The adoption of the Philippine Financial Reporting Standards (PFRS)/Philippine Accounting Standards (PAS) had a minimal impact on the capital level of the universal/commercial banking (U/KB) industry based on the evaluation made by the Bangko Sentral ng Pilipinas.
The impact of adoption of PFRS/PAS was assessed based on the extent of adjustments to the retained earnings of banks as disclosed in the audited financial statements (AFS). Said adjustments represent the gains/(losses) in effecting the provisions of the new standards to the account balances.
Net loss adjustments to retained earnings of U/KBs totaled P46.9 billion consisting of gross loss adjustments of P58.0 billion and gross gain adjustments of P11.1 billion.
The gross loss adjustments of P58.0 billion consisted mainly of adjustments arising from the shift from the equity method to the cost method in accounting for investments in subsidiaries/associates of P29.4 billion (51%), additional impairment on financial assets of P15.2 billion (26%) and losses from other adjustments of P6.7 billion (12%). On the other hand, The P11.1 billion gross gain adjustments were due to the increase in fair value of Real and Other Properties Acquired (ROPA) of P10.0 billion (89%) resulting from the use of fair value as the deemed cost of ROPA upon transition to the new standards and day one gains of P1.2 billion (11%) resulting from restatement of the carrying amount of financial instruments as if booked at fair value upon initial recognition.
Notwithstanding the P46.9 billion net loss adjustments in retained earnings of U/KBs due to the adoption of PFRS/PAS, the U/KB industry still maintains a comfortable margin over the 10 percent minimum prescribed capital adequacy ratio (CAR) ratio with CARs of 16.31 percent on solo basis and 17.75 percent on consolidated basis as of 31 December 2005.
This can be attributed to the adjustments that were not recognized for purposes of preparing the prudential reports submitted to BSP such as the P29.4 billion loss adjustments from the shift in the accounting treatment of investments in subsidiaries and associates, among others. The BSP, in its earlier issuances emphasized that for purposes of preparing the prudential reports banks shall continue to use the equity method in accounting for investments in subsidiaries and associates as it reflects the ownership interest of the bank in said companies at any point in time and it closely approximates financial statements prepared on a consolidated basis.
Based on the availability of AFS, only 36 out of the 41 U/KBs were included in the study, which is composed of 20 domestic banks and 16 foreign banks.
PFRS/PAS are the new set of generally accepted accounting principles, which was adopted in the banking industry for the financial reporting period beginning 1 January 2005. The BSP has issued several Circulars aligning the regulatory accounting practices with the new standards.