Amendments to Regulations on Financial Audit of Banks

BaNoxo SerurnaL No PrLrPrNAs OFFICE OF THE GOVERNOR ctRcuLAR NO. L074 Series of 2O2O Subject: Amendments to Regulations on Financial Audit of Banks The Monetary Board (MB), in its Resolution No. 48 dated 8 January 2020 approved the amendments to the relevant provisions of the Manual of Regulations for Banks (MORB) and Manual of Regulations for Foreign Exchange Transactions (MORFXT): Section 1. The following provisions of Section L74 on Audited Financial Statements of the MORB are hereby amended to read, as follows: Audited Financiol Statements The Bangko Sentral recognizes that external auditors play a vital role in contributing to the conduct of effective supervision and sustaining the confidence of the public in the financial system. In this light, the regulations on financial audit aim to enhance the quality of information channeled to the supervisory process and ultimately promote fairness, transparency and accuracy in financial reporting. The following rules shall govern the submission of audited financial statements (AFS) of Banks. For purposes of this Section, AFS shall include the balance sheets, income statements, statements of changes in equity, statements of cashflows, notes to financial statements, and opinion of the external auditor. The AFS of banks with subsidiaries shall be presented side by side on a solo basis (parent) and on a consolidated basis (parent and subsidiaries). Financiol Audit. Banks shall cause an annual financial audit by an external auditor included in the List of Selected External Auditors for BSFIs not later than thirty (30) calendar days after the close of the calendar year or the fiscal year adopted by the bank. The AFS shall be submitted by the bank to the appropriate supervising department of the Bangko Sentral not later than 120 calendar days after the close of the calendar year or the fiscal year adopted by the bank, accompanied by the documentary requirements as enumerated under Appendix 55. In addition, the external auditor shall be required by the bank to submit to the board of directors or country head, a LOC indicating any material weakness or breach in the institution's internal control and risk management systems not later than 120 calendar days after the close of the calendar year or fiscal year adopted by the bank. lf no material weakness or breach is noted to warrant the issuance of an LOC, a certification under oath stating A. Mabiri Si., Maiate 1004 Manila, Philippines . (4i32i7087701 . www.bsp.gov.lrh . [email protected];ov.ph

that no material weakness or breach in the internal control and risk management systems was noted in the course of the audit of the bank shall be submitted in its stead, together with the AFS. "xxx The board of directors, in a regular or special meeting, shall consider and act on the AFS and the Letter of Comments (LOC) and shall submit, not later than 120 calendar days after the close of the calendar year or fiscal year adopted by the bank, a copy of its resolution (containing the date of receipt of the AFS and LOC by the board of directors), to the appropriate supervising department of the Bangko Sentral. The resolution shall show the action(s) taken on the AFS and the findings and recommendations stated in the LOC, if any. In the case of foreign banks with branches in the Philippines, the country head shall submit a report on the action taken by management (head office, regional, or country, as the case may be) on the AFS and the LOC not later than 120 calendar days after the close of the calendar year or fiscal year adopted by the bank. Government-owned or-controlled banks, including their subsidiaries and affiliates under Bangko Sentral supervision, which are under the concurrent jurisdiction of the Commission on Audit (COA) shall be exempt from the aforementioned annual financial audit by an external auditor included in the List of Selected External Auditors for BSFIs: Provided, That when warranted by supervisory concern such as material weakness/breach in internal control and/or risk management systems, the Monetary Board rlay, upon recommendation of the appropriate supervising department of the Bangko Sentral, require the financial audit to be conducted by an external auditor included in the List of Selected External Auditors for BSFls, at the expense of the institution concerned: Provided, further,fhat when circumstances such as, but not limited to loans from multilateral Fls, privatization, or public listing warrant, the financial audit of the institution concerned by an external auditor included in the List of Selected External Auditors for BSFIs may also be allowed. XXX The AFS required to be submitted shall in all respect be PFRS/PAS compliant. The guidelines under Section 172 shall be adopted. XXX Paee 2 of 4

