Handbook for the preparation of annual accounts of banks under Luxembourg accounting framework

Transcription

1 Handbook for the preparation of annual accounts of banks under Luxembourg accounting framework Applicable to credit institutions ruled by the bank accounting Law of 17 June 1992 as amended. December 2012

2 This publication is exclusively designed for the general information of readers and is (i) not intended to address the specific circumstances of any particular individual or entity and (ii) not necessarily comprehensive, complete, accurate or up to date and hence cannot be relied upon to take business decisions. Consequently, PricewaterhouseCoopers, Société coopérative ( PwC Luxembourg ) does not guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. The reader must be aware that the information to which he/she has access is provided as is without any express or implied guarantee by PwC Luxembourg. PwC Luxembourg cannot be held liable for mistakes, omissions, or for the possible effects, results or outcome obtained further to the use of this publication or for any loss which may arise from reliance on materials contained in it, which is issued for informative purposes only. No reader should act on or refrain from acting on the basis of any matter contained in this publication without considering and, if necessary, taking appropriate advice in respect of his/her own particular circumstances.

3 Content Preface 2 Introduction 3 General provisions related to the content and layout of the annual 5 accounts Conditions for the preparation of consolidated accounts 10 Publication of annual accounts for the year ended 31 December 12 Audited annual accounts 15 Content 17 Directors report 18 Balance sheet as at 31 December 20 Profit and loss account for the year ended 31 December 22 Notes to the accounts as at 31 December 26 Other required disclosures 62 Contacts 65 Handbook for the preparation of annual accounts of banks under Luxembourg accounting framework 1

4 Preface The globalisation of business and finance has inevitably led to calls for a common set of high quality, global accounting standards. In this context, International Financial Reporting Standards (IFRS) have gained significant momentum in Europe, especially since the enforcement of the EU Regulation of 2002, which require listed companies to prepare their consolidated annual accounts using this accounting framework. Since then, the Luxembourg bank accounting law has been subsequently amended to introduce the possibility for Luxembourg credit institutions to use IFRS - in part or as a whole - in order to prepare their annual accounts. The Law of 17 June 1992 relating to the annual and consolidated accounts of Luxembourg credit institutions has undergone substantial changes over the years. Such changes were driven to a large extent by developments in the EU accounting legislation. The Law of 16 March 2006 has fully integrated the International Financial Reporting Standards (IFRS) into Luxembourg Law, thus introducing more flexibility to Luxembourg credit institutions in the preparation of their annual and consolidated accounts. Luxembourg credit institutions can now choose between the current accounting regime (LUX GAAP), the mixed accounting regime with IFRS valuation principles applied to only certain items (i.e. financial instruments, investment properties and provisions) and the full IFRS framework as adopted by the European Union. Moreover, since 2008 the IFRS have underpinned CSSF prudential reporting framework applicable to all Luxembourg credit institutions (FinRep and CoRep). For these reasons, the present bank accounting framework represents a good opportunity for banks to achieve enhanced convergence in their accounting policies throughout the entire financial reporting process. We hope that this handbook will provide useful guidance to both preparers and users of annual accounts published by Luxembourg credit institutions. Fabrice Goffin Partner, Bank Accounting Technical Leader PwC Luxembourg Philippe Sergiel Partner, Banking Audit Leader PwC Luxembourg

5 Introduction The Law of 16 March 2006 incorporating the requirements imposed by EU directives into Luxembourg Law has introduced more flexibility in the accounting framework applicable to credit institutions. Non-listed Luxembourg banks have the option to measure certain captions based on applicable IFRS valuation rules or to apply the IFRS accounting framework as adopted by the European Union. The Law of 16 March 2006 has introduced major changes into the Law of 17 June 1992 ( the Law ) relating to the annual and consolidated accounts published by Luxembourg credit institutions. On the one hand, the Law of 16 March 2006 has transposed into national law the optional regime of the EU IAS regulation, thus extending the scope of IFRS as adopted by the EU to unlisted companies, both for standalone and consolidated accounts. On the other hand, the Law of 16 March 2006 has transposed the Fair Value and Modernisation Directives into Luxembourg Law, and enables, among others, the use of certain provisions of IFRS as adopted by the EU. Beside credit institutions listed on a regulated market, which are required to publish their consolidated accounts, if any, in accordance with IFRS as adopted by the EU pursuant to the mandatory IAS regulation, the Law now permits credit institutions to publish both their annual and consolidated accounts according to one of the following regimes: Historical Luxembourg accounting rules based on the 4 th bis and 7 th bis EU Directives (Luxembourg banking GAAP); Mixed accounting regime using historical accounting rules with some IFRS options to use fair value for certain items; Full application of IFRS as adopted by the European Union. Those options, on which the Commission de Surveillance du Secteur Financier ( CSSF ) has provided additional guidance in CSSF Circular 08/340, are described in this publication. The CSSF has also introduced as from 2008 a new prudential reporting framework based on IFRS (FinRep). Consequently, the existing Recueil des instructions aux banques (the CSSF s instructions for banks, thereafter referred as the CSSF Recueil ), which provides accounting and prudential reporting instructions under the former reporting framework, is no longer applicable for CSSF prudential reporting. However, it is still valid for the preparation of annual accounts under Luxembourg banking GAAP. This handbook includes a summary of the general provisions related to the content and layout of annual and consolidated accounts under the regime introduced by the Law of 16 March 2006 and CSSF Circular 08/340. It also describes the legal publication requirements for credit institutions in Luxembourg. The last part of this handbook includes a set of standard annual accounts designed to apply to the majority of Luxembourg credit institutions, and a list of supplementary disclosures required in certain specific circumstances. Where possible, the standard annual accounts and the list of supplementary disclosures include references to the relevant articles of the amended Law of 17 June 1992, of CSSF Circular 01/32 or of other related texts. The set of standard annual accounts included in this handbook aims to be as realistic and comprehensive as possible. However, it does not cover the full range of possible Handbook for the preparation of annual accounts of banks under Luxembourg accounting framework 3

