Part Instruction Guide - Financial Sector (Collection of Data) determination No. 65 of 2005 - Reporting Standard ARS 110.0 (2005) - Capital Adequacy - Instruction Guide | Zoe
Financial Sector (Collection of Data) determination No. 65 of 2005 - Reporting Standard ARS 110.0 (2005) - Capital Adequacy
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Turn the raw legal text into a practical explanation grounded in Financial Sector (Collection of Data) determination No. 65 of 2005 - Reporting Standard ARS 110.0 (2005) - Capital Adequacy.
The Capital Adequacy form sets out the means of calculating an ADI’s capital ratios at the stand-alone and consolidated banking group level. In completing this form, reference should be made to Prudential Standard APS 110 Capital Adequacy and Prudential Standard APS 111 Capital Adequacy: Measurement of Capital and their accompanying Guidance Notes.
General directions and notes
Reporting entity
The Capital Adequacy form is to be completed by all locally incorporated ADIs (including Specialist Credit Card Institutions (SCCIs)) on both a Licensed ADI and Consolidated ADI Group basis (where applicable). Foreign ADIs[1] and SCCIs operating through branches in Australia are not required to complete this form.
Licensed ADI
This refers to the operations of the reporting ADI at Level 1 (i.e. the stand-alone level) defined in accordance with Prudential Standard APS 110 Capital Adequacy.
Consolidated ADI group
This refers to the consolidated group of the reporting ADI at Level 2 (i.e. the consolidated banking group level) defined in accordance with Prudential Standard APS 110 Capital Adequacy.
The basis of consolidation required in this form is in accordance with the prudential Consolidated ADI Group. The prudential consolidated group should also be determined in accordance with Australian accounting standards, notably AASB 1024 ‘Consolidated Accounts’ with the following modifications:
(1) Include the following:
all controlled banking entities, securities entities and other financial entities (e.g. finance companies, money market corporations, stockbrokers and leasing companies).
(2) Exclude subsidiary entities involved in the following business activities:
insurance businesses (including friendly societies and health funds);
acting as manager, responsible entity, approved trustee, trustee or similar role in relation to funds management or the securitisation of assets; and
non-financial (commercial) operations.
Note: ADIs should consult APRA in case of doubt as to whether a subsidiary or controlled entity that engaged in non-financial operations should be consolidated at Level 2 for capital adequacy purposes.
Reporting period
The form is to be completed as at the last day of the stated reporting quarter. Locally incorporated banks and Special Service Providers should submit the completed form to APRA within 20 business days after the end of the relevant reporting quarter. Credit Unions, Cairns Penny Savings & Loans Limited, Building Societies and Specialist Credit Card Institutions (SCCIs) should submit the completed form to APRA within 15 business days after the end of the relevant reporting quarter.
Unit of measurement
Banks are asked to complete the form in millions of Australian dollars rounded to one decimal place. Special Service Providers, Building Societies, Credit Unions, SCCIs and Cairns Penny Savings & Loans Limited are asked to complete the form in whole Australian dollars (no decimal place).
Amounts denominated in foreign currency are to be converted to AUD in accordance with AASB 1012 ‘Foreign Currency Translation’.
The general requirements of AASB 1012 for translation are:
Foreign currency monetary items outstanding at the reporting date must be translated at the spot rate at the reporting date.
Other items outstanding at the reporting date must not be retranslated subsequent to initial recognition of the transaction.
Monetary items are defined to mean money held and assets and liabilities that are to be received or paid in fixed or determinable amounts of money.
Monetary items arising under foreign currency derivative contracts at the reporting date must be translated as follows:
Where the exchange rate is fixed in the contract, at that fixed exchange rate; and
Where the exchange rate varies, at the spot rate at the reporting date.
Specific instructions
The following instructions are applicable to both the Capital Adequacy (Licensed ADI) form and the Capital Adequacy (Consolidated Group) form (where relevant).
Section A: Capital base
For capital instruments issued at a discount or in a partly paid form, only the net proceeds of such an issue are counted as capital.
Tier 1 capital
Capital profits reserve
Include realised gains on the disposal of revalued assets that have not been transferred from the Asset Revaluation Reserve to Retained Earnings.
Foreign currency translation reserve
Include the exchange rate differences arising on translation of assets and liabilities in accordance with AASB 1012.
Current year’s earnings net of expected dividends and tax expenses
Report current year’s profits (or losses) net of estimated tax obligations and dividend payments (after adjustment for any dividend reinvestment plan) at Level 1/Level 2 (as appropriate).
Minority interests in Tier 1 capital of subsidiaries
Include any minority interests in Tier 1 capital of subsidiaries on consolidation at Level 2.
