equipment
(including payments on account) in respect of which the banking corporation is the
registered owner thereof or the proprietor of the rights therein (by way of tenancy or
lease) or in which another person acting as trustee or as agent of the banking corporation
is the registered owner or proprietor of such rights, in accordance with the principles
stipulated in International Accounting Standard "Fixed Assets" (hereinafter - "IAS 16"),
a1.
Notwithstanding the aforesaid, in paragraph a. above, when implementing IAS 16, the
following will apply:
1.
The standard will not apply to foreclosed assets, according to their definition in the
Public Reporting Directives;
2.
A banking corporation will not be able to choose the "revaluation model", set forth
in paragraph 29, 31-42 of IAS 16;
3.
In place of the definition of fair value included in paragraph 6 of IAS 16, the
definition of fair value included in the Public Reporting Directives and general
accepted accounting principles in Israel should be used.
4.
Instead of the references detailed below, which are included in IAS 16, reference
should be made to the Public Reporting Directives and generally accepted
accounting principles in Israel.
1)
Reference to International Accounting Standard 19, included in
paragraph 17(a);
2)
Reference to International Accounting Standard 37 included in
paragraph 18;
3)
Reference to International Accounting Standard 18 included in
paragraph 72.
a2.
Notwithstanding the aforesaid in paragraph 2.(b) in Interpretation 1 of the IFRS
Interpretations Committee (IFRIC 1) – "Changes in Existing Decommissioning,
Restoration and Similar Liabilities", a banking corporation should measure changes in
liabilities in respect of costs of decommissioning and evacuating an item and restoring
the site on which the item was located in accordance with paragraph 47 of the Public
Reporting Directives regarding "Contingent Liabilities and Special Commitments" and
U.S. generally accepted accounting principles
b.
In addition to the aforementioned in paragraph a. above, this paragraph includes:
(1) Equipment that the banking corporation leased under a financing lease in
accordance with the criteria stipulated in paragraph 18;
(2) Software costs recognized as an intangible asset, in accordance with the principles
set for in paragraph 34.
Next page 662-15.1
Supervisor of Banks: Public Reporting Directives [1](4/11)
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Page 662-15.1
(3)
Investment property in accordance with principles stipulated in International
Accounting Standard 40 regarding "Investment Property"(hereinafter - "IAS 40").
On implementing Standard 40, the following will apply:
a.
Instead of the definition of fair value included in paragraph 5 of IAS 40, the
definition of fair value included in the Public Reporting Directives and
accounting principles generally accepted in Israel should be used
b.
The banking corporation should not choose the "fair value model" outlined
in paragraphs 32A, 33-55 in IAS 40
c.
Instead of the references detailed below, reference should be made to the
Public Reporting Directives and generally accepted accounting principles in
Israel.
1)
Reference to International Accounting Standard 37, included in
paragraph 52;
2)
Reference to International Accounting Standard 18 included in
paragraph 67;
3)
Reference to International Accounting Standard 18 included in
paragraph 70
4)
Reference to International Accounting Standard 37 included in
paragraph 71.
d.
IAS 40 will not apply to foreclosed assets according to their definition in the
Public Reporting Directives.
c.
Buildings and equipment are to be classified and detailed in the following groups:
(1) Buildings and land (including: installations and leasehold improvements);
(2) Equipment, furniture and vehicles;
(3) Software costs;
(4) Investment property (if material);
(5) Other equipment whose balance exceeds 5% of the balance of building and
equipment;
(6) The aggregate.
d.
This note will provide separate information on assets that are due for sale, and assets that
are not used by the banking corporation, itemizing losses and the cancellation of losses
from impairment that has been recognized during the reporting period in the statement of
profit and loss.
Where the loss or cancellation of loss from the impairment of buildings and equipment
was recognized during the reporting period in the statement of profit and loss in item
paragraph other than depreciation and amortization, disclosure of the item in which the
loss or cancellation of that loss has been included should be provided.
Next page 662-15.2
Supervisor of Banks: Public Reporting Directives [1](4/11)
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Page 662-15.2
d1.
In any case where a banking corporation, from significant considerations of the amounts,
has chosen not to include separate disclosure in Note 7 in accordance with paragraph e.
below with regard to investment property, disclosure should be provided at least of the
balance sheet balance of "investment property" which is included in the balance sheet
balance of buildings and equipment which is not in use by the banking corporation or the
group.
e.
