MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is requiring banks to incorporate forward-looking information in measuring impairment loss on financial instruments as well as credit losses under the new reporting standards.
The regulator said the Monetary Board has approved the guidelines on the adoption of Philippine Financial Reporting Standards (PFRS) 9 – Financial Instruments for Bangko Sentral supervised financial institutions (BSFIs).
The International Financial Reporting Standards (IFRS) 9 - Financial Instruments, which was issued by the International Accounting Standards Board (IASB), replaced the International Accounting Standards (IAS) 39 - Financial Instruments: Recognition and Measurement.
PFRS 9 is the local adoption of IFRS 9 and mandatorily effective for periods beginning on or after Jan. 1.
The BSP flagged the adoption of PFRS 9 as early as May 2016 under Circular No. 912.
“The policy sets out the supervisory expectations in classifying and measuring financial instruments and in recognizing impairment to promote prudence and transparency in financial reporting,” the central bank said.
In particular, the board of directors is required to assess the impact of PFRS 9 on business strategies and risk management systems to be able to adopt appropriate policies and control measures to ensure integrity of the reporting process.
The regulator expects banks to exercise sound professional judgment in implementing the provisions of the standards considering that these are largely principles-based.
“The guidelines present a holistic approach in assessing the appropriateness of classification of financial instruments,” it said.
Based on the guidelines, the regulator will evaluate the consistency of sales activities and metrics being used in monitoring the performance of financial instruments with the business model for holding the instrument.
This, the BSP added, would align the accounting treatment with risk management strategies and is seen to strengthen governance over the reporting system.
PFRS 9 also requires the adoption of the expected credit loss (ECL) in recognizing impairment to provide timely and more useful information about an entity’s expected credit losses to the users of financial statement under the “Guidelines on Sound Credit Risk Management.”
“The said model requires early recognition of allowance for credit losses even before the default or non-payment of the borrower,” the BSP said.
The BSP’s earlier issuance amending the definitions of past due and non-performing loans likewise paved the way for the implementation of the ECL methodology in booking allowance for credit losses.
In keeping with the principle of proportionality, BSFIs with simple operations are expected to adopt simple loan loss methodologies fundamentally anchored on the principle of recognizing ECL.
Other financial institutions with credit operations that may not economically justify adoption of a model will be subject to the regulatory guidelines in setting up allowance for credit losses.