The Monetary Board approved on 23 December 2004 the revised rules and regulations governing the accounting treatment of investments in debt and equity securities. This is to align the existing regulations with the provisions of International Accounting Standards (IAS) 39 – Financial Instruments: Recognition and Measurement, which is due for full implementation effective the annual reporting period beginning 1 January 2005.
The approved rules and regulations provide general guidelines, in accordance with IAS 39, for classifying, recognizing and measuring investments in debt and equity which shall be classified under any of the following categories: (a) Held-to-Maturity Securities (HTM); (b) Securities at Fair Value through Profit or Loss which shall, initially consist of Securities Held for Trading Securities (HFT); (c) Available-for-Sale Securities (AFS) which shall include as a sub-account Underwriting Accounts (UA); and (d) Investments in Non-Marketable Equity Securities (INMES). HTM replaces the Investment in Bonds and Other Debt Instruments (IBODI) account while the Trading Account Securities (TAS) is renamed HFT.
Financial institutions are required to classify their outstanding investments in debt and equity securities based on their intention for holding or purchasing the securities. In this regard, securities intended to be held until maturity will fall under the HTM category while securities that are acquired principally for the purpose of selling or repurchasing in the near term or for short-term profit taking shall be classified as HFT under the Securities at Fair Value through Profit or Loss category.
One of the significant provisions of the new set of rules and regulations on investments in debt and equity securities is the tainting provision on HTM. The HTM portfolio will be considered tainted when a financial institution sells or reclassifies a significant amount of HTM securities prior to maturity for reasons that are not considered permissible under the new regulations. Permissible sales or reclassification include, among others, those that occur close to maturity (i.e., less than three months before maturity); those that occur after the financial institution has substantially collected all (i.e., at least 85 percent) of the security’s original principal through scheduled payments or prepayments; or those that are attributable to an isolated event that is beyond the financial institution’s control, is non-recurring and could not have been reasonably anticipated by the financial institution. Financial institutions with tainted HTM portfolio shall be required to reclassify the remaining securities in their HTM portfolio to AFS, and shall be prohibited from using the HTM account during the reporting period in which the sales/reclassifications occurred and for the succeeding two full financial years.
Moreover, to impose discipline in the classification of securities as provided for under IAS 39, financial institutions are prohibited from transferring securities into or out of the Securities at Fair Value through Profit or Loss category.
The new set of rules and regulations on debt and equity securities excludes in its coverage: (a) those that are part of hedging relationship; (b) those that are hybrid financial instruments; (c) those financial liabilities that are held for trading; (d) those financial assets and financial liabilities which upon initial recognition are designated by the financial institution as at fair value through profit or loss; and (e) those that are classified as loans and receivables. It also does not include accounting for derivatives and non-derivative financial instruments other than debt and equity securities. The aforementioned topics shall be covered by separate issuances from the Bangko Sentral ng Pilipinas (BSP) in the near future.