Banking (prudential standard) determination No. 4 of 2007 - Prudential Standard APS 111 - Capital Adequacy: Measurement of Capital
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Investments
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Investments in another entity at Level 1 and Level 2 include equity exposures (as defined in paragraphs 47 to 50 of APS 113) and, in the case of an APRA-regulated institution or an overseas equivalent, holdings of debt instruments issued by the entity that qualify as regulatory capital. Investments include holdings of units in a trust.
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For the purposes of this Prudential Standard, the amount of equity exposures (as defined in paragraphs 47 to 50 of APS 113) and any other capital investments, including any excess equity holdings in non-subsidiary entities, that must be deducted from capital is the book value of the equity exposure or other capital investment, including any amount by which they have been revalued. Any intangible component of equity exposures or other capital investments must be deducted from Tier 1 capital. In the case of investments in a subsidiary, this would be calculated as the excess of the book value over the net tangible assets of the subsidiary.
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Where the amount of equity exposures (as defined in paragraphs 47 to 50 of APS 113) and any other capital investments, including any excess equity exposures in non-subsidiary entities, held by an ADI is revalued, and the ADI is permitted to include in its capital only the discounted portion of the increase in value of the equity exposures and other capital investments, the ADI need only deduct from its capital the value of equity exposures and other capital investments included in its risk assets incorporating the discounted portion of any revaluation included in the ADI’s capital.
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Where any investments in non-consolidated subsidiaries, including minority interests, (refer to Attachment B of APS 110) have been incorporated for accounting purposes into the ADI’s consolidated group accounts, the consolidation of these entities must be reversed prior to the calculation of risk-based capital ratios at Level 2; that is, any retained earnings, other reserves or minority interests of these entities included in, and any other items impacting on Level 2 Tier 1 capital as a result of the accounting consolidation must be removed from Level 2 Tier 1 capital for capital adequacy purposes. Goodwill and any other intangible component of the investments in non-consolidated subsidiaries must be deducted from the ADI’s Tier 1 capital at Level 2.