The Australian Prudential Regulation Authority (APRA) today announced amendments to the prudential standard on the measurement of capital by authorised deposit‑taking institutions (ADIs).

The amendments require ADIs to treat certain types of capitalised expenses as intangible assets for prudential purposes.  These include:

• loan and lease origination fees and commissions paid to mortgage originators and brokers;
• capitalisation of securitisation establishment costs;
•  costs associated with debt raisings and other similar transaction related costs; and
•  capitalised expenses of a general nature, eg strategic business development initiatives.

ADIs will be required to deduct these items from capital, on both a stand‑alone and group basis, in determining whether they meet APRA?s capital adequacy requirements.

The revised arrangements will come into effect for most ADIs from 1 July 2004.  Limited transitional arrangements will allow ADIs with capitalised expenses greater than five per cent of total regulatory capital until 1 July 2005 to fully implement the arrangements.

APRA?s proposals on the treatment of capitalised expenses were set out in a discussion paper in June 2003 and were finalised after industry consultation.  Earlier, in September 2002, APRA had conducted a survey of 243 ADIs on the accounting policy, nature and materiality of capitalised expenses and intangible assets, which showed inconsistencies in the treatment of these items in prudential reporting. 

APRA?s Chairman, Dr John Laker, said the revised standard would strengthen the capital adequacy framework for ADIs by enhancing confidence that assets are available to protect depositors should an ADI come under stress.

He added: ?By clarifying the prudential treatment for these types of intangible assets, the measurement of capital for prudential purposes will also be consistent whatever the accounting policy adopted by ADIs.?

The revised Prudential Standard APS 111 Capital Adequacy: Measurement of Capital and corresponding Guidance Note AGN 111.4 Capital Deductions APS 111 and AGN 111 are available on the APRA website at:

http://www.apra.gov.au/Policy/Prudential-Standards-Guidance-Notes-for-ADIs.cfm

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry.  It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry.  APRA is funded largely by the industries that it supervises.  It was established on 1 July 1998.  APRA currently supervises institutions holding approximately $1.7 trillion in assets for 20 million Australian depositors, policyholders and superannuation fund members.

Media and industry inquiries only:	Sue Morey Head of Public Affairs Australian Prudential Regulation Authority Telephone: 02 9210 3384 Mobile: 0438 124 524
All other inquiries:	APRA Contact Centre 1300 131 060