Non-cumulative irredeemable preference shares
To be eligible for inclusion in Tier 1 capital at Level 1/Level 2 (as appropriate), these shares must satisfy the criteria set out in Guidance Note AGN 111.1 Tier 1 Capital.
Innovative Tier 1 capital instruments approved by APRA
Include capital instruments (other than ordinary shares and non-cumulative irredeemable preference shares) that APRA has agreed to count as part of Tier 1 capital at Level 1/Level 2 (as appropriate).
Note: A capital instrument is not eligible for inclusion in Tier 1 capital (before deductions), whether at Level 1 or Level 2, to the extent that its inclusion will result in the aggregate amount of non-cumulative irredeemable preference shares and innovative Tier 1 capital instruments exceeding 25% of the sum of all the other Tier 1 capital components. Any excess amounts ineligible for inclusion as Tier 1 capital as a result of this limit are to be included in Upper Tier 2 capital.
Deductions from Tier 1 capital
Goodwill
Deduct goodwill paid on equity investments in subsidiaries on consolidation at Level 2. Goodwill (determined in accordance with AASB 1013 ‘Accounting for Goodwill’) represents the excess of the cost of acquisition over the fair value of the net tangible assets of the acquired entity at the time of acquisition.
Intangible component of investments in subsidiaries and other entities
Deduct the intangible component of investments (e.g. purchased goodwill) in subsidiaries and other entities at Level 1 (see paragraph 2 in Guidance Note AGN 111.4 Capital Deductions).
Intangible component of investments in non-consolidated subsidiaries and other non-Level 2 entities
Deduct the intangible component of investments (e.g. purchased goodwill) in non-consolidated subsidiaries (see Guidance Note AGN 110.2 Non-consolidated Subsidiaries) and other entities that do not form part of the consolidated banking group at Level 2 (see paragraphs 2 and 3 in Guidance Note AGN 111.4 Capital Deductions).
Other intangible assets
Deduct all other intangible assets at Level 1/Level 2 (as appropriate). Exclude hardware and software costs.
Refer paragraph 5 Guidance Note AGN 111.4 Capital Deductions effective 1 July 2004 for required treatment of specific items below:
Detail separately:
Loan and lease origination fees and commissions paid to mortgage originators and brokers;
Securitisation establishment costs;
Costs associated with debt raisings/fundings; and
Other capitalised expenses of a general nature e.g. strategic business development initiatives.
Other intangible assets:
Show other intangible assets not reported above e.g. brand names, contractual rights not Goodwill, hardware and software costs.
Future income tax benefits
The amount of future income tax benefits (other than those associated with general provisions for doubtful debts) to be deducted from Tier 1 capital at Level 1 and Level 2 should be net of any provision for deferred income tax liabilities. Where the provision for deferred income tax liabilities exceeds the amount of future income tax benefits, the excess cannot be added to Tier 1 capital (i.e. the net deduction is zero).
Holdings of own Tier 1 capital instruments and any unused trading limit agreed with APRA
See paragraph 4 in Guidance Note AGN 111.4 Capital Deductions.
Equity and other capital investments in associated lenders mortgage insurers (Level 1)
Equity and other capital investments in non-consolidated captive lenders mortgage insurers (Level 2)
Deduct all equity and other capital investments in captive lenders mortgage insurers at Level 1/Level 2 (as appropriate). (These entities are not consolidated for capital adequacy purposes – see Guidance Note AGN 110.2 Non-consolidated Subsidiaries). Other capital investments include debt capital instruments held and provision of any credit support of a capital nature (e.g. provision of a first loss guarantee).
Equity investments in non-subsidiary entities exceeding prescribed limits
Deduct all equity investments in non-subsidiary entities at Level 1/Level 2 (as appropriate) that are not operating in the field of finance in excess of 0.25% of the ADI’s Level 2 Tier 1 capital for an individual investment or 5% of the ADI’s Level 2 Tier 1 capital in aggregate.
Eligible Tier 1 capital
Sum all the Tier 1 capital components less all specified deductions from Tier 1 capital. Eligible Tier 1 capital must constitute at least 50% of the ADI’s capital base, both at Level 1 and Level 2 (except in the formative years of mutually owned ADIs as approved by APRA).
Tier 2 capital
2.1 Upper Tier 2 capital
Asset revaluation reserves
To be eligible for inclusion in Upper Tier 2 capital at Level 1 and Level 2, reserves arising from the revaluation of premises and securities must satisfy the conditions set out in Guidance Note AGN 111.2 Tier 2 Capital.
General provisions for doubtful debts
The amount of general provisions for doubtful debts to be included in Upper Tier 2 capital at Level 1 and Level 2 should be net of any associated future income tax benefits on a gross basis, and is limited to a maximum of 1.25% of total risk-weighted exposures (see Guidance Note AGN 110.4 Risk-based Capital Adequacy Framework for definition).