Buildings and equipment will be specified in the groups set out in sub-paragraph c. and,
with respect to each group, the following details shall be shown:
(1) The cost of assets at the beginning of the reported year, the cost of assets added
during the reported year, the cost of assets removed in the reported year, other
changes in the cost of the buildings and equipment (giving details, if material) and
the cost of assets as of the balance sheet date;
(2) Accumulated depreciation (including losses that have accrued from impairment) at
the beginning of the reported year, depreciation in the reported year (excluding
losses and the cancellation of losses from impairment that has been recognized in
the reported year, losses from impairment cancelled in the reported year,
accumulated depreciation deducted in respect of assets subtracted in the reported
year and accumulated depreciation as of the balance sheet date;
(3) The depreciated balance of each group.
f.
There is no obligation to specify comparative data for the previous reported year in
relation to amounts specified in sub-paragraph 33e. (1) and (2).
g.
The measurement bases used to determine the gross book value, the depreciation rates on
an average basis as at the reporting date should be noted and, if the depreciation method
is not "the straight line method", the length of the use of life of the asset should also be
noted.
The average depreciation rate will be calculated taking into account each rate of
depreciation by the ratio which the balance of cost (before accumulated depreciation) to
which it relates, bears to the balance of the cost (before accumulated depreciation) of all
the depreciable assets. The calculation should exclude assets which, on the reporting
date, have been fully depreciated.
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Supervisor of Banks: Public Reporting Directives [1](4/11)
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Page 662-16
h.
i.
j.
34.
Where the buildings and assets include rights in land, the following provisions shall
apply:
(1) These rights shall be specified distinguishing between ownership and leasehold
rights;
(2) Leasehold rights will be specified specifying the balance of the lease term and
distinguishing between a capitalized and uncapitalized lease;
(3) Where rights in land in Israel have not been registered in the name of the
corporation or its subsidiary in the Land Registry, the reason for the lack of
registration is to be specified;
(4) Where rights in land outside of Israel have not been registered in the name of
corporation or its subsidiary in a registry maintained according to the law of the
foreign country, the reason for the lack of registration is to be specified;
(5) Rights in land will also include rights in land held through a held company where
the holding of such rights is its sole business; where the corporations holds 50% or
less of the voting rights in such company, the corporation's share in that company
will not be included in "rights in land" unless the share in the rights in land is
available to the corporation as if it held the same directly.
(6) The amounts of the costs or expenses attributed to the value of the rights in the
land are to be specified if so made; there is no obligation to specify the amounts of
the costs or the expenses attributed prior to 25 Teveth 5752 (1 January 1992) (see
also paragraph 73A. - Deferral of expenses and capitalization thereof).
The note shall specify that a loss from the realization of buildings and equipment due for
sale in excess of the provisions made in respect thereof is not anticipated.
The note shall specify separately assets which are not used by the banking corporation
and the group.
Other Assets and Goodwill
a.
A banking corporation shall implement International Accounting Standard 38 "Intangible
Assets" (hereinafter - "IAS 38"). In applying IAS 38, the following provisions will apply:
(1) Banking corporations will amortize intangible assets, which are not software cost
for own use and are not servicing assets, in accordance with the regulations
stipulated in Chapter 10B of the Bank Accounting Advisory Series. A banking
corporation which considers that it is appropriate to amortize an intangible asset as
aforesaid as for a period exceeding 10 years, or that it is appropriate to define an
intangible asset as aforesaid as an asset with a defined lifespan, shall apply to the
financial reporting unit manager in the Banking Supervision department to obtain a
pre-ruling.
(2) Banking corporations should implement the other positions of the OCC regarding
intangible assets, except for the responses to questions 1 and 3 in Chapter 10B, as
long as they do contradict the International Financial Reporting Standards.
(3) Notwithstanding the aforesaid in clause 72 to IAS 38, a banking corporation
should not choose the revaluation model as its accounting policy.
(4) Software costs for own use –
In applying IAS 38 to software costs, a banking corporation should:
Next page 662-16.1
Supervisor of Banks: Public Reporting Directives [1](4/11)
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Page 662-16.1
(a)
b.
35.
implement the rules outlined in SOP 98-1 "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" (hereinafter "the SOP") on the matter of amortization of software costs for self-use
(clauses 36-38) and in any other matter explicitly noted in the Public
Reporting Directives.
