The Monetary Board (MB) approved on 18 August 2005 the guidelines in adopting the Philippine Financial Reporting Standards (PFRS) and Philippine Accounting Standards (PAS) effective the annual financial reporting period beginning 1 January 2005. This is pursuant to the Memorandum to All Banks and Other BSP Supervised Financial Institutions dated 11 January 2005 announcing the adoption of the PFRS/PAS for the annual financial reporting period ending December 2005.
The approved guidelines outline the accounting treatment for specific items to align the existing BSP regulations with the provisions of PFRS/PAS. As a general rule, financial institutions shall comply in all respect with the provisions of PFRS/PAS in preparing both their audited financial statements and the financial statements for prudential reporting.
The only instances where a different accounting treatment is prescribed for prudential reporting are: (1) in preparing consolidated financial statements, only financial allied subsidiaries, except subsidiary insurance companies, shall be consolidated on a line-by-line basis; and (2) in setting the allowance for probable losses on loans, the BSP prescribed valuation reserves shall be complied with. The accounting treatment for prudential reporting aims to ensure that the financial statements provide a suitable basis for measuring banking risks and banking ratios.
One of the important provisions of the new guidelines that may have a significant impact on the industry is the accounting treatment for derivatives and hedging relationships which shall be accounted for in accordance with PAS 39. Under the said standard all derivatives shall be reported on-balance sheet and those not held as hedging instruments shall be classified as Held for Trading (HFT) with gains or losses from marking to market recognized in the income statement. Strict criteria are imposed for hedge accounting which includes compliance with the designation, documentation and hedge effectiveness requirements.
Another significant provision of the guidelines is the accounting treatment for Real and Other Properties Acquired (ROPA), ROPA shall now be booked at the carrying amount of the loan less the allowance computed based on PAS 39 provisioning requirements plus booked accrued interest less allowance for probable losses plus transaction costs incurred upon acquisition. Subsequent to initial recognition, ROPA in the form of land, buildings and other non-financial assets shall be accounted for using the cost model under PAS 40 and PAS 16; while ROPA in the form of financial assets shall be accounted for under PAS 39. Accordingly, land shall no longer be subject to the 50 percent valuation reserves previously imposed on the said properties while buildings shall be depreciated for a period not exceeding 10 years. Further, ROPA that comply with the provisions of PFRS 5 shall be reclassified and accounted for as such.
The guidelines also set forth the change in the accounting treatment for goodwill and mandatorily redeemable preferred shares. Goodwill, which shall be accounted for in accordance with PFRS 3 will no longer be amortized but shall be subject to the impairment provisions of PAS 36. Mandatorily redeemable preferred shares previously accounted for as equity instruments on the other hand, shall now be treated as debt instruments both in the books of the investor and the issuer pursuant to PAS 32.
The adoption of the new set of accounting standards in the financial industry is part of BSP’s commitment to promote fairness, transparency and accuracy in financial reporting. The PFRS/PAS issued by the Accounting Standards Council (ASC) are based on the revised International Accounting Standards (IAS) and the new International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board.