XXX Disclosure requirements to the oudited linoncial stotements. Banks shall disclose the information prescribed under Annex A of Appendix 55 in the AFS. Section 2. The provisions on audited financial statements under Section 435 of the MORB are hereby amended to read, as follows: Audited financiol stotements. The trust/investment management department shall adopt the provisions of the PFRS/PAS in all respect, for purposes of preparing the AFS of its trust and other fiduciary and investment management activities. The guidelines underSection LTZshall be adopted. Section 3. The pertinent provisions on submission frequency/deadline of AFS under Sections 84 and 101 of the Manual of Regulations for Foreign Exchange Transactions {MORFXT) are hereby amended to read, as follows: Section 84. Accounting. The foreign currency deposits and corresponding cover xxx. XXX. Banks which are authorized to operate under this Chapter shall submit to the appropriate supervising department of the Bangko Sentral a separate audited financial statement (category B report) of the FCDU/EFCDU for the past year not later than 1.20 calendar days after the close of the calendar year or fiscal year adopted by the bank in accordance with the provisions of Section L74 of the MORB. Section 101. Reportorial Requirements. The following reports are required to be submitted to the BSP by AABs, OBUs, and AAB-forex corps, where applicable: Title of Report Submission Submission Categorv Frequencv/Deadline Procedure Xxx Xxx Xxx XXX D. FCDUs/EFCDUs "xxx Xxx XXX B Audited Financial Annually, not later Hardcopy to the Statement of than L20 calendar appropriate FCDU/EFCDU days after the close supervising of the calendar year department of or fiscal year the Bangko adopted by the Sentral

bank. Xxx Report on xxx Xxx Compliance with FCDU/EFCDU Cover Requirements (Appendix L5) XXX. Section 4. The pertinent provisions in Appendix 55 of the MORB, as shown in Annex A, are amended to indicate the new requirements and deadline in the submission of the AFS. Section 5. This Circular shall take effect fifteen (15) calendar days following its publication either in the Official Gazette or in a newspaper of general circulation. FOR THE MONETARY BOARD: c (- (, BENJAMIN E. DIOKNO \ Governor 67 rebruary2o2o

Appendix 55 CHECKTIST OF BANGKO SENTRAT REQUIREMENTS IN THE SUBMISSION OF AUDITED FINANCIAL STATEMENTS AND ANNUAT AUDIT REPORT (Appendix to Section 774 on Finoncial Audit) The external auditor (included in the List of Bangko Sentral Selected External Auditors) shall start the audit not later than thirty (30) calendar days after the close of the calendar/fiscal year adopted by the bank. AFS of banks with subsidiaries shall be presented side by side on a solo basis and on a consolidated basis (banks and subsidiaries). The following shall be submitted by the bank to the appropriate supervising department of the Bangko Sentral: I nformation/Data Required Deadline for submission 1. Audited Financial Statements (AFS) Not later than one hundred twenty (120) calendar days after the close of the calendar year or fiscal year adopted by the bank. 2. Certification by the external auditor on For submission together with the AFS not later compliance with the following: than 120 calendar days after the close of the calendar year or fiscal year adopted by the a. Confidentiality clause pertinent to bank. read-only access to the Report of Examination; and b. Disclosure requirements under Section L74 and other information that may be required. 3. Reconciliation statement, including For submission together with the AFS not later copies of adjusting entries on the than 120 calendar days after the close of the reconciling items, between the AFS and calendar year or fiscal year adopted by the the prudential reports (i.e., Balance bank. Sheet and Income Statement for bank proper (regular and FCDU) and Financial Reporting Package for Trust Institutions lFRPrl for trust department/institutions, following the formats in Annexes B and C of Appendix 55 [for the bank proper and for the trust department, respectively] ). 4. Letter of Comments (LOC)I indicating For submission together with the AFS not later material weaknesses on internal control than 120 calendar days after the close of the and risk management system as well as calendar year or fiscal year adopted by the other issues, which may include findings bank. on the quality of governance, that should be brought to the attention of 1 LOC or equivalent letter to Management/Board of Directors