6 Introduction (cont.) notes to the accounts, and the examples given in this publication should not be considered as universally applicable. It should be noted that the responsibility of drawing up the annual accounts lies with the Board of Directors, and that the form and content of the information in this guide will need to be adapted to meet the requirements of each credit institution. All references to the CSSF Recueil are made to the French version of the Recueil as published on the CSSF website. Finally, please note that the general provisions in this publication do not apply to the full IFRS accounting regime, for which full adherence to all international standards and interpretations is required. For a comprehensive summary of IFRS requirements applying to Luxembourg credit institutions and a comparison with Luxembourg accounting rules, please refer to our publication entitled Similarities and Differences: IFRS and Luxembourg Banking GAAP published in November Discover all our brochures related to IFRS on: 4 PwC Luxembourg

7 General provisions related to the content and layout of the annual accounts Ref. article of Law/Circular Content 2(1) The annual accounts shall comprise the balance sheet (including some off-balance sheet disclosures), the profit and loss account and the notes to the accounts. These documents shall constitute a composite whole. Circ. 08/340 The amendments introduced by the Law of 16 March 2006 enable banks that have elected to use the mixed accounting regime to include other primary statements in their annual accounts, such as a cash flow statement or statement of changes in equity. However, the banks need to obtain approval from the CSSF before including such additional primary statements. Clear layout 2(2) Annual accounts shall be drawn up clearly and in accordance with the Law. 7 bis A standard layout is required both for the balance sheet (art. 7) and for the profit and loss account (art. 41 and 42), 40 unless the Bank has elected to use a format complying with IFRS as adopted by the European Union by applying the mixed or full IFRS accounting regime. In such cases, and provided the Bank has obtained prior CSSF approval, it shall comply with the minimum layout as provided in IAS 1, with a balance sheet presented in order of liquidity. True and fair view 2(3) The annual accounts shall give a true and fair view of the financial position and of the results of the operations of the Bank. 2(4) Where the application of the provisions of the Law is not sufficient to give a true and fair view, additional information must be given. 2(5) Where, in exceptional cases, the application of a provision of the Law is incompatible with the true and fair view, that provision must be departed from and any such departure must be disclosed in the notes to the accounts together with an explanation of the reasons for it and a statement of its effect on the assets, liabilities, financial position and results of the bank. Consistency of presentation 3 The structure of the balance sheet and the profit and loss account, specifically as regards their layout, must be applied consistently from one financial year to another. Departures from this principle shall be permitted in exceptional cases. Any such departures must be disclosed in the notes to the accounts together with the reasons for them. Strict form of presentation 4(1) Unless the Bank has elected to apply the full IFRS accounting regime, in which case it must comply with IFRS as adopted by the EU, the items in the layouts for the balance sheet and the profit and loss account as provided for by articles 7, 41 and 42 of the Law, must appear separately and in the indicated order. A more detailed subdivision of captions is authorised as long as it respects the structure of the framework. New items may be added if their content is not covered by any of the items provided in the standard layout. Handbook for the preparation of annual accounts of banks under Luxembourg accounting framework 5

8 General provisions related to the content and layout of the annual accounts (cont.) Ref. article of Law/Circular 4(2) The balance sheet and profit and loss account sub-items preceded by a lower-case letter may be combined: (a) when they represent a negligible amount with respect to the true and fair view principle; (b) when the regrouping promotes clarity, provided that the combined items are presented in a distinct way in the notes to the accounts. The regroupings described in (a) and (b) may only be done after the Bank has received CSSF approval. An item in the balance sheet or profit and loss account with a zero balance shall be omitted unless a balance was recorded in the preceding year. Substance over form 4(5) The presentation of the amounts recorded on the balance sheet and profit and loss account should refer to the substance of the operation rather than its legal form. Offset 6 Any offsetting between assets and liabilities or between expenses and revenues is prohibited. However, the Law provides for some limited exceptions: Syndicated loans: each credit institution participating in the syndicate shall disclose only that part of the total loan which it has funded itself (art. 9). Presentation of the net profit or loss on financial operations (art. 46). Value adjustments and value re-adjustments in the profit and loss account can be disclosed as a net item (art. 47(3) and 48(2)). Netting reciprocal assets and liabilities of the Bank s various units (branches, agencies) is mandatory when preparing an aggregate situation. In the case where the Bank has opted for the full IFRS accounting regime, it shall adhere to IFRS requirements in terms of offsetting (mainly IAS 1 and IAS 32). Comparative figures 4(3) Each of the balance sheet and profit and loss account items must include the comparative amount from the preceding financial year. Any lack of comparability between the amounts from one financial year to another or, as the case arises, any changes made to the amounts from the preceding year in order to ensure comparability, must be disclosed in the notes to the accounts, together with relevant comments. Valuation rules 4(4) The three below-mentioned options are further described hereafter. Please note that the application of option two or three is however subject to prior CSSF approval. Option 1: historical Luxembourg accounting rules based on the cost convention 51 The valuation of the items in the annual accounts, except derogations duly disclosed and explained in the notes to the accounts, shall be based on the following general principles: (a) the Bank must be presumed to be on a going concern basis for the foreseeable future; (b) the valuation methods shall not be modified from one financial year to another; (c) the prudence principle must be applied at all times, namely: (i) only realised profits at the balance sheet date shall be accounted for in the profit and loss account; 6 PwC Luxembourg

