Local adoption of amendments to IAS 39 and IFRS 7 on reclassification of financial assets

Introduction

As discussed in our KPMG Corner published last Nov. 11, 2008, the International Accounting Standards Board (IASB) issued the Amendments to International Accounting Standard (IAS) 39 Financial Instruments: Recognition and Measurement, and International Financial Reporting Standard (IFRS) 7 Financial Instruments: Disclosures.

The following are the recent local developments relating to these amendments:

Adoption by the Philippine financial reporting standards council (FRSC)

The FRSC approved on Oct. 29, 2008 the immediate adoption of Amendments to IAS 39 and IFRS 7 as amendments to Philippine Accounting Standard (PAS) 39 and Philippine Financial Reporting Standard (PFRS) 7. Adoption of the amendments would enable Philippine entities applying PFRSs to avail of the allowed international accounting treatments.

For Philippine financial reporting purposes, the amendments to PAS 39 are effective from July 1, 2008. Entities are not permitted to reclassify financial assets in accordance with the amendments before July 1, 2008. Any reclassification of a financial asset made in periods beginning on or after Nov. 15, 2008 will take effect only from the date the reclassification is made. Philippine reporting entities should note that the use of the November 15, 2008 “cut-off date” would not be in accordance with IFRSs. Accordingly, a Philippine entity that will present financial statements in accordance with IFRSs (e.g., for IPO purposes) would have to use the November 1, 2008 “cut-off date” in the IAS 39 amendments to be in compliance with IFRSs.

Adoption by the Philippine Securities and Exchange Commission (SEC)

The SEC, for its part, initially studied the implications on Philippine companies of the mark-to-market rule under the original provisions of IAS 39, before deciding on the adoption of the amendments.

And just very recently, last Nov. 14, 2008, the SEC issued SEC Memorandum Circular No. 10, Series of 2008, Amendments to Philippine Accounting Standard 39 and Philippine Financial Reporting Standard 7 that provides the specific guidelines to be observed in the reclassification of financial assets under the above-stated amendments.

Under this Circular, the SEC finally adopted the amendments to PAS 39 and PFRS 7 to permit the following actions for some financial instruments:

• Reclassification of securities out of the trading category in rare circumstances;

• Reclassification to loan category (cost basis) if there is an intention and ability to hold the financial instruments for the foreseeable future (in the case of loans) or until maturity (for debt securities).

The effective date of the amended standard shall be July 1, 2008, hence, no reclassification before such date shall be permitted. On first application, companies can revert to July 1, 2008 and make transfers as of that date. Any subsequent reclassification made in periods beginning on or after Nov. 15, 2008 shall be effective from the date the reclassification is made. Companies with cross-border offerings or trading may use the Nov. 1, 2008 cut-off date set by the IASB.

In this regard, you may want to visit the SEC website to access SEC Memorandum Circular No.10, Series of 2008 for your reference.

Adoption by the Bangko Sentral ng Pilipinas (BSP)

The BSP also issued Circular No 626, Series of 2008, Reclassification of Financial Assets Between Categories. Further to Circular No. 626, the BSP issued Circular No. 628, Series of 2008, that discusses additional guidelines on the said reclassification. Among others, the following may be adopted for prudential reporting purposes:

• Hybrid financial assets (other than CLNs) may be included among the financial assets that may be reclassified out of the Held for Trading (HFT) and into the Available for Sale (AFS)/Held to Maturity (HTM)/Unquoted Debt Securities Classified as Loans (UDSCL) by, first, bifurcating the embedded derivative from the host instrument and booking the derivatives under Derivatives with Positive/Negative Fair Value; and second, reclassifying the host contract to AFS/HTM/UDSCL.

• Financial assets that are booked under the AFS category because of a previous tainting of the HTM portfolio may be reclassified to HTM or UDSCL using the fair value carrying amount of the financial assets as of the effective date of reclassification.

In addition, the provisions of Circular No. 628 shall likewise be applicable to trust institutions, except for (1) Unit Investment Trust Funds (UITFs); and (2) Pre-need, escrow and other accounts whose investments are regulated by or require approval from other regulatory agencies.

BSP Circulars No. 626 and 628 can be downloaded from the BSP website for your reference.

If you would like further information on any of the matters discussed in this article, please contact Sharon G. Dayoan, Risk Management Partner of Manabat Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.

(This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please email [email protected] or [email protected]).