By Bianca Cuaresma, August 6 2018; Business Mirror
Image Credit to Business World
THE Bangko Sentral ng Pilipinas (