9 Ref. article of Law/Circular (ii) account must be taken of all liabilities arising in the course of the financial year or of a previous one, even if such liabilities become apparent only between the date of the balance sheet and the date on which it is drawn up. In addition, account may be taken of all foreseeable liabilities and potential losses arising in the course of the financial year or of a previous one, even if such liabilities or losses become apparent only between the date of the balance sheet and the date on which it is drawn up; (iii) all depreciations must be taken into account, whether or not the result of the current financial year is a profit or a loss; (d) all charges and income relating to the current financial year must be accounted for, irrespective of the date of their receipt or payment; (e) the components of asset and liability must be valued separately; (f) the opening balance sheet of one financial year must correspond to the closing balance sheet of the previous financial year. 52 The valuation of the items in the annual accounts shall be made in accordance with the provisions of articles 54 to 64 of the Law, based on the principle of acquisition cost or production cost. Option 2: Luxembourg accounting rules with IFRS option to use fair value for certain items 64 bis The general principles described above are applicable to the mixed accounting regime, except for the prudence principle, from which credit institutions may depart to a certain extent by measuring their financial instruments (including derivatives) and investment properties at fair value. 53 Under the mixed regime, Luxembourg credit institutions also have the possibility to use the IFRS valuation rules Circ. 08/340 for their provisions (IAS 37) and for their defined-benefit pension obligations (IAS 19). However, the fair value model may not be applied to tangible or intangible assets; this restriction will remain in force until a Grand-Ducal regulation authorising such practice has not been issued. Application of the fair value option to financial instruments 64 bis, 64 ter, The bank has the possibility to carry all or part of its financial instruments at fair value in accordance with current 64 quater IAS 39 valuation rules applicable to available-for-sale financial assets or financial assets and liabilities at fair value Circ. 08/340 through profit or loss. The IAS 39 hedge accounting rules applicable to hedged items and hedging instruments, which are part of a fair value hedge or cash flow hedge relationship, can also be applied. The Bank shall however define a clear and coherent approach in the application of valuation rules, which shall comply with the principle of consistency. Application of the fair value option to investment properties 64 quinquies The bank has the option to remeasure its investment properties at fair value through profit or loss. Investment properties are real estate assets (land and buildings) held for the purpose of earning rentals or for capital appreciation rather than for own use. Option 3: IFRS as adopted by the European Union 76 bis The Bank has the option of preparing its annual accounts according to IFRS as adopted by the European Union and could accordingly depart from Chapter II of the Law of 16 March Consequently, it is not subject to the Law, except for the following requirements: The presentation of a Directors report in accordance with the Law is mandatory (see below); Obligation to include a report of the Réviseur d entreprises agréé ; Obligation to publish the accounts in accordance with the Law and CSSF requirements (see below); The following disclosures must also be presented in the notes to the annual accounts as they are not specifically addressed by IFRS: - Average number of staff members; - Remuneration, pension commitments, loans and advances granted to members of the administrative, management or supervisory bodies; - Overview of the group composition; - Details of fees paid to the Réviseur d entreprises agréé. Handbook for the preparation of annual accounts of banks under Luxembourg accounting framework 7

10 General provisions related to the content and layout of the annual accounts (cont.) Ref. article of Law/Circular However, those credit institutions that fall under the scope of the EU Regulation are still subject to the following requirements of the Law: Presentation of a consolidated Directors report in accordance with the Law; Obligation to include the report of the Réviseur d entreprises agréé ; Obligation to publish the consolidated accounts in accordance with the Law and CSSF requirements (see below); In addition, the following disclosures should be presented in the notes to the consolidated accounts as they are not specifically addressed by IFRS: - Number of staff members; - Remuneration, pension commitments, loans and advances granted to members of the administrative, management or supervisory bodies; - Overview of the group composition; - Fees of the Réviseur d entreprises agréé. Regarding sub-group consolidation, it should be noted that since the endorsement of the Transparency Directive into Luxembourg Law, credit institutions whose shares or bonds are listed on a regulated market can no longer benefit from the exemption to not consolidate. In other words, a Luxembourg parent credit institution whose shares or bonds are listed on a regulated market must prepare consolidated accounts in accordance with the EU IFRS Regulation, even if the Luxembourg parent credit institution is part of a larger group publishing consolidated accounts in which the Luxembourg credit institution and its subsidiaries are included. 8 PwC Luxembourg