(b) If there a lack of clarity in the provisions stipulated in IAS 38, it should
apply the provisions of the SOP, as long as they do not contradict the
provisions stipulated in IAS 38.
(5) The measurement rules of IAS 38 do not apply to servicing assets, according to
their definition in paragraph 21 of the Public Reporting Directives. A banking
corporation should measure servicing assets in accordance with paragraph 21 of
the Public Reporting Directives.
(6) In place of the references outlined below in IAS 38, the reference to the Public
Reporting Directives and generally accepted accounting principles in Israel will
apply.
(a) Reference to International Financial Reporting Standard 6, Exploration for
and Evaluation of Mineral Resources, included in paragraph 2(c).
(b) Reference to International Financial Reporting Standard 4, Insurance
Contracts, included in paragraph 3(g).
(c) Reference to International Accounting Standard 18, Revenue, in paragraphs
114 and 116
(d) Reference to International Accounting Standard 39, Financial Instruments:
Recognition and, Measurement, in paragraph 2(b) and 3(e)
(7) In place of the definition of an active market included in paragraphs 8 of IAS 38,
an active market according to its meaning in paragraph 19.24 to the Public
Reporting Directives (page 661.20.10) should be used.
(8) In place of the definition of fair value included in paragraphs 8 and 40 of IAS 38,
the definition of fair value in paragraph 19.5 to the Public Reporting Directives
(page 661.20.2) should be used.
This paragraph will include intangible assets according their meaning in IAS 38, except
software costs for internal use, which will be presented within "buildings and
equipment". In addition, the consolidated balance sheet is to include goodwill created in
respect of successive purchases of non-controlling interests. (In an unconsolidated
balance sheet, goodwill as aforesaid should be included within "investments in investee
companies").
Other Assets
a.
The Note to this item shall include and specify, inter alia:
(1) Deferred taxes receivable, which are to be presented after offsetting the reserve for
deferred taxes, incorporating a reference to Note 27. Where the reserve for
deferred taxes exceeds the deferred taxes receivable, the net balance is to be
included in the item "other liabilities".
This provision relates to a consolidated statement for the financial statement of
each corporation separately;
Next page 662-17
Supervisor of Banks: Public Reporting Directives [1](4/11)
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Page 662-17
(2)
b.
c.
The amounts by which the funds for severance pay, retirement compensation,
pensions and vacation exceed the appropriate reserves, which are to be presented
incorporating a reference to Note 15. Where the reserves exceed the funds, the
amounts are to be included in the item entitled "other liabilities". This provision, in
the consolidated statement, relates to the financial statement of each corporation
separately;
(3) Cancelled.
(4) Assets received in respect of credits discharged – long-lived assets seized which
are being held for sale – see paragraph 30B.
(5) The balance of the expenses for amortization according to the following details:
(a) The balance of the expenses for amortization in respect of a debentures issue
(for this purpose, including also subordinated notes) and the raising of longterm deposits;
(b) Other expenses for amortization;
(6) For those years where no final tax assessments have been issued, the amount by
which the advance payments paid to the income tax authorities exceed the current
reserve for income tax. If the current reserve exceeds the advance payments paid,
the net balance should be shown in "other liabilities". The provisions of this subparagraph relate to the consolidated statement of a financial statement of each
corporation separately;
(7) Other receivables and debit balances should be included, inter alia:
(a) Receivables in respect of income not yet received, apart from interest and
linkage differentials which, according to paragraph 10, are to be added to
the appropriate item in the balance sheet;
(b) Prepaid expenses;
(c) Gold, namely, gold coins, gold bullion and certificates conferring a right to
coins or bullion, provided it is held for the banking corporation itself
(nostro); the gold is to be included at market value as of the balance sheet
date.
(d) Amounts in suspense;
(e) Where the aggregate of the sub-item "receivables and balances" is material,
the material elements of this item are to be specified in the note.
The note should specify the method and rate of amortization of deferred expenses and the
circumstances of their occurrence.
Disclosure shall be provided with respect to the amount of the losses from impairment
and the amount of the cancellations of losses from impairment that have been recognized
during the reporting period in the statement of profit and loss, itemizing the relevant
assets and the items in the statement of profit and loss in which these amounts have been
recognized.
Next page 663-1