BSP to let banks defer booking losses on sale of bad assets

The Bangko Sentral ng Pilipinas (BSP) will allow banks to defer booking their losses from the sale of bad assets but they will still be required to comply with auditing standards when preparing their financial statements.

The BSP said its rules on the sale of non-performing assets (NPAs) under the Special Purpose Vehicle Act (SPVA) amended the accounting guidelines on the sale of NPAs to special purpose vehicles and to qualified individuals for housing.

However, the SPVA provisions would run counter to the Philippine Financial Reporting Standards (PFRS)/Philippine Accounting Standards (PAS) which would take effect when banks make their annual financial reporting period beginning Jan. 1, 2005.

According to BSP Governor Amando Tetangco Jr., the BSP had decided to allow banks, for prudential reporting purposes, to "derecognize" or remove from their books whatever NPAs have been sold even if the sale does not qualify for derecognition under the provisions of the new accounting standards.

"The limitation is that the transaction must qualify as a true sale under the SPV Law and its implementing rules and regulations," Tetangco said. "The bank must also appropriately disclose such fact."

Tetangco said that under the BSP rule, banks shall continue to enjoy the regulatory incentive of deferred booking of losses.

"However, we wish to emphasize that banks are still required to comply with the provisions of the PFRS/PAS for purposes of preparing the audited financial statements," Tetangco said.

Availing of the regulatory incentives, Tetangco explained, would have to involve a trade-off because the audited financial statements could warrant a qualified opinion from external auditors.

"This is a business decision on the part of banks," he said. "Banks with strong balance sheets may very well opt not to defer booking of losses to avoid a qualified auditor’s opinion."

The guideline for the adoption of the PFRS and PAS was approved by the Monetary Board (MB) earlier this year, outlining the accounting treatment for specific items to align the existing BSP regulations with the provisions of PFRS/PAS.

As a general rule, Tetangco said financial institutions are required to comply in all respect with the provisions of PFRS/PAS in preparing both their audited financial statements and the financial statements for prudential reporting.

The MB outlined only two instances where a different accounting treatment is prescribed for prudential reporting.

One is when preparing consolidated financial statements, only financial allied subsidiaries, except subsidiary insurance companies, shall be consolidated on a line-by-line basis.

The second is in setting the allowance for probable losses on loans, the BSP prescribed valuation reserves shall be complied with. The accounting treatment for prudential reporting aims to ensure that the financial statements provide a suitable basis for measuring banking risks and banking ratios.

One of the important provisions of the new guidelines that may have a significant impact on the industry is the accounting treatment for derivatives and hedging relationships which shall be accounted for in accordance with PAS 39.

Under the said standard all derivatives shall be reported on-balance sheet and those not held as hedging instruments shall be classified as held for trading (HFT) with gains or losses from marking to market recognized in the income statement.

Tetangco said strict criteria would be imposed for hedge accounting which includes compliance with the designation, documentation and hedge effectiveness requirements.

Tetangco said the adoption of the new set of accounting standards in the financial industry was part of BSP’s goal to ensure fairness, transparency and accuracy in financial reporting.

The PFRS/PAS issued by the Accounting Standards Council (ASC) are based on the revised International Accounting Standards (IAS) and the new International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board.