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12 Conditions for the preparation of consolidated accounts Ref. article of Law/Circular 77 The Bank is required to prepare consolidated accounts and a consolidated Directors report if it: has a majority of the voting rights in another entity; or has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of another entity and is at the same time a shareholder in or a member of that entity; or is a shareholder in or a member of another entity and, by virtue of an agreement with other shareholders or members, controls a majority of the voting rights; or has the power to exercise, or actually exercises, a dominant influence or a control over another entity or that Bank and another entity are managed on a unified basis. The Law of 16 March 2006 has aligned the definition of control with the definition provided by IFRS (IAS 27, SIC-12 and subsequently IFRS 10), so that the scope of consolidation should apply equally to both accounting frameworks (except for certain exemptions described below provided for by the Law which cannot always be applied under IFRS). Exemptions to consolidation 80(1) Any non-listed credit institution which is also a subsidiary is exempt from the obligation to prepare consolidated accounts and a consolidated Directors report if the parent company is incorporated in the EU and holds: all of the shares of the exempted non-listed credit institution; or at least 90% of the shares of the exempted non-listed credit institution and the remaining shareholders or members have approved the exemption. 80(2) In addition, this exemption is conditional upon compliance with all of the following requirements: The exempted credit institution and all its subsidiaries shall be consolidated in the accounts of a larger body of undertakings, the parent company of which is governed by the Law of an EU member state. The consolidated accounts, consolidated Directors report and consolidated audit report of the parent company shall be published in Luxembourg (see below). The parent company is a credit institution. The notes to the exempted credit institution s annual accounts shall disclose: - the name and registered office of the parent company preparing the consolidated accounts and the consolidated Directors report; - the mention of the fact that the credit institution is exempted from preparing consolidated accounts and the consolidated Directors report. 80(3) Credit institutions which are listed on a regulated market do not benefit from this exemption. 82 The same sub-group exemption applies to non-listed credit institutions whose parent company is not governed by the Law of an EU member state if the following conditions are met: The exempted credit institution and all its subsidiaries shall be consolidated in the accounts of a larger body of undertakings. The consolidated accounts, together with the consolidated Directors report, where applicable, shall be prepared in accordance with the Law or in an equivalent manner. 10 PwC Luxembourg

13 Ref. article of Law/Circular The consolidated accounts shall be audited in accordance with the national Law governing the parent company. The consolidated accounts, consolidated Directors report and consolidated audit report shall be published in Luxembourg (see below). The parent company is a credit institution. The notes to the exempted credit institution s annual accounts shall disclose: - the name and registered office of the parent company preparing the consolidated accounts and the consolidated Directors report; - specific mention of the fact that the credit institution is exempted from preparing consolidated accounts and the consolidated Directors report. 83(1) A subsidiary needs not be included in the consolidated accounts if it is not significant with regards to the true and fair view principle. 83(2) The materiality threshold must be assessed both at the individual and aggregate level. 83 (2 bis) A credit institution which has only undertakings which are not significant with regard to the true and fair view principle shall be exempted to prepare consolidated accounts and a consolidated Director s report. 83(3) Finally, a subsidiary needs not be included in the consolidated accounts in the case of: severe long-term restrictions are noted on the exercise of the parent s rights over the assets or management of that subsidiary; or a disproportionate expense or undue delay was incurred to obtain the information necessary for the preparation of the consolidated accounts; or the shares of the subsidiary are held exclusively with a view to be resold. For further guidance on credit institutions applying IFRS, please refer to our brochure Illustrative IFRS financial statements _ Banks available on our website: Handbook for the preparation of annual accounts of banks under Luxembourg accounting framework 11

