GUIDELINES ON THE ADOPTION OF PHILIPPINE FINANCIAL REPORTING STANDARDS 9 (PFRS 9) FINANCIAL INSTRUMENTS – IMPAIRMENT
Section 1. Expected Credit Loss Model
a) BSFIs shall apply the ECL model on credit exposures covered by PFRS 9, which include the following:
• Loans and receivables that are measured at amortized cost;
• Investments in debt instruments that are measured at amortized cost or at fair value through other comprehensive income (FVOCI); and
• Credit commitments and financial guarantee contracts that are not measured at fair value through profit or loss (FVTPL)
b) Credit exposures shall classify into three (3) stages using the following time horizons in measuring ECL:
| Stage of credit impairment |
Characteristics | Time horizon in measuring ECL |
| Stage 1 |
– Credit exposures that are considered “performing” and with no significant increase in credit risk since initial recognition or with low credit risk |
Twelve (12) months |
| Stage 2 |
– Credit exposures that are considered “under-performing” or not yet non-performing but with significant increase in credit risk since initial recognition |
Lifetime |
| Stage 3 |
– Credit exposures that are considered “under-performing” or not yet non-performing but with significant increase in credit risk since initial recognition |
Lifetime |
c) BSFIs shall promptly recognize and maintain adequate allowance for credit losses at all times. It shall adopt the principles provided under the Enhanced Standards on Credit Risk Management1 in implementing sound and robust credit risk measurement methodologies that adequately considers ECL. In this respect, the ECL methodology shall not be considered as a separate and distinct process but as an important element of the entire credit risk management process.
Section 2. Twelve (12)-Month ECL
a) BSFIs shall consider reasonable and supportable information, including forward-looking information that affect credit risk in estimating the twelve (12)-month ECL. BSFIs shall exercise experienced credit judgment and consider both qualitative and quantitative information that may affect the assessment.
b) Zero allowance for exposures under Stage 1 shall be rare. It shall be expected only for exposures with zero percent (0%) credit risk-weight under the Risk-Based Capital Adequacy Framework, such as Philippine peso-denominated exposures to the Philippine National Government and the Bangko Sentral.
Section 3. Lifetime ECL
a) BSFIs shall evaluate the change in the risk of default occurring over the expected life of the exposures in assessing whether these shall be moved to a lifetime ECL measure2. Although collateral will be used to measure the loss given a default, this should not be primarily used in measuring risk of a default or in transferring to different stages.
b) BSFIs shall measure lifetime ECL of the following:
• exposures that have significantly increased their credit risk from origination (Stage 2); and
• non-performing exposures (Stage 3).
Section 4. Assessment of forward-looking information
Section 5. Transfer from Stage 1 to Stage 2 – Assessment of significant increase in credit risk
a) BSFIs shall establish well-defined criteria on what constitutes significant increase in credit risk. BSFIs shall consider a wide range of information, which includes among others, information on macroeconomic conditions, economic sector and the geographical region relevant to the borrower, and other factors that are borrower-specific. The criteria on what constitutes significant increase in credit risk shall consider, at a minimum, the list provided in PFRS 9.
b) BSFIs shall classify exposures to Stage 2 if the exposures have potential weaknesses, based on current and/or forward-looking information, that warrant management’s close attention. Said weaknesses, if left uncorrected, may affect the repayment of these exposures. BSFIs shall also classify exposures Stage 2 if there are adverse or foreseen adverse economic or market conditions that may affect the counterparty’s ability to meet the scheduled repayments in the future.
c) The Bangko Sentral shall apply the following indicators of significant increase in credit risk in BSFIs noted to have weak credit loss methodologies:
• exposures considered especially mentioned under Sec. 143 (Credit Classification and Provisioning);
• exposures with missed payment for more than thirty (30) days; and
• exposures with risk ratings downgraded by at least two (2) grades (e.g., exposure with risk rating of “3” on the origination date was downgraded to risk rating of “5” on the reporting date) for BSFIs with below fifteen (15)-risk rating grades, and three (3) grades for BSFIs with fifteen (15) or above risk rating grades.
Section 6. Transfer from Lifetime ECL to Twelve (12)-month ECL
a) Non-performing restructured exposures that have exhibited improvement in creditworthiness of the counterparty may only be transferred from stage 3 to Stage 1 after a total of one (1) year probation period [i.e., six (6) months in Stage 3 before transferring to Stage 2, and another six (6) months in Stage 2 before transferring to Stage 1; or directly from Stage 3 to Stage 1, without passing through Stage 2, after twelve (12) months]; and
b) Restructured accounts classified as “performing” prior to restructuring shall be initially classified under Stage 2. The transfer from Stage 2 to Stage 1 will follow the six (6)-month rule mentioned in Item “a” of this Section.
