The Monetary Board (MB) approved additional guidelines on the early adoption by banks and other BSP-supervised financial institutions (FIs) of Philippine Financial Reporting Standards (PFRS) 9 Financial Instruments under Circular No. 708 dated 10 January 2011.
The recently approved guidelines amend the provisions of Circular No. 708, which initially dealt with the classification and measurement of financial assets under PFRS 9 (2009), so as to expand its coverage to, likewise, include the classification and measurement of both financial assets and financial liabilities, in keeping with the provisions of PFRS 9 (2010).
As a background, PFRS 9 (2009) simplifies the classification and measurement of financial assets to either at amortized cost or at fair value depending on the (a) entities' business model for managing financial assets; and (b) contractual cash flow characteristics of the financial assets.
PFRS 9 (2010), on the other hand, consolidates the provisions of PFRS 9 (2009) on financial assets together with the new PFRS 9 provisions on financial liabilities. The PFRS 9 provisions on financial liabilities generally retain the accounting standards on the classification and measurement of financial liabilities under Philippine Accounting Standards (PAS) 39, except for the treatment of changes in fair value of financial liabilities that are attributable to credit risk which shall be presented in "Other Comprehensive Income", except in certain cases.
Banks and other BSP-supervised FIs are given the option of adopting the provisions of PFRS 9 (2009) on financial assets or PFRS 9 (2010) on both financial assets and financial liabilities, prior to its mandatory effectivity date of 1 January 2013.
In addition to compliance with the provisions of PFRS 9, banks/FIs which intend to early adopt the provisions of PFRS are subject to the following prudential requirements:
- Approval by the entities' board of directors, or equivalent governing body, of the early adoption, and
- Submission of prescribed reportorial requirements, such as the one-time Report on Initial Application of PFRS 9. The one-time Report on Initial Application of PFRS 9 shall disclose the cumulative impact of the bank's/FI's adoption of PFRS 9 on selected balance sheet accounts, net income and capital position. The disclosure requirements shall vary depending on the PFRS 9 standard adopted by the bank/FI, i.e., PFRS 9 (2009) or PFRS 9 (2010).
Lastly, the recently approved guidelines grant regulatory relief to 2011 early adopters by giving them up to 31 December 2011 to reflect the impact of their early adoption in their books. This means that banks and other BSP-supervised FIs will have more time to (a) assess the implications of adopting PFRS 9 on their accounting and information systems, as well as (b) implement measures to calibrate these systems in preparation for their eventual adoption of the said standard.
The regulatory relief provided by the BSP on the interim reportorial requirements of banks and other BSP-supervised FIs is consistent with that granted by the Securities and Exchange Commission (SEC) to covered entities under SEC Memorandum Circular No. 3 dated 16 May 2011.
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 impairment and hedge accounting, respectively.