the Board/Management along with the recommendations for corrective action. Otherwise, a certification by the external auditor that there are no issues noted in the course of the audit to warrant the submission of the LOC. 5. Copy of the board resolution showing For submission together with the AFS not later the actions on the AFS and the than 120 calendar days after the close of the submitted LOC, if any. calendar year or fiscal year adopted by the bank. 6. In case of foreign banks with branches in the Philippines, in lieu of the board For submission together with the AFS not later resolution, a report by the country head than 120 calendar days after the close of the on the action taken by management calendar year or fiscal year adopted by the (head office or regional) on the AFS and bank. the LOC, if any. 7. The external auditor shall report to the appropriate supervising department of the Bangko Sentral any matter Within fifteen (15) calendar days upon adversely affecting the condition or discovery. soundness of the BSFI, such as, but not limited to the following cases: a. Any material finding involving fraud or error; b. Actual or potential losses the aggregate of which amounts to at least ten percent (1O%l of the consolidated total assets of the BSFI; c. Significant doubt as to the ability of the BSFI to continue as a going concern; d. Material breach of laws or Bangko Sentral rules and regulations such as but not limited to prescribed capital and liquidity ratios, significant deficiency in allowance for credit losses, material weaknesses in fair value measurement methodology, significant vulnerabilities to money laundering and combating the financing of terrorism; e. Material internal control weaknesses which may lead to financial reporting problems; and

f. Findings on matters of corporate governance that may require urgent action by the Bangko Sentral. In case there are no matters to report (e.g., Not later than 120 calendar days after the close fraud, dishonesty, breach of laws, etc.), a of the calendar year or fiscal year adopted by notarized certification that there is none to the BSFI. report. AAR - For banks under the concurrent jurisdiction of the Bangko Sentral and Commission on Audit (COA) 1. Copy of the AAR accompanied by the: Within forty (40) calendar days after receipt of a. Certification by the institution the AAR by the board of directors. concerned on the date of receipt of the AAR by the board of directors; b. Reconciliation statement, including copies of adjusting entries on the reconciling items, between the AFS in the AAR and the prudential reports (i.e., Balance Sheet and Income Statement of bank proper (Regular and FCDU) and Financial Reporting Package for Trust Institutions [FRPTI] for trust department/institutions, following the formats in Annexes B and C of Appendix 55 [for the bank proper and for the trust department, respectivelyl; and c. Other information that may be required by the Bangko Sentral. 2. Copy of the board resolution showing the Within thirty (30) banking days after receipt of action taken on the AAR, as well as on the AAR by the board of directors. the comments and observations, including the names of the directors present and absent, among other things.

Annex A APPENDIX 55 - DISCLOSURE REQUIREMENTS TO THE AUDITED FINANCIAL STATEMENTS (Appendix to Section 774 on Disclosure requirements to the oudited linonciol stotements) Banks shall include the additional information to the Audited Financial Statements: a. Notes to the financial statements (U Capital position on solo and consolidated bases. These shall include Common Equity Tier 1 (CETI) capital, Tier 1 capital, Total Qualifying Capital, Total Risk-Weighted Assets; CapitalAdequacy Ratio (CAR), Tier 1 ratio, and CET 1 ratio, as applicable; (2) Leverage ratio and Total Exposure Measure both on solo and consolidated bases; (3) Liquidity position on solo and consolidated bases. lt shall include the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR); In the case of stand-alone thrift banks, rural banks, cooperative banks and quasi- banks, only the Minimum Liquidity Ratio (MLR) shall be disclosed. (4) Provisioning methodology and key assumptions used in determining allowance for credit losses; (5) Accounting policies which shall include, but not limited to, general accounting principles, valuation policies for financial instruments and Real and Other Properties Acquired (ROPA), and policies on securitizations, foreign currency translations, and repurchase agreements. b. Supplementary information {1) Basic quantitative indicators of financial performance such as return on average equity, return on average assets and net interest margin; For purposes of computing the indicators, the following formulas shall be used: (a) Return on Average = Net Income (or Loss) after lncome Tax x 100 Equity (%) Average Total Capital Accounts Where: li::i:t'"' o;i,T;:::,:#i:'.'ffi**1:..";,, Accounts balance 2