14 Publication of annual accounts Ref. article of Law/Circular The legal publication of the accounts comprises the following information: Name and registered address of the bank; Date of publication of incorporation documents in the Mémorial (official journal for Luxembourg legal information); Name, occupation and address of each Board member (with entry/exit dates if changes occurred during the financial year); Annual accounts as prepared in accordance with the modified Law of 17 June 1992 (including additional disclosures on financial instruments, risk management objectives and policies as required by CSSF Circular 01/32); Directors report; Report of the Réviseur d entreprises agréé ; Both proposed and effective appropriation of results; Names of shareholders who have subscribed shares which are not yet fully paid in, including amounts still due, and in the case of capital increase during the year, the portion of capital which is not yet subscribed; Any additional information where the provisions of the Law have been departed from or complemented to give a true and fair view. The VISA procedure This information must first be sent to the CSSF in order to obtain its approval: this is referred to as the Visa procedure, whereby the CSSF can request modifications on the documents to be published. Three copies of the publication documents must be sent by the Bank s management to the CSSF at least two weeks before the annual shareholders meeting, together with a side letter signed by the Bank s management confirming that the annual accounts have been duly approved by the Board of Directors. In addition, together with these publication Circ. 98/143 documents, the Bank s management has to provide the CSSF with the report of the management on the internal control and a copy of the summary report of the internal auditor. These documents must be filed with the Luxembourg Register of Commerce during the month of shareholders approval of the annual accounts and at the latest seven months after the closing of the financial year. Although the CSSF recommends publishing all documents which are subject to the Visa procedure, credit institutions may publish an abridged version only of the annual accounts with a reference to where the full version of the annual accounts are filed. In that case, a notice of this filing has to be published in the Mémorial. The annual accounts, Directors report and report, also need to be published in any EU member state where the bank has established branches. The Visa procedure also requests the bank to provide the CSSF with a reconciliation of the net equity at year end between the annual accounts prepared in accordance with the Law (under one of the 3 options described in section 1.1 above) and the net equity presented in the regulatory financial reporting ( FinRep ). FinRep is prepared under IFRS rules as adopted by the CSSF for use in Luxembourg (i.e. IFRS as adopted by the EU but allowing certain limited prudential provisions as detailed in the CSSF circular 07/279). The Réviseur d entreprises agréé is required to draw up a specific report on the reconciliation, which is only for CSSF use and not subject to any publication requirements. These publication requirements, including the Visa procedure, also apply to consolidated accounts if applicable to the credit institution. 12 PwC Luxembourg

15 Ref. article of Law/Circular Publication of accounting documents of Luxembourg branches of credit institutions with registered offices in the European Union 113 Branches of credit institutions having their registered office in the European Union must file, every year and in compliance with article 9 of the amended Law of 10 August 1915 on commercial companies, annual accounts, consolidated accounts, a Directors report, a consolidated Directors report as well as reports issued by the auditors of the annual and consolidated accounts. Directive 86/635/EEC sets out that the above-mentioned documents must be prepared and verified in accordance with the applicable Laws of the EU Member State where the credit institution has its registered office. Branches are not required to publish annual accounts relating to their own activity. Publication of accounting documents of Luxembourg branches of credit institutions with registered offices outside the European Union 114 Branches of credit institutions having their registered office outside the European Union must file, every year and in compliance with article 9 of the amended Law of 10 August 1915 on commercial companies, annual accounts, consolidated accounts, a Directors report, a consolidated Directors report as well as reports issued by the auditors of the annual and consolidated accounts of the credit institution. All these documents should be prepared and verified in accordance with the applicable Laws of the country in which the registered office of the branch is located. If the above-mentioned documents have been prepared in accordance with parts II, II bis, III, III bis, and V of the Law relating to the annual accounts of credit institutions or in a similar manner, the branches are not required to publish annual accounts pertaining to their own activity. In situations other than the ones mentioned here above, documents must be restated in order to achieve the conformity required. Handbook for the preparation of annual accounts of banks under Luxembourg accounting framework 13

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17 Audited annual accounts for the year ended 31 December Bank S.A. Registered office, location and trade register number

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19 Content Directors report 18 Balance sheet as at 31 December 20 Profit and loss account for the year ended 31 December 22 Notes to the accounts as at 31 December 26 Note 1 General 26 Note 2 Summary of significant accounting policies and valuation rules 26 Note 3 Analysis of financial instruments 39 Note 4 Cash in hand, balances with central banks and post office banks 45 Note 5 Participating interests and shares in affiliated undertakings 45 Note 6 Transferable securities 48 Note 7 Fixed assets 50 Note 8 Amounts due from leasing operations 52 Note 9 Other assets 52 Note 10 Fiduciary transactions included in the balance sheet 53 Note 11 Assets pledged as collateral security 53 Note 12 Amounts owed to customers: savings deposits 53 Note 13 Debt securities in issue 53 Note 14 Other liabilities 54 Note 15 Borrowings 54 Note 16 Subscribed capital 55 Note 17 Reserves 55 Note 18 Changes in shareholders equity 56 Note 19 Interim dividend 57 Note 20 Special items with a reserve quota portion 57 Note 21 Hybrid capital instruments 57 Note 22 Positions in foreign currencies 57 Note 23 Contingent liabilities and commitments 57 Note 24 Profit and loss account 59 Note 25 Information relating to staff employed and management 60 Note 26 Independent Auditor s Fees 61 Other required disclosures 62 Handbook for the preparation of annual accounts of banks under Luxembourg accounting framework 17

