REGULATION ON THE ACCOUNTING OF CREDIT INSTITUTIONS

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1 Changed parts are underlined. 1 (5) Concerns credit institutions and financial holding companies REGULATION ON THE ACCOUNTING OF CREDIT INSTITUTIONS By virtue of section 14, paragraph 1, of the Act on the Financial Supervision Authority, the Financial Supervision Authority (FSA) hereby issues the following regulation on the accounting of credit institutions. 1 Scope Credit institutions shall observe this regulation in their accounting. In addition, credit institutions must comply with the provisions of the Accounting Act, with the regulations issued by virtue thereof by the Ministry of Trade and Industry and with the general guidelines of the Accounting Board, unless otherwise stipulated in this regulation. The provisions in this regulation concerning credit institutions shall correspondingly apply to financial institutions belonging to the consolidation group of a credit institution. This regulation shall not apply to ancillary banking services undertakings as referred to in the Credit Institutions Act. The provisions in this regulation concerning annual accounts and the financial year shall correspondingly apply to the interim reports of deposit banks referred to in FSA Regulation No and to the iterim reports referred to in FSA Guideline No of credit institutions whose securities are subject to public trading. 2 General principles concerning the entering of business transactions Contrary to the provisions of chapter 2, section 4, of the Accounting Act, business transactions must be entered daily without delay, on a chronological and items basis. Entries may be made on an items basis as combinations of daily entries. By business transactions are meant expenses, income, financial transactions and related adjustments and transfers, as referred to in chapter 2, section 1, of the Accounting Act. The provisions on entering of corrections laid down in the Decision by the Ministry of Trade and Industry on accounting methods (47/1998) shall not be applied to credit institutions.

2 Changed parts are underlined. 2 (5) If business transactions have been entered on a cash basis, the entries, with the exception of entries involving business transactions of minor importance, must be adjusted and supplemented to conform with the accruals convention before the drawing up of the annual accounts. Entries involving purchases and sales of securities and other contracts where the settlement of the contracts takes place after the date the contract was entered into must be adjusted and supplemented according to that date before the drawing up of the annual accounts. 3 Accounting material and the keeping of accounting material A credit institution can record vouchers and bookkeeping entries in electronic form, provided that they are retrievable in written, plain text form whenever necessary, in accordance with chapter 2, section 8, of the Accounting Act. According to chapter 1, section 2, of the Decision by the Ministry of Trade and Industry on accounting methods, if a credit institution keeps both vouchers and book-keeping entries in electronic form, it must have at its disposal a data system or a method whereby the data or selected transactions from the accounting material can be retrieved for inspection and transferred to another electronic system whenever necessary and without undue delay. The provisions on recording and keeping of accounting material in electronic form laid down in chapter 1 of the Decision by the Ministry of Trade and Industry referred to above, may also be applied by a credit institution in respect of accounting material recorded before 1 February 1998 (chapter 4, section 3, paragraph 2). The credit institution must be able to prove, by means of reconciliations, that the accounting material recorded in this manner corresponds to the original accounting material recorded in plain text form. 4 Keeping of accounting material abroad Vouchers, correspondence concerning business transactions and other such accounting material of a foreign branch may be kept in the relevant branch. However, the provisions on disclosure of information to auditors and authorities laid down in the Decision by the Ministry of Trade and Industry on keeping of accounting material abroad on a temporary basis (49/1998) shall be observed. A voucher made out in Finland by an undertaking with a legal obligation to keep accounts can be transferred to another country for the purpose of accounting and drawing up of annual accounts, in compliance with the provisions on keeping of accounting material on a temporary basis laid down in section 2 of the Decision by the Ministry of Trade and Industry.