(b) Return on Average = Net Income (or Loss) after Income Tax x 100 Assets (%) Average Total Assets Where: Average = Qurrent calendar/fiscal TotalAssets year-end TotalAssets balance + previous calenda r/fiscal yea r-end Total Assets balance (c) Net Interesf = Net Interest Income x 100 Margin (%) Average Interest Earning Assets Where: Net Interesl = Total Interest Income - Total Interest Expense lncome Average = Current calendar/fiscal year-end Total lnterest Interest Earning Assets balance + previous Earning calendar/fiscal year-end Total Interest Earning Assets Assets balance (21 Description of capital instruments issued; (3) Significant credit exposures (30.0 percent of the total loan portfolio or 10.0 percent of Tier 1 capital) as to industry/economic sector; (4) Breakdown of total loans as to: (i) security (secured, including type of security, and unsecured), and (ii) status (performing and non-performing per product line); (5) lnformation on related party loans broken down as follows: DOSRI Related Party Loans Particulars Loans (inclusive of DOSRI Loans) o Outstanding loans o Percent of DOSR|/Related Party loans to total loan portfolio o Percent of unsecured DOSRI/ Related Party loans to total DOSRI/Related Party loans o Percent of past due DOSRI/ Related Party loans to total DOSRI/Related

Party loans o Percent of non-performing DOSRI/Related Party loans to total DOSRI/Related Party loans (5) Aggregate amount of secured liabilities and assets pledged as security; and (71 Nature and amount of contingencies and commitments arising from off-balance sheet items Iinclude direct credit substitutes (e.9., export LCs confirmed, underwritten accounts unsold), transaction-related contingencies (e.9., performance bonds, bid bonds, standby LCs), short-term self-liquidating trade- related contingencies arising from the movement of goods (e.g., sight/usance domestic LCs, sight/usance import LCs), sale and repurchase agreements not recognized in the balance sheet; interest and foreign exchange- rate related items; and other commitments. For items "5" , "6" , and "7' , indicate if there is none to report.

Annex B Appendix 55 Name of Financial Institutaon Comparison of Submitted Balance Sheet and lncome Statement and Audited Financial Statements As of (end of calendar or fiscal year) (ln Thousand Pesos) Submitted Audited Variance/ Reasons for Report Report Discrepancy Discrepancy Cash and Other Cash ltems Due from BSP Due from Other Banks Financial Assets Measured at Fair Value through Profit or Loss Financial Assets Measured at Fair Value through Other Comprehensive Income Debt Securities Measured at Amortized Cost Loans and Receivables, net Loans and Receivable Arising from Repurchase Agreements, Certificates of Assignment/Participation with Recourse, and Securities Lending and Borrowing Transactions Accrued Interest lncome from Financial Assets Bank Premises, Furniture, Fixture and Equipment, net Other Assets Due f rom Head Office/Branches/Agencies Abroad Total Assets Financial Liabilities Designated at Fair Value through Profit or Loss (DFVPL) Bonds Payable Redeemable Preferred Shares Financial Liabilities Associated with Transferred Assets Finance Lease Payment Payable Accrued Interest, Taxes and Other Expenses Other Liabilities Due to Head Office/Branches/Agencies Abroad Paid-in Capital Stock Additional Paid-in Capital

Retained Earnings Other Comprehensive I ncome Total Capital Total Liabilities and Capital Total Income Total Expenses Net lncome Before lncome Tax

Annex C Appendix 55 Name of Financial Institution Trust Department (Contractual Relationship of TE, e.g., Institutional-Trust, etc.) Comparison of Submitted FRPTI Balance Sheet and Audited Financial Statements As of (end of calendar or fiscal year) (ln Thousand Pesos) Accounts FRPTI AFS Discrepancy Explanation for Discrepa ncy Assets (net) Cash and Other Cash ltems Due from BSP Due from Other Banks Financial Assets Measured at Fair Value through Profit or Loss Financial Assets Measured at Fair Value through Other Comprehensive Income Debt Securities Measured at Amortized Cost Loans and Receivables and Loans Arising from Repurchase Agreements and Securities Lending and Borrowing Transactions Other Financial Assets Investment Properties and Real and Other Properties Acquired Other Assets Total Assets ========== =========== ============= Accountabilities Principa I Accumulated Income Net Unrealized Gains/(Losses) on AFS Financial Assets Other Accounta bilities Total Accountabilities