20 Directors report Ref. article of Law/Circular Introduction Article 70 of the amended Law of 17 June 1992 ( the Law ) requires the Bank to establish a Directors report, usually presented on the face of the annual accounts. The Réviseur d entreprises agréé must ensure that the Directors report is consistent with the annual accounts of the financial year. Circ. 01/32 Circular CSSF 01/32 concerning disclosure of information of financial instruments requires some qualitative 25, 29 information in the Directors report regarding management objectives and strategies with respect to the use of these instruments as well as risk management policies and practice. Information required under article 70 70(1) The Directors report must include a true and fair review of the development and performance of the credit institution s business and of its position, together with a description of the principal risks and uncertainties that it faces. The review shall be a balanced and comprehensive analysis of the development and performance of the credit institution s business and of its position, consistent with the size and complexity of the business. To the extent necessary for an understanding of the credit institution s development, performance and position, the analysis shall include both financial and, where appropriate, non financial key performance indicators relevant to the particular business, including information about environment and employee matters. In providing its analysis, the Directors report must include, where appropriate, references to the amounts reported in the annual accounts and relevant explanations pertaining thereto. The report must comply with the information contained in the annual accounts. 70(2) The report shall also give an indication of: any important events that have occurred since the end of the financial year; the likely future development of the Bank 1 ; the activities of the Bank in the field of research and development; the acquisition of the Bank s own shares; the provisions of article 49-5(2) of the amended Law of 10 August 1915 on commercial companies have to be complied with, i.e.: - the reason for purchases of shares made during the financial year; - the number and nominal value, or in the absence of a nominal value the accounting par value, of shares acquired and sold during the financial year, as well as the portion of share capital represented by such transactions; - where there has been forced acquisition or disposal of shares, the consideration exchanged for such shares; - the number and the nominal par value, or in the absence of a nominal value, the accounting par value of shares acquired and retained in the Bank own portfolio, as well as the portion of share capital which they represent. the existence of branches of the credit institution: as regards the use of financial instruments by the undertaking and where relevant to the valuation of its assets, liabilities, financial position and profit or loss: 18 PwC Luxembourg 1 As far as the Bank s likely development is concerned, events that occurred during the financial year and that will have an impact on results in subsequent years should be taken into account. Examples of such events include restructuring or downsizing activities, setting up or closing down a business unit (private banking, credit department, custody, etc.), and acquiring or selling participating interests (CSSF Recueil, part V, Publicité, p. 29).

21 Ref. article of Law/Circular - the credit institution s financial risk management objectives and policies, including its policies for hedging each major type of forecast transaction for which hedge accounting is used, and - the credit institution s exposure to price risk, credit risk, liquidity risk and cash flow risk. All information provided must be relevant to the Bank. General information on the economic environment or related matters is not required. Information required for listed credit institutions 70 bis Credit institutions whose securities are admitted to trading on a regulated market 4 shall include a corporate governance statement in their Director s report. This statement includes: - a reference to the corporate governance code to which the bank is subject; and/or - a reference to the corporate governance code which the Bank may have voluntarily decided to apply; and/or - a reference to all relevant information about the corporate governance practices applied beyond the requirements under Luxembourg law. Information required under Circular 01/32 concerning the disclosure of information on financial instruments Circ. 01/32 According to Circular 01/32, the Directors report must include qualitative information regarding the use of 26, 27, financial instruments. The report must therefore describe the Bank s risk management objectives and strategies Ann.1/I regarding its use of instruments within the context of its overall business objectives 2. Circular 01/32 specifies that meaningful and comparable qualitative and quantitative information must appear in the notes to the accounts in order to clarify the understanding of the annual accounts. Where other information is disclosed, this should be included in the notes to the accounts if it is essential to a better understanding of the accounts. In all other cases, the Bank may elect to disclose such information either in the notes to the accounts or in the Directors report 3. Moreover, information should be disclosed in the Directors report on the policies and practice of managing the risks associated with trading and non-trading activities addressing the specific nature of the institution s exposure to, and its management of, credit risk, market risk, liquidity risk and other significant risks. Quantitative information that is not essential to a good understanding of the annual accounts may also be included in the Directors report. 2 Circular 01/32 gives illustrative examples regarding the information to be provided. For example, information concerning risk management may cover the following aspects: basic features of the risk management system; transactions in instruments used for trading purposes; transactions in instruments used for non-trading and, in particular, for hedging purposes; transactions in high-risk instruments or complex instruments such as leveraged derivative instruments; the use of collateral; the use of netting agreements. 3 Circular 01/32 states that information may be drawn from the long form report of the Bank. transactions in instruments used for non-trading and, in particular, for hedging purposes; transactions in high-risk instruments or complex instruments such as leveraged derivatives instruments; the use of collateral; the use of netting agreements. 4 Regulated market as defined by article 4 (1), point 14 of Directive 2004/39/EC of 21 April 2004 on markets in financial instruments. Handbook for the preparation of annual accounts of banks under Luxembourg accounting framework 19

22 Balance sheet as at 31 December expressed in currency of the share capital 5 Ref. article of Law/Circular 7 ASSETS Note(s) 31 December 31 December Cash in hand, balances with central banks and post office banks Treasury bills and other bills eligible for refinancing with central banks treasury bills and similar securities other bills eligible for refinancing with central banks Loans and advances to credit institutions repayable on demand other loans and advances 3, 4 3, 5.3, 5.4, 6.5 3, 5.3, 5.4 Loans and advances to customers 3, 5.3, 5.4 Leasing transactions 3, 5.3, 5.4, 8 Bonds and other fixed-income transferable securities issued by public bodies issued by other borrowers 3, 5.3, 5.4, 6, 7.1 Shares and other variable-yield transferable securities 3, 6.1, 6.5 Participating interests 5.1, 5.2, 5.5, 6.1, 7.1 Shares in affiliated undertakings 5.1, 5.2, 5.5, 6.1, 7.1 Intangible assets 7.1, 7.2 Tangible assets 7.1, 7.3 Own shares 17.4 Other assets 9 Subscribed capital unpaid of which: called-up capital Prepayments and accrued income Total assets The accompanying notes form an integral part of these annual accounts. 5 In addition to the presentation currency in which they are established, annual accounts may also be presented in euro, using the conversion rate at the closing date of the balance sheet. In that case, this rate is specified in the notes to the annual accounts. 20 PwC Luxembourg

