Cyprus Investment Firms: Mistakes to Avoid in Capital Adequacy Reports (COREP) – Financial Services

1. Calculation of own funds

Calculation of own funds

As expected, the most common errors occur with the calculation of equity as shown below:

A. Management Profit/Loss vs Audited Profit/Loss

There seems to be confusion as to what profits or losses are eligible when calculating capital. The illustration below is intended to simplify the process:

a) Last audited FS shows losses while management accounts reflect interim profits –> Audited losses will be used

b) Latest audited FS show profit while management accounts reflect profit –> audited profit will be used

c) Latest audited FS shows profits while management accounts reflect losses –> Management losses will be used

Reference – Article 26(2) of CRR

Accounting rule “Prudence principle”

Be slow to take profits but fully plan for foreseeable losses. CySEC requires the calculation of Tier 1 capital to be conservative and therefore take losses into account to the extent possible. According Circulars C305 last paragraph “It should be noted that CySEC authorization is not required for losses, whether interim or final. Losses must be fully deducted from equity as soon as they are incurred.”

For details, refer to Circulars C305

B. What happens when the turnover is qualified in the auditors’ report?

In the scenario where a company’s audited RU shows a profit but with auditor qualifications affecting that profit (for whatever reason), then the items for which the auditors have expressed an opinion should be deleted and the new revised profit figure should be used. Indeed, qualifying items contributing to profit must be considered unaudited and therefore cannot be part of Common Equity Tier 1 capital.

Reference: -Circular C305

C. Management wants to use interim profits based on management accounts

In the event that management wishes to include interim profits in its capital calculations, despite audited losses, its interim results must be audited by a licensed independent auditing and assurance firm and approved by CySEC before being released. used.

Given the tight timelines of COREP reports, the above approach is not practical and is rarely used.

References – Circulars CySEC C305 & European Banking Authority

Note: Circular 305 analyzes this scenario in detail.

D. “Other reserves” calculations

The other reserves (in accordance with the declaration of ) must be reserves available to the CIF. If these reserves are reimbursable or refundable to the persons who contributed them, they must be deducted from the capital calculations.

Generally, “Other Reserves” may include non-refundable contributions from Shareholders or other Related Parties. Non-refundable, as the word suggests, means that these contributions have been paid to the CIF and belong to the CIF without any constraint. These reserves should not be deducted from capital calculations.

Reference: –Article 26(1) of CRR

E. Contribution to the Investor Compensation Fund (ICF)

Should always be excluded from the capital calculation (Common Equity Tier 1 Capital).

Reference: – Circular C162

F. Treatment of the Additional Investor Compensation Fund (ICF) Cash Buffer in the Capital Calculation

The new deduction from the capital calculation of 3% serving as an additional cash reserve for the investor compensation fund, no matter how small, must be deducted from the capital calculation and must correspond to the funds deposited in a separate bank. Account. This cash reserve must be used in case of need for an extraordinary contribution and must not be used for other purposes. In other words, the CIF should be able to display this stamp on his bank account at any time.

Reference: – Circular 334

2. Exposures of directors and shareholders

Forms 144-14-08.2 and 144-14-08.3

When completing these forms, we must also declare the exposures of Directors and Related Party Shareholders as defined in
Article 4(39) of CRR. From experience, most companies tend to omit this point.

Best Practice Guidelines – by CySEC

CySEC has identified that a number of CIFs have adopted the following best practices:

  • The internal or external auditor or other independent person reviews the CIF’s regulatory reports to provide assurance of its accuracy and completeness;

  • Reconcile regulatory reporting with management accounts and data from other internal systems;

  • Companies are encouraged to go so far as to create automated systems for the calculation of capital, the capital adequacy ratio and the monitoring of large exposures, where possible and appropriate to the nature and complexity of their activities.

For example, a number of FICs have integrated their systems and developed/acquired software applications to automatically calculate capital, capital adequacy ratio and large exposures.

IMPORTANT:

  • Always submit COREP forms at least 3-4 days before the deadline. This will ensure that if any typing errors (wrong date format, etc.) have been used, there will be enough time for you to submit it again.

  • Values ​​are reported in thousands NOT absolute numbers

  • Always download COREP reports from the portal as they change frequently

  • Always read the latest circulars and announcements before completing your COREP reports or statistics. Use a checklist (ask for ours [email protected]).

  • Currency € is reported in EUR and the rest as follows (USD, GBP, RUB)

  • Fixed overhead – remember to fill in company information (last page of form 144-14-0.61)

  • The presentation currency must be excluded from the calculation of market risk

  • The figures used must be consistent in all reports (COREP, statistical reports, management accounts, ICAAP) and so on. Check the trial balance used before processing it for the corresponding reports.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.