The amount of provisions included must be created against future, presently unidentified losses and must be freely available to meet any losses that may subsequently materialise. Any general provisions created against specific or identified losses and against identified deterioration in the value of particular assets, whether individual or grouped, foreign or domestic, are not eligible for inclusion in Upper Tier 2 capital.
Cumulative irredeemable preference shares
Mandatory convertible notes and similar capital instruments
Perpetual subordinated debt
These are hybrid capital instruments, which combine certain characteristics of equity capital and debt. To be eligible as Upper Tier 2 capital at Level 1 and Level 2, these instruments must satisfy the criteria set out in Guidance Note AGN 111.2 Tier 2 Capital.
Deductions from Upper Tier 2 capital
Holdings of own Upper Tier 2 capital instruments and any unused trading limit agreed with APRA
See paragraph 4 in Guidance Note AGN 111.4 Capital Deductions.
Eligible Upper Tier 2 capital
Sum all the Upper Tier 2 capital components less any deductions from Upper Tier 2 capital.
2.2 Lower Tier 2 capital
Term subordinated debt
Limited life redeemable preference shares
Other Lower Tier 2 capital instruments approved by APRA
To be eligible as Lower Tier 2 capital at Level 1 and Level 2, these instruments must satisfy the criteria set out in Guidance Note AGN 111.2 Tier 2 Capital.
The amount of an instrument eligible for inclusion in Lower Tier 2 capital at Level 1 and Level 2 is to be amortised on a straight line basis at a rate of 20% per annum over the last 4 years to maturity as follows:
Years to Maturity
Amount eligible for inclusion in Lower Tier 2 capital
More than 4
100%
Less than and including 4 but more than 3
80%
Less than and including 3 but more than 2
60%
Less than and including 2 but more than 1
40%
Less than and including 1
20%
Deductions from Lower Tier 2 capital
Holdings of own Lower Tier 2 capital instruments and any unused trading limit agreed with APRA
See paragraph 4 in Guidance Note AGN 111.4 Capital Deductions.
Eligible Lower Tier 2 capital
Sum all the Lower Tier 2 capital components (net of amortisation) less any deductions from Lower Tier 2 capital. Eligible Lower Tier 2 capital at Level 1 and Level 2 is limited to a maximum of 50% of the ADI’s eligible Tier 1 capital at the respective level (except in the formative years of mutually owned ADIs as approved by APRA).
Eligible Tier 2 capital
This is the sum of eligible Upper and Lower Tier 2 capital at Level 1 and Level 2 as appropriate. Eligible Tier 2 capital at Level 1 and Level 2 is limited to a maximum of 100% of the ADI’s eligible Tier 1 capital at the respective level (except in the formative years of mutually owned ADIs as approved by APRA).
Total capital
This is the sum of eligible Tier 1 and Tier 2 capital at Level 1 and Level 2 as appropriate.
3.1 Deductions from total capital
Equity and other capital investments in other ADIs and equivalent overseas deposit-taking institutions (and their subsidiaries)
Deduct equity and other capital investments in other ADIs or equivalent overseas deposit-taking institutions (and their subsidiaries) at Level 1 and Level 2 as appropriate, except where:
a) that other ADI or equivalent overseas deposit-taking institution is wholly owned or effectively controlled (whether directly or indirectly) by the reporting ADI, and has been consolidated with the reporting ADI at Level 2 for capital adequacy purposes; or
b) that other ADI’s or equivalent overseas deposit-taking institution’s capital instruments are held for trading purposes in which case they are to be included in the reporting ADI’s total risk-weighted exposures at Level 1 and Level 2 as appropriate in accordance with Prudential Standard APS 113 Capital Adequacy: Market Risk.
Other capital investments include debt capital instruments held and provision of any credit support of a capital nature (e.g. provision of a first loss guarantee).
Equity and other capital investments in authorised non-operating holding companies of ADIs
Deduct equity and other capital investments in authorised non-operating holding companies of ADIs at Level 1/Level 2 (as appropriate), unless these are held for trading purposes in which case they are to be included in the ADI’s total risk-weighted exposures at the respective level in accordance with Prudential Standard APS 113 Capital Adequacy: Market Risk.
Other capital investments include debt capital instruments held and provision of any credit support of a capital nature (e.g. provision of a first loss guarantee).
Equity and other capital investments in non-consolidated subsidiaries and controlled entities
Deduct equity and other capital investments in non-consolidated subsidiaries or controlled entities (other than captive lenders mortgage insurers) after any intangible component of the investment is deducted from Tier 1 capital at Level 2 (see Guidance Note AGN 110.2 Non-consolidated Subsidiaries and paragraphs 2 and 3 in Guidance Note AGN 111.4 Capital Deductions).
