By Lee C. Chipongian
The Bangko Sentral ng Pilipinas (BSP) has approved the adoption of the Philippine Financial Reporting Standards 9 (PFRS 9)-Financial Instruments to promote prudence and transparency in financial reporting.
The BSP, in a statement Friday, said the guidelines cover the supervisory expectations in classifying and measuring financial instruments and will “provide the overarching governance overlay on the adoption of the standard.”
The BSP said bank directors are now required to do assessment impact of PFRS 9 on business strategies and risk management systems to determine best policies and measures.
They also expect 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,” according to the central bank. “Specifically, the BSP 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 will align the accounting treatment with risk management strategies and is seen to strengthen governance over the reporting system.”
Under PFRS 9, the so-called expected credit loss (ECL) will be adopted to detect “impairment.”
“The model requires early recognition of allowance for credit losses even before the default or non-payment of the borrower,” said the BSP. In fact, this has been adopted by the BSP when it amended the definitions of past due and non-performing loans and implemented the ECL methodology in booking allowance for credit losses.
“In keeping with the principle of proportionality (banks) with simple operations are expected to adopt simple loan loss methodologies fundamentally anchored on the principle of recognizing ECL,” said the BSP. 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 prescribed under Circular No. 855, it said.
The International Financial Reporting Standards (IFRS) 9-Financial Instruments, which was issued by the International Accounting Standards Board (lASB), replaced the International Accounting Standards (IAS) 39-Financial Instruments: Recognition and Measurement.
PFRS 9 is the local adoption of IFRS 9. The standard is mandatorily effective starting January 1, 2018.