EBA · 2015_2544 Final Q&A

Deduction from own funds of items entered as assets that are not yet included within equity

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
26, para. 2
Topic
Own funds
Submitted by
Consultancy firm
Submitted
2015-12-23
Answered
2017-10-06
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

If an institution enters an asset (e.g. at Equity valuation of a holding in a Financial Sector Entity (FSE) or increasing the amount of a deferred tax asset) through the profit and loss statement (P&L), the corresponding profit is not eligible for own funds before it is audited and officially approved (or in case of interim or year-end profits before it is audited and recognition is approved by the competent authority). However, the deduction amount (e.g. holdings in FSE or DTAs) has formally increased and would lead to an immediate higher deduction amount. If this was the case, it would represent the deduction of gains that are not yet recognized in the own funds of the institution.

Background

In case an institution registers the increase of 10 of an asset which represents a deduction item from own funds in year x0 on its balance sheet and - in line with accounting rules - this increase of in value of 10 is booked through P&L increasing the institutions profit by 10, the deduction of the increased amount in x0 of +10 would represent a deduction of a value that is not yet reflected in the equity of the institution in x0 as the profit in x0 is 0 (unless the institution has done an audit of interim profit and has received approval for recognition by the competent authority). On the contrary, in case the revaluation of 10 is not booked through P&L but through other comprehensive income (OCI), the OCI eligible to own funds in x0 is 10 (after transitional period) and also the deduction amount has correspondingly increased to 10.

Answer

Deduction items have to be taken into account immediately as they arise. For the inclusion of the corresponding amount of profit a formal decision confirming the final profit or loss for the year or the permission according to Article 26(2) CRR is needed. This does not represent an unintended double deduction but reflects the differentiated treatment of deduction amounts and profits by the CRR.

Original source: European Banking Authority, Q&A ID 2015_2544

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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