Section 7. Multiple exposures to specific counterparties
a) Exposures to non-retail counterparties. BSFIs with multiple exposures to a non-retail counterparty shall measure ECL at the counterparty level. In particular, the BSFI shall consider all exposures to a counterparty as subject to lifetime ECL when any of its material exposure is subjected to lifetime ECL;
b) Exposures to a retail counterparty. BSFIs with multiple exposures to a retail counterparty shall measure ECL at the transaction level. In particular, the BSFI may classify one transaction under Stage 1 and another transaction under Stage 3. However, BSFIs are not precluded from taking into account the potential of cross default, such that if one exposure is classified under Stage 3 all the other exposures may be classified under Stage 3; and
c) Exposures to counterparties belonging to a group f related entities. BSFIs with multiple exposures to counterparties that belong to the same group of related entities shall measure ECL at the counterparty level (per entity). BSFIs shall likewise consider the status of the other counterparties belonging to the same group in determining the stage under which the exposures shall be classified.
Section 8. Recognition of Income
Section 9. Off-balance sheet financial items
a) If the BSFI cannot separately identify the ECL attributable to the drawn and undrawn commitment, the provision for ECL on the off-balance sheet accounts shall be presented together with the allowance for the financial asset (contra-asset); and
b) If the combined ECL exceeds the gross carrying amount of the financial asset, the ECL should be recognized as “Provisions-Others” (liability).
Section 10. Application to simple BSFIs
Section 11. General and Specific Provisions for Loan Accounts
a) BSFIs shall treat Stage 1 provisions for loan accounts as General Provision (GP), while Stages 2 and 3 provisions shall be treated as Specific Provisions (SP).
b) BSFIs shall set up general loan loss provision (GLLP) equivalent to 1 percent (1%) of all outstanding Stage 1 on-balance sheet loans, except for accounts considered as credit risk-free under existing regulations. BSFIs are not required to provide a 1 percent (1%) GP on other credit exposures covered by PFRS 9 such as off-balance sheet accounts and investments.
c) Allowance for credit losses for Stages 1, 2 and 3 accounts shall be recognized in the profit or loss statement. In cases when the computed allowance for credit losses on Stage 1 accounts is less than the 1 percent GP required, the deficiency shall be recognized by appropriating the Retained Earnings (RE)3 account. GP recognized in profit or loss as allowance for credit losses for Stage 1 accounts and the amount appropriated in RE shall be considered as Tier 2 capital subject to the limit provided under the Capital Adequacy Ratio (CAR) framework4.
d) BSFIs that use the guidelines provided under Appendix 15 in determining allowance for credit losses shall book the entire amount of GP in profit or loss.
e) BSFIs shall charge against RE the increase in ECL – SP as of 01 January 2018 as a result of the change in accounting policy.
Section 12. Expectations from Trust Entities
a) A TE with simple operations shall adopt simple loan loss methodologies fundamentally anchored on the principle of recognizing ECL. In this respect, the TE shall look beyond the past due/missed amortizations in classifying exposures and in providing allowance for credit losses.
b) A TE with credit operations that may not economically justify adoption of said simple loan loss estimation methodology that is compliant with PFRS 9 shall, at a minimum, be subject to the regulatory guidelines in setting up allowance for credit losses prescribed under Appendix 15.
(Circular Nos. 1023 dated 04 December 2018 and 1011 dated 14 August 2018)
Footnotes
- Sec. 143
- PFRS 9 paragraph 5.5.9 provides that the assessment should be made in terms of the risk of a default and not on the expected credit loss (i.e., before consideration of the effects of credit risk mitigants such as collaterals or guarantees).
- BSFIs shall use Retained Earnings Reserve – Others as temporary account of Retained Earnings – General Provisions (RE-GP)
- As temporary presentation in CAR reports, the Retained Earnings (RE) included in Common Equity Tier (CET/Core Tier 1 shall be net of RE-GP. In computing Tier 2 Capital, the General Loan Loss Provision (GLLP) shall include the RE-GP. However, the GLLP added back to on-balance sheet assets subject to risk-weight shall not include the RE-GP since when appropriating the RE, total assets is not affected.