Capital adequacy is a term that has emerged in the wake of the repercussions of the 2008 global financial crisis in 2008, which called for the Basel Committee’s members to hold several rounds of meetings until they adopted a set of recommendations in November 2010, which the members of the Basel Committee should observe to address the crisis repercussions and ensure that it will not recur. Capital adequacy indicates the ability of financial institutions (banks and investment companies) to provide liquidity to meet short-term liabilities and create capital capable of withstanding the investment risks, so that in the event that these risks materialize, such financial institutions are not exposed to bankruptcy or collapse, which would enhance the stability and efficiency of financial systems worldwide.
In the State of Kuwait, the Capital Markets Authority issued Resolution No. 170 of 2019 concerning the application of capital adequacy instructions to the licensed persons, and devoted a module in the Executive Regulations titled “Module Seventeen – Capital Adequacy Instructions for Licensed Persons”.
FAQs about the capital adequacy reports are as follows:
What is the scope of applicability of capital adequacy instructions?
The capital adequacy instructions are applicable to all local CMA Licensed Persons operating in the State of Kuwait.
(Reference: Article 2-1 of Chapter 2 – Scope of Applicability, Module Seventeen – Capital Adequacy Instructions for Licensed Persons”).
Is it required to appoint a CMA registered auditor to provide assurance opinion regarding the application of capital adequacy instructions?
Yes, Article 2-3 of Chapter 2 – Scope of Applicability, Module Seventeen – Capital Adequacy Instructions for Licensed Persons indicates that a licensed person shall issue capital adequacy report on consolidated and quarterly basis; provided that such report shall be reviewed and audited by a CMA registered auditor for interim and annual reports.
What is the international standard governing the auditor’s scope of work related to review/ audit of capital adequacy reports?
The auditor shall carry out the scope of work related to review/ audit of capital adequacy reports in accordance with International Standard on Related Services 4400 (ISRS 4400) Engagements to perform Agreed Upon Procedures.
What is the timeframe set under Resolution No. 170 of 2019 for Licensed Person to comply with the capital adequacy requirements?
The Licensed Persons that are subject to the Resolution No. 170 of 2019 shall comply with the requirements of capital adequacy instructions not later than 31 December 2020.
Are Licensed Persons required, during the transition person for complying with the capital adequacy requirements, to have assurance reports issued by a CMA registered auditor?
No, they are not required to do so unless a licensed person will have reduced the capital as per the criteria set forth in Module Seventeen – Capital Adequacy Instructions for Licensed Persons or a licensed person receives the license after the issue date of the Resolution No. 170 of 2019.
What is frequency of capital adequacy reports and the related deadlines for submission to Capital Markets Authority?
A licensed person shall issue the capital adequacy interim reports on a quarterly basis and annual report, and present the report to the Capital Markets Authority within forty five days from the end of the financial reporting period.
What is the added value to business entities from Capital Adequacy Reports?
Ensure compliance with the regulatory requirements of Capital Markets Authority
The experience of the firm and assurance services team with the capital adequacy concept and the instructions issued by CMA; and
Availability of the resources required to meet the prescribed deadlines.
What are the services provided by Baker Tilly?
AUP Report on Capital Adequacy by CMA registered auditor.