3 Changed parts are underlined. 3 (5) 5 Entering of loan losses A credit institution shall regularly review the credit quality of its claims so that doubtful claims can be identified as early as possible. The review shall always take place at least in the preparation of annual and interim reports, taking into consideration the economic conditions and other circumstances at the reporting date that may significantly affect creditworthiness. Accounting systems must be maintained in such a manner that the following facts can be continuously assessed regarding each claim: the outstanding principal of the claim (gross amount); specific loan loss provisions made in respect of the claim during previous financial years; interest receivable on the claim, calculated on the basis of the gross amount of the claim; increases or decreases in the specific loan loss provisions; claims written off as actual loan losses against the specific loan loss provision during the financial year; claims directly written off as actual loan losses during the financial year; and amounts recovered in respect of claims written off as actual loan losses. Specific loan loss provisions must be recorded in the accounting systems without delay after the grounds for the entry have been recognized. A written decision must be made concerning the making of a specific loan loss provision and the writing off of claims as actual loan losses. These decisions must be kept in compliance with chapter 2, section 10, of the Accounting Act. A specific loan loss provision shall be recorded in the accounting systems irrespective of whether an insurance indemnity is expected. An expected insurance indemnity shall be recorded in the accounting systems as a deduction in the specific loan loss provision made in respect of each claim in such a manner that the gross amount of the specific loan loss provision and the deduction therefrom may be assessed separately and continuously. An expected insurance indemnity shall be recorded in the accounting systems in the manner described above when the notification of the claim has been filed with the insurance company and the insurance company has acknowledged receipt of the notification. If the collection of claims that have been written off is continued, such claims and any changes in them must be registered in such a manner that they may be continuously assessed. Any decisions concerning the discontinuation of the collection of such claims must be evident from the register.

4 Changed parts are underlined. 4 (5) The credit quality of a credit institution's claims shall, as a rule, be reviewed on a claimby-claim basis. If, however, the credit institution considers it probable that a certain group of claims has generated loan losses, but that these cannot yet be recorded under individual claims, a specific loan loss provision in respect of the group must be made. A credit institution may make specific loan loss provisions on a customer-by-customer basis or in respect of a customer group or group of claims regarding the following claims: 1 Claims in respect of a certain country or field of activity that are expected to generate losses that cannot be recorded under an individual claim or customer at the time the annual accounts are drawn up; and 2 A large number of small claims of similar kind, if the loan losses generated by the claims may be estimated in a reliable manner using statistical methods. Loan loss provisions which are made in respect of groups shall be documented in the form of written decisions with details attached on the principles applied in identifying the group, any loan losses entered previously in respect of the group and the method used in calculating the amount of the provision. The FSA shall be informed of all groupspecific loan loss provisions. Allowances for group-specific loan losses should be calculated in a prudent manner so that they cover the imprecision inherent in most estimates of loan losses. A loan loss provision made in respect of a group is regarded as an interim step pending the making of specific loan loss provisions in respect of individual claims, and as soon adequate information is available to identify loan losses on individual claims, the groupspecific loan loss provision should be replaced by specific allowances in respect of individual claims or by recognized loan losses (charged-offs). An actual loan loss shall mean the removal of a claim from the accounting system and connected systems. A claim or a part thereof must be removed from the books as an actual loan loss when the following facts have been verified in respect of the debtor and possible other parties liable for the debt: 1 The final accounts have been settled in the bankruptcy of a corporate customer or the administration of the bankrupt's estate has issued a declaration concerning the share of the debtor's assets to the creditor; 2 The collateral for a claim on a private customer has been realized and the customer has turned out to be insolvent after at least one unsuccessful execution attempt;

5 Changed parts are underlined. 5 (5) 3 A composition or some other agreement has been made with a private or corporate customer, or a court of law has issued a decision whereby the credit institution will definitively waive, or is obliged to waive, in part or in whole, its right to collect the principal of the claim; or 4 The credit institution has decided to discontinue the collection of the claim, or has lost the right to collect the claim for some other reason. Claims, together with the information required in order to calculate interest thereon, must be kept in the accounting systems until a claim is written off as an actual loan loss. 6 Entering of off-balance-sheet items Guarantees given by a credit institution and other off-balance-sheet commitments, including interest rate, currency and stock-related derivative contracts and other derivatives, must be recorded in such a manner that they and any changes in them can be continuously assessed. Contracts entered into for hedging purposes must be registered in such a manner that the purpose of the hedging and the hedged items can be continuously assessed. Such registers must be kept in compliance with the provisions of chapter 2, section 10, of the Accounting Act.