The Monetary Board (MB) recently approved the guidelines on the early adoption by banks and other BSP-supervised financial institutions (FIs) of Philippine Financial Reporting Standards (PFRS) 9 Financial Instruments.
PFRS 9 is the local adoption of International Financial Reporting Standards (IFRS) 9 Financial Instruments – the first phase of the three-phased improvement project by the International Accounting Standards Board (IASB) to ultimately replace International Accounting Standards (IAS) 39 Financial Instruments: Recognition and Measurement. Phases 2 and 3 of the project deal with amortized cost and impairment of financial assets and hedge accounting, respectively.
IFRS 9 (Phase 1) which deals with the classification and measurement of financial assets was adopted in the Philippines by the Financial Reporting Standards Council (FRSC) as PFRS 9. It will be mandatory beginning 1 January 2013 but entities are permitted to early adopt beginning on or after 1 January 2010. The Securities and Exchange Commission (SEC) has approved its adoption as part of its rules and regulations on 6 May 2010.
PFRS 9 aims to improve and simplify the classification and measurement of financial instruments. It requires entities to classify and subsequently measure financial assets at either amortized cost or fair value on the basis of both (a) the entities’ business model for managing the financial assets; and (b) the contractual cash flow characteristics of the financial assets.
Among others, it has done away with “Available for Sale” (AFS) and “Held to Maturity” (HTM) categories, together with the “tainting rule” which forces entities to reclassify HTM securities to AFS securities in the event that any of those instruments booked under the HTM category is sold. It also requires enhanced disclosures to help the users of financial statements better understand the risks and the likely cash flows from the financial assets.
In addition to the required compliance with the provisions of PFRS 9 by banks and other BSP-supervised entities, the newly approved guidelines also provide for certain prudential requirements such as approval by the entities’ board of directors or equivalent governing body of the early adoption and submission by early adopters of the prescribed additional reportorial requirements.