Clarifications concerning balance sheet recognition

Question

Section 5.4.2 in Part II of the Manual provides criteria for classifying the reported instruments pursuant to their balance sheet recognition. However, a single instrument may be split for accounting purposes and reported accordingly in FINREP so that the criteria for reporting “balance sheet recognition” values in AnaCredit seem to differ from those applicable in FINREP. Could you therefore please explain the criteria in more detail?

Answer

As stated in the Manual, the value “entirely recognised” is reported for instruments which are recognised for their total amount in the balance sheet in accordance with the applicable accounting standard (see Section 14.4.23 in Part II of the Manual).

As far as the value “recognised to the extent of the institution’s continuing involvement” is concerned, this value is reported if (a part of) the instrument is recognised in accordance with the applicable accounting standard to the extent of the observed agent’s legal entity’s continuing involvement in accordance with paragraphs 3.2.6(c)(ii) and 3.2.16 of IFRS 9. In particular, this value is only reported when the instrument has been fully or partially transferred and the observed agent neither transfers nor retains substantially all the risks and rewards of ownership of the transferred instrument, and it continues recognising the instrument to the extent of its continuing involvement (i.e. to the extent to which it is exposed to changes in the value of the transferred instrument).

Please note than in FINREP, in accordance with paragraph 3.2.2 of IFRS 9, the instrument is always split into the part that has not been transferred and the part that has been transferred, and the institution’s continuing involvement refers exclusively to the part of the financial asset that has been transferred. Nevertheless, in the context of AnaCredit, where a partially transferred instrument may be reported as a single instrument (i.e. the instrument is reported as a single instrument with two or more creditors and no distinction is made between the transferred part of the instrument and the retained part), the value “recognised to the extent of the institution’s continuing involvement” is also used to identify such partially transferred instruments.

Finally, the value “entirely derecognised” is reported if the instrument is not recognised in the balance sheet in accordance with the applicable accounting standard. Please note that, contrary to amended Implementing Regulation (EU) No 680/2014, in the context of AnaCredit, for practical reasons, the value “entirely derecognised” is also used for instruments that are reported because they are serviced by the observed agent, although the observed agent has never before recognised them (e.g. in the case of fiduciary loans that are not recognised as assets).

Consequently, considering the above clarifications, the principles, as discussed in Section 5.4.2 in Part II of the Manual, which indicate how the data attribute “balance sheet recognition” is reported, have been enhanced as follows:

  • a fully written-off instrument: such an instrument is reported as “entirely derecognised” after the write-off takes place as the instrument is no longer recognised in the balance sheet;
  • a partially written-off instrument: this instrument is still considered as “entirely recognised” until the moment it becomes fully written off;
  • an instrument subject to a full or partial transfer (i.e. where the outstanding nominal amount of the instrument has been transferred) in a traditional securitisation or a transfer other than traditional securitisation: the observed agent which acts as servicer of the instrument, independently if it was the originator, reports the transferred instruments as:
    • “entirely derecognised”, when the originator transfers substantially all the risks and rewards of ownership of the instrument, or when it neither transfers nor retains substantially all the risks and rewards of ownership of the instrument and it has not retained control (in this case, the observed agent is not the creditor) (see paragraphs 3.2.6(a) and 3.2.6(c)(i) of IFRS 9);
    • “entirely recognised”, when the observed agent as originator retains substantially all the risks and rewards of ownership of the instrument (in this case, the observed agent is the creditor) (see paragraph 3.2.6(b) of IFRS 9); or
    • “recognised to the extent of the institution’s continuing involvement”, when the instrument has been fully or partially transferred and the observed agent neither transfers nor retains substantially all the risks and rewards of ownership of the transferred instrument, and it continues recognising the instrument to the extent of its continuing involvement; please note that an observed agent is deemed to have “continuing involvement” not because it continues to service the instrument, but because it bears part of the credit risk of the instrument.

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