Question ID:
2014_1221
Legal Act:
Regulation (EU) No 575/2013 (CRR)
Topic:
Own funds
Article:
26
Paragraph:
2
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Not applicable
Article/Paragraph:
N/A
Disclose name of institution / entity:
No
Type of submitter:
Credit institution
Subject Matter:
Inclusion of consolidated current and year-end profits in Common Equity Tier 1 Capital
Question:
According to Articles 18 and 19 of Regulation (EU) No 575/2013 (CRR), institutions have to carry out a prudential consolidation. The scope of entities included in prudential consolidation can differ from the scope of full financial consolidation. For the purposes of meeting the requirements of Article 26(2) of the CRR, should the current as well as year-end profits resulting from the prudential consolidation also be verified by persons independent of the institution that are responsible for the auditing of the accounts of that institution? Is the General Meeting of Shareholders obliged to confirm the year-end profit for the Group prudentially consolidated, in addition to the year-end profit for the Group financially consolidated?
Background on the question:
The profit for the Group prudentially consolidated can be greater in some cases (e.g. losses arising from entities not included in the scope of prudential consolidation, but included in the scope of financial consolidation) than the profit for the Group financially consolidated.
Date of submission:
20/05/2014
Published as Final Q&A:
20/03/2015
EBA Answer:

Article 26(2)(a) of Regulation (EU) No 575/2013 (CRR) specifies that one of the conditions for interim or year-end profits to qualify for inclusion in Common Equity Tier 1 capital, prior to the institution taking a formal decision confirming the final profit or loss of the institution of for the year, is the verification of those profits by persons independent of the institution responsible for the auditing of the accounts. The second subparagraph of Article 26(2) of the CRR clarifies that this verification shall provide "an adequate level of assurance that those profits have been evaluated in accordance with the principles set out in the applicable accounting framework". (See further Q&A 2013_384).

For the purposes of meeting the requirements of Article 26(2) of the CRR, where the prudential and the accounting scope of consolidation differ, the consolidated financial interim or year-end profit should be reconciled with the consolidated prudential interim or year-end profit prepared according to the methods of consolidation specified under Article 18 of the CRR. This is in line with the principle of reconciliation of prudential and financial figures established in the ITS on the disclosure of own funds requirements (Annex I.3 of Regulation (EU) No 1423/2013).

The reconciliation is to be undertaken to the satisfaction of the relevant competent authority, and is applicable at all relevant levels of consolidation.

The CRR does not require an approval of the year-end profits within the scope of prudential consolidation by the General Meeting of Shareholders. This is without prejudice to any legal requirements in that respect which stem from other European or national legal frameworks. 

Status:
Final Q&A
Answer prepared by:
Answer prepared by the EBA.
Note to Q&A:
Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.
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