23 Ref. article of Law/Circular 7 LIABILITIES Amounts owed to credit institutions repayable on demand with agreed maturity dates or periods of notice Amounts owed to customers savings deposits other debts: - repayable on demand - with agreed maturity dates or periods of notice Debt evidenced by certificates debt securities in issue others Note(s) 3, 5.3, 5.4 3, 5.3, , 5.3, , 15.1 Other liabilities 14 Accruals and deferred income Provisions provisions for pensions and similar obligations provisions for taxation other provisions Subordinated liabilities 5.3, 5.4, 15.2 Special items with a reserve quota portion 20 Fund for general banking risks Hybrid capital instruments 21 Subscribed capital 16, 18 Share premium account 18 Reserves 17, 18 Interim dividend 19 Revaluation reserve 17.4, 18 Profit or loss brought forward 18 Profit or loss for the financial year 18 Total liabilities 31 December 31 December Contingent liabilities of which: acceptances and endorsements guarantees and assets pledged as collateral security Commitments of which: commitments arising out of sale and repurchase transactions Fiduciary transactions The accompanying notes form an integral part of these annual accounts Handbook for the preparation of annual accounts of banks under Luxembourg accounting framework 21

24 Profit and loss account for the year ended 31 December expressed in currency of the share capital 6 Ref. article of Law/Circular 41 Vertical layout Note(s) Interest receivable and similar income of which: arising fixed-income transferable securities Interest payable and similar charges Income from transferable securities income from shares and other variable-yield transferable securities income from participating interests income from shares in affiliated undertakings Commissions receivable Commissions payable Net profit or net loss on financial operations Other operating income 24.3 General administrative expenses staff costs of which: - wages and salaries - social security costs of which: pension costs other administrative expenses Value adjustments in respect of intangible and tangible assets Other operating charges 24.2 Value adjustments in respect of loans and advances and provisions for contingent liabilities and commitments Value re-adjustments in respect of loans and advances and provisions for contingent liabilities and commitments Value adjustments in respect of transferable securities held as financial fixed assets, participating interests and shares in affiliated undertakings Value re-adjustments in respect of transferable securities held as financial fixed assets, participating interests and shares in affiliated undertakings The accompanying notes form an integral part of these annual accounts. 6 In addition to the presentation currency in which they are established, annual accounts may also be presented in euro, using the conversion rate at the closing date of the balance sheet. This rate is specified in the notes to the annual accounts. 22 PwC Luxembourg

25 Ref. article of Law/Circular 41 Vertical layout (cont.) Note(s) Allocation to special items with a reserve quota portion Income from the reversal of special items with a reserve quota portion Allocations to the fund for general banking risks Income from the reversal of amounts included in the fund for general banking risks Tax on profit or loss on ordinary activities Profit or loss on ordinary activities after tax Extraordinary income 24.5 Extraordinary charges 24.5 Extraordinary profit or loss Tax on extraordinary profit or loss Extraordinary profit or loss after tax Other taxes not shown in the preceding items Profit or loss for the financial year The accompanying notes form an integral part of these annual accounts. Handbook for the preparation of annual accounts of banks under Luxembourg accounting framework 23

26 Profit and loss account for the year ended 31 December (cont.) expressed in currency of the share capital 7 Ref. article of Law/Circular 42 Horizontal layout Charges Note(s) Interest payable and similar charges Commissions payable Net loss on financial operations General administrative expenses staff costs of which: - wages and salaries - social security costs of which: pension costs other administrative expenses Value adjustments in respect of intangible and tangible assets Other operating charges 24.2 Value adjustments in respect of loans and advances and provisions for contingent liabilities and commitments Value adjustments in respect of transferable securities held as financial fixed assets, participating interests and shares in affiliated undertakings Allocations to special items with a reserve quota portion Allocations to the fund for general banking risks Tax on profit or loss on ordinary activities Profit on ordinary activities after tax Extraordinary charges 24.5 Tax on extraordinary profit or loss Extraordinary profit after tax Other taxes not shown under the preceding items Profit for the financial year Total charges The accompanying notes form an integral part of these annual accounts. 7 In addition to the presentation currency in which they are established, annual accounts may also be presented in euro, using the conversion rate at the closing date of the balance sheet. In that case, this rate is specified in the notes to the annual accounts. 24 PwC Luxembourg

27 Ref. article of Law/Circular 42 Income Note(s) Interest receivable and similar income of which: arising from fixed-income transferable securities Income from transferable securities income from shares and other variable-yield transferable securities income from participating interests income from shares in affiliated undertakings Commissions receivable Net profit on financial operations Value re-adjustments in respect of loans and advances and provisions for contingent liabilities and for commitments Value re-adjustments in respect of transferable securities held as financial fixed assets, participating interests and shares in affiliated undertakings Other operating income 24.3 Income from the reversal of special items with a reserve quota portion Income from the reversal of amounts included in the fund for general banking risks Loss on ordinary activities after tax Extraordinary income 24.5 Extraordinary loss after tax Loss for the financial year Total income The accompanying notes form an integral part of these annual accounts. Handbook for the preparation of annual accounts of banks under Luxembourg accounting framework 25

