The Philippine Financial Reporting Standards (PFRS)/Philippine Accounting Standards (PAS) are the new set of Generally Accepted Accounting Principles (GAAP) issued by the Accounting Standards Council (ASC) to govern the preparation of financial statements. These standards are patterned after the revised International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) issued by the International Accounting Standards Board (IASB).
The Bangko Sentral ng Pilipinas (BSP) pronounced its adoption of the PFRS/PAS effective the annual financial statements beginning 1 January 2005 in its Memorandum to All Banks and Other BSP Supervised Financial Institutions dated 11 January 2005. The adoption of the new set of standards is aimed at promoting fairness, transparency and accuracy in financial reporting.
The BSP in its Circular No. 494 dated 20 September 2005, emphasized that 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.
Deviations between local and international accounting standards only apply to the preparation of prudential reports to the BSP and these are, as follows:
- Separate financial statements
In preparing separate/solo financial statements, investments in subsidiaries and associates are accounted for using the equity method instead of at cost or in accordance with PAS 39.
- Consolidated financial statements
Under PAS 27, all bank subsidiaries, regardless of type, are consolidated on a line-by-line basis.
For prudential reporting purposes, however, financial allied subsidiaries, except insurance companies, are consolidated with the financial statements of the parent bank on a line-by-line basis. Non-financial allied subsidiaries and insurance subsidiaries, on the other hand, are accounted for using the equity method.
- Provisioning requirement
In preparing general purpose financial statements/audited financial statements, banks adopt the provisions of PFRS/PAS in booking provisions for credit losses.
For prudential reporting purposes, however, banks are required to meet the BSP-recommended provisioning requirement which is the higher of the (a) BSP recommended valuation reserves and (b) PFRS/PAS impairment provisioning. Compliance with the BSP recommended provisioning requirement is evaluated on an aggregate basis.
- Deemed cost of real and other properties acquired in settlement of loans (ROPA)
In computing the deemed cost of ROPA, banks are required to value the property at initial recognition based on the carrying amount of the asset given up in the exchange; i.e., carrying amount of the loan, instead of the fair value of the real and other property acquired.
The accounting treatment for prudential reporting aims to ensure that the financial statements provide a suitable basis for measuring banking risks and banking ratios.