www.pwc.lu/banking
Flash News
Treatment of the lump-sum and the
AGDL provisions in the prudential
reporting for Luxembourg banks
Further to the enforcement of EU Regulation 575/2013 (known as the
"CRR"), the current prudential reporting framework needed some
amendments to ensure conformity with European requirements in respect
of banking regulation. In order to achieve proper harmonisation among
market participants, the CSSF has issued on 19 December 2014 a new
circular 14/599 clarifying the treatment of certain prudential provisions in
the financial reporting framework of banking institutions in Luxembourg
13 January 2015
Background
Since the introduction of FinRep in 2008, the CSSF has required Luxembourg banks to
retain the lump-sum and the AGDL provisions in their periodic reporting, although
those provisions do not comply with IFRS recognition requirements. This was, at that
time, not breaching EU rules as the adoption of IFRS as single accounting framework
for the financial reporting was elective for each member state.
Since 2014, the CRR – and the related EU-harmonised CoRep – now requires that Risk
Weighted Assets and Prudential Own Funds be determined based on IFRS as adopted
by the EU. As those data are directly extracted from FinRep, this prudential reporting
needed some amendments so as to fully conform to IFRS as adopted by the EU.
It is important to note that the new requirements of the Circular are applicable for all
banks reporting – including Luxembourg branches of EU banks1 – as from
31 December 2014, with a first submission date being 15 January 2015.
What has changed?
The main changes introduced by the circular are the following:



1
Existing lump-sum and AGDL provisions shall be reversed into equity in FinRep
giving rise to a deferred tax effect.
An unavailable reserve shall be constituted in the same amount of the lumpsum/AGDL provisions (allocation of results/free reserves).
Future contributions made to the new Deposit Guarantee Scheme (still to be set up
in Luxembourg) will be recognised through the profit and loss account in FinRep.
except for the AGDL provision which is not relevant to those branches


Preparers of annual accounts under IFRS shall constitute an unavailable reserve
for the same amounts as part of the annual appropriation of results.
The new lump-sum reserve is eligible as CET1 in the own funds.
It is important to note that this new Circular does not impact the preparation of the
annual accounts under Luxembourg banking GAAP as both the lump-sum and the
AGDL provisions are still allowed.
Summary of new requirements and guidance on application
The appendix to this Flash News covers the main financial reports issued by
Luxembourg banking institutions and provides a numerical example, which we hope
you will find useful.
For more information, please contact us:
…………………………………………………………………………………………………………………….
Fabrice Goffin
Partner
+352 49 48 48 2155
fabrice.goffin@lu.pwc.com
Philippe Sergiel
Partner
+352 49 48 48 2055
philippe.sergiel@lu.pwc.com
Olivier Delbrouck
Director
+352 49 48 48 2630
olivier.delbrouck@lu.pwc.com
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Appendix: Summary of new requirements and guidance on application
Annual accounts established under Luxembourg
Banking GAAP - Standalone and consolidated
Treatment of
the provisions
No change
Annual accounts established under IFRS Standalone and consolidated
FinRep – Standalone reporting
Constitution of an unavailable reserve
FinRep – Consolidated reporting
No longer allowed
CoRep - standalone and consolidated
Lump-sum reserve: eligible as Core Equity Tier 1 capital
AGDL reserve: non eligible as prudential own funds
Lump-sum provision:
Provision still allowed and still presented on the balance sheet
partly as value adjustment relating to the relevant caption (to
cover possible credit risk on balance sheet exposures), partly as
provision (to cover possible credit risk on off-balance sheet
commitments).
Provisions not allowed under IFRS. However, an
allocation to an unavailable reserve shall be submitted
to - and approved by - the annual general meeting of
shareholders (AGM), i.e. in the subsequent year.
Though not specified in the circular, the amounts to be
transferred into this reserve are the following:
AGDL provision:
Lump-sum reserve:
Presentation on
the face of the
balance sheet
Provision still allowed and presented as a provision on the
balance sheet. Though this provision is elective according to
Lux Banking GAAP and limited to a cap of 10% of the eligible
guaranteed deposits, the CSSF has notified all institutions in
scope of the future Deposits Guarantee Scheme (DGS) that
they must build up a provision reaching a minimum level of 1%
of eligible guaranteed deposits by 31.12.2016 at the latest.
Minimum annual recognition is not specified, so it is at the
choice of the institution. After the introduction of this new prefunded scheme (exact timing and procedure to be clarified by
the CSSF at a later stage), the provision will be reduced by the
contributions effectively made to the DGS.
Amount currently reported as lump-sum provision in
FinRep (before reversal imposed by the circular
14/599), if not already recognised on a voluntary basis
through the appropriation of results approved by the
AGM. The unavailable reserve is released to free
reserve (after approval by the AGM) as credit losses
are effectively incurred and impact the profit and loss
account.
AGDL reserve:
Both provisions are tax deductible.
Minimum 1% of eligible guaranteed deposits to be
reached by 31.12.2016 at the latest. Annual recognition
not specified so at the choice of the institution. After
introduction of the new DGS, contributions made will
be recognised as annual expenses in the profit and loss
account and the unavailable reserve will be
progressively released as free reserve to be approved
by the AGM (i.e. in the subsequent year).
Stock of provisions must be reversed into equity, net of deferred tax, as from 31.12.2014.
Practically, it is done as follows (as illustrated in the numerical example below):