Other capital investments include debt capital instruments held and provision of any credit support of a capital nature (e.g. provision of a first loss guarantee).
Credit support of a capital nature provided to other entities (Level 1)
Credit support of a capital nature provided to other non-Level 2 entities (Level 2)
Deduct any credit support of a capital nature provided to other entities at Level 1 or to other entities that do not form part of the consolidated banking group at Level 2 as appropriate, such as provision of a first loss guarantee, including any undertakings by the ADI to absorb designated first level of losses on claims supported by it (first loss facilities associated with funds management and the securitisation of assets should be deducted in accordance with the requirements set out in Prudential Standard APS 120 Funds Management & Securitisation).
Non-repayable loans advanced by the ADI under APRA’s certified industry support arrangements
Deduct any non-repayable loans advanced by the reporting ADI to another ADI under APRA’s certified industry support arrangements at both Level 1 and Level 2.
Total capital deductions
Sum all deductions from total capital at Level 1 and Level 2 as appropriate.
Capital base
This is equal to total capital less total capital deductions at Level 1 and Level 2 as appropriate.
Memo item
5.1. Total general provisions for doubtful debts
Report the total amount of general provisions for doubtful debts net of any associated future income tax benefits on a gross basis. General provisions should be reported irrespective of whether they are included in the capital base.
Note: The total general provisions for doubtful debts reported in the memo item should not be limited to 1.25 per cent of total risk-weighted exposures.
The amount of provisions included must be created against future, presently unidentified losses and must be freely available to meet any losses that may subsequently materialise. Any general provisions created against specific or identified losses and against identified deterioration in the value of particular assets, whether individual or grouped, foreign or domestic, should not be recorded.
Section B: Risk profile
This section allocates balance sheet amounts and the credit equivalent amounts of off-balance sheet business at Level 1 and Level 2 as appropriate to individual credit risk weight categories.
Column 1.1. classifies the gross amounts of balance sheet assets (i.e. the principal amounts of on-balance sheet assets after adjustment for any accrued interest, revaluations, depreciation and specific provisions as appropriate) into risk weight categories, based on the nature of counterparty or the underlying collateral or guarantor where the balance sheet assets are secured against eligible collateral or guarantee recognised by APRA (see Guidance Note AGN 112.1 Risk-Weighted On-Balance Sheet Credit Exposures).
Column 1.2. equals the reported figure in Column 1 multiplied by the applicable Risk Weight.
Column 2.1. classifies the credit equivalent amounts (CEAs) of off-balance sheet business (including both market and non-market related transactions) into risk weight categories, based on the nature of the counterparty or the underlying collateral or guarantor where the CEAs of the off-balance sheet business are secured against eligible collateral or guarantee recognised by APRA (see Guidance Note AGN 112.1 Risk-Weighted Off-Balance Sheet Credit Exposures).
Column 2.2. equals the reported figure in Column 3 multiplied by the applicable risk weight.
For each risk category, Column 3 equals the sum of Column 1.2 and Column 2.2.
1.5. Total credit risk is the sum of the assessed credit risk exposures (both on- and off-balance sheet).
Market risk charge (for both specific and general market risk) as reported in ARF 113.0 Market Risk is determined in accordance with Prudential Standard APS 113 Capital Adequacy: Market Risk. For capital adequacy purposes, the reported amount must be adjusted by multiplying it by a constant factor of 12.5 (i.e. the reciprocal of the minimum capital ratio of 8%) to obtain an equivalent risk-weighted exposure. The resulting figure is then added to the total risk-weighted on and off balance sheet credit exposures, to derive the total risk-weighted exposures (i.e. the denominator of the capital ratio).
Other charges as required by APRA should only be reported if agreed to by APRA.
Section C: Risk ratio
Capital adequacy ratio
This is calculated by dividing eligible capital base by total risk-weighted exposures (i.e. the amount of capital base reported in Section A divided by the sum of total credit risk exposures, market risk charge and other charges as required by APRA reported in Section B).
Note on references to Accounting Standards
This Note is about references in these instructions to an accounting standard or accounting standards, e.g. where the instructions say that something must be done in accordance with a particular AASB or international accounting standard, or must be done in accordance with the accounting standards (however described) generally.
Where you see such a reference, you must read it as meaning the version of the accounting standard, or versions of the accounting standards, applying to reporting periods (within the meaning of the accounting standards) beginning immediately before 1 January 2005.
Accordingly, the new AASB standards for 2005 are not to be applied.
Similarly, a reference to principles or conventions (however described) governing an accounting procedure or treatment shall be taken to refer to principles or conventions applicable in relation to reporting periods (within the meaning of the accounting standards) that began immediately before 1 January 2005.