28 Notes to the accounts as at 31 December Ref. article of Law/Circular/ IFRS standard Note 1 - General Bank S.A. ( the Bank ) was incorporated in the Grand-Duchy of Luxembourg on as a 8.. The Bank deals with 9 : Note 2 - Summary of significant accounting policies and valuation rules 2.1 Basis of presentation These annual accounts have been prepared in conformity with accounting principles generally accepted in the banking sector in the Grand-Duchy of Luxembourg. The accounting policies and the valuation principles are determined and applied by the Board of Directors, except those which are defined by Law and by the Commission de Surveillance du Secteur Financier. The preparation of annual accounts requires the use of certain critical accounting estimates. It also requires the Board of Director to exercise its judgment in the process of applying the accounting policies. Changes in assumptions may have a significant impact on the annual accounts in the period in which the assumptions changed. The Board of Directors believes that the underlying assumptions are appropriate and that the annual accounts therefore present the financial position and results fairly. The Board of Directors makes estimates and assumptions that affect the reported amounts of assets and liabilities in the next financial year. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 80(1) On the basis of the criteria set out by the Luxembourg Law, the Bank is exempted from establishing consolidated accounts and a consolidated Directors report for the year ended 31 December. In accordance with the amended Law of the 17 June 1992, the accounts are consequently presented on an unconsolidated basis. 8 As per article 4 of the amended Law of the 5 April 1993 relating to the financial sector in Luxembourg, authorisation may only be granted to legal entities established under Luxembourg Law which have the form of an undertaking established under public Law ( établissement de droit public ), a limited liability company ( société anonyme ), a partnership limited by shares ( société en commandite par actions ) or a cooperative company ( société cooperative ). 9 We recommend indicating either the corporate object of the Bank as set out in the articles of incorporation, or if not, the main activities of the Bank. 26 PwC Luxembourg

29 Ref. article of Law/Circular/ IFRS standard 68(10) The Bank is included in the consolidated accounts of 10 : 2.2 Foreign currencies 68(1) The annual accounts are expressed in the currency of the share capital ( ). The Bank has adopted a multicurrency accounting system, as a result of which assets and liabilities are recorded in the currencies in which they were created. For the preparation of the annual accounts, amounts in foreign currencies are translated into on the following basis: Spot transactions 64(1) Assets and liabilities denominated in foreign currencies are translated into at the average spot exchange rates applicable at the balance sheet date. However, assets held as financial fixed assets and tangible and intangible assets, which are not hedged in either the spot or forward markets are translated into at the rates prevailing on their acquisition dates (2), Unsettled spot foreign exchange transactions are translated into at the spot rate of exchange prevailing on 64(3)b) the balance sheet date. Foreign exchange gains and losses resulting from spot transactions not hedged by forward transactions are accounted for in the profit and loss account for the financial year (3)a) Foreign exchange gains and losses resulting from spot transactions hedged by forward transactions ( swaps ) are neutralised through prepayments and accrued income and accruals and deferred income accounts. Differences arising due to the gap between spot and forward exchange rates are amortised in the profit and loss account on a prorata basis Forward transactions 64(2) Unsettled forward exchange transactions are translated into at the forward rate prevailing on the balance sheet date for the remaining maturity. 64(3)c) Exchange losses on un-hedged forward exchange contracts are recognised in the profit and loss account at the forward rate prevailing on the balance sheet date for the remaining term of the contract 13. Exchange gains on unhedged forward exchange contracts are only recognised when realised. For hedged exchange transactions, foreign exchange losses arising on revaluation are set against profits arising as stated above. Provision is made to hedge any net loss position arising. 10 The following should be disclosed: a) The name and registered office of the undertaking preparing the consolidated accounts of the largest body of undertakings of which the company forms part as a subsidiary undertaking; b) The name and registered office of the undertaking preparing the consolidated accounts of the smallest body of undertakings of which the company forms part as a subsidiary undertaking; c) The place where copies of the consolidated accounts referred to in a) and b) above may be obtained, provided that they are available. 11 Valuation at historical rates is optional. If the foreign currency in which these assets are denominated has suffered from a depreciation of durable nature, a value adjustment shall be made using the exchange rates prevailing at the balance sheet date. This reduction may be compensated with the revaluation of the intrinsic value of the underlying asset (CSSF Recueil, part III, DCP, p. 68). 12 The recording of unrealised foreign exchange gains is optional, whereas the recording of unrealised foreign exchange losses is mandatory (art 64(3)b). 13 When a forward exchange rate cannot be obtained, the Bank determines a probable value by extrapolation or uses an available rate as close as possible to the settlement date. For practical reasons, all forward transactions maturing in the same calendar month may be converted at the end of the month rate (CSSF Recueil, part III, DCP, p. 68). Handbook for the preparation of annual accounts of banks under Luxembourg accounting framework 27