Incorporation of the existing stock of provision at 1.1.2014, net of deferred tax, directly in
equity (unavailable reserve).
Reversal of the allocation (respectively reversal) of the provision booked during the year
in the Lux GAAP accounts and recognition (respectively derecognition) of the
corresponding deferred tax liability.
In the subsequent year (i.e. in 2015 for the first time), an amount equivalent to the 2014
variation of the lump-sum and AGDL provisions must be set aside as unavailable reserve.
Characteristics of the "lump-sum reserve":



Not available for distribution to shareholders.
Can only be used (i.e released from unavailable to free reserve with no impact on profit or
loss) to cover identified credit losses when they impact the profit and loss account, and
after approval from the CSSF.
Although not separately disclosed from other reserves, the amount of unavailable reserve
in year N must equal the amount of lump-sum provision recognised in the Lux GAAP
annual accounts for the year N-1 (or the amount of the lump-sum reserve in the IFRS
annual accounts for the year N).
Characteristics of the "AGDL reserve":



Not available for distribution to shareholders.
Can only be used (i.e. released from unavailable to free reserve) as future payments to the
DGS will be made.
Although not separately disclosed from other reserves, the amount of unavailable reserve
in year N must equal the amount of AGDL provision recognised in the Lux GAAP annual
accounts for the year N-1 (or the amount of the AGDL reserve in the IFRS annual accounts
for the year N).
Recognition of deferred tax liabilities depend on the
tax treatment agreed with the Tax Administration at
the time of IFRS first-time adoption and whether this
treatment gives rise to taxable temporary differences
or not.
Allocation
to/reversal of
provision
Allocation to and release of provision still booked in the profit
and loss account under caption "Value (re)adjustment in
respect of loans and advances and provisions for contingent
liabilities and commitments".
Movements in profit and loss account of the year must be reversed into equity ("lump-sum
reserve") and a deferred tax liability shall be recognised.
The "lump-sum reserve" is to be reported net of deferred
tax in table C01.00 (Own funds), row 200 - Other reserves
(ID 1.1.1.4).
The "AGDL reserve" is to be reported net of deferred tax in
the table C01.00 (Own funds), row 200 - Other reserves
(ID 1.1.1.4) and is to be deducted in the same table, row
529 - CET1 capital elements or deductions - Other (ID
1.1.1.28).
Annual accounts established under Luxembourg
Banking GAAP - Standalone and consolidated
Annual accounts established under IFRS Standalone and consolidated
FinRep – Standalone reporting
FinRep – Consolidated reporting
For the purpose of this example, please
consider the following assumptions:





Lump-sum provision at 1.1.2014 = 100
2014 allocation to the lump-sum
provision (in Lux GAAP accounts) = 10
AGDL provision at 1.1.2014 = 60
2014 allocation to the AGDL provision
(in Lux GAAP accounts) = 20
Tax rate rounded at 30%
The following booking entries must be made
at 31.12.2014:
To reverse opening balance through
retained earnings:
Db. 2.8.99 Other provisions (LSP)
Db. 2.8.99 Other provisions (AGDL)
Numerical example
Cr. 3.5 Reserves (incl. R/E) *
Cr. 2.9.2 Def. Tax Liab.
100
60
112
48
To reverse the accounting entry made in
2014 Lux GAAP accounts:
Db. 2.8.99 Other provisions (LSP)
10
Db. 2.8.99 Other provisions (AGDL)
20
Cr. 5.15 Other oper. charges**
30
Db. 5.24 Tax expense (def. tax)
9
Cr. 2.9.2 Def. Tax Liab.
9
* immediately unavailable for distribution in
2014 reporting
** same amount to be made unavailable for
distribution in 2015
CoRep - standalone and consolidated
Same assumptions as for the standalone
FinRep. However, the booking entries have
been adapted to consider the new harmonised
consolidated FinRep imposed by the EBA.
The following booking entries must be made at
31.12.2014:
To reverse opening balance through retained
earnings:
Db. 1.2-230 Other provisions (LSP)
100
Db. 1.2.230 Other provisions (AGDL)
60
Cr. 1.3-230 Reserves (incl. R/E)
112
Cr. 1.2-260 Def. Tax Liab.
48
To reverse the accounting entry made in 2014
Lux GAAP accounts:
Db. 1.2-230 Other provisions (LSP)
10
Db. 1.2-260 Other provisions (AGDL)
20
Cr. 2-450 Provisions - Other (P/L)
30
Db. 2-620 Tax expense (def. tax)
9
Cr. 1.2-260 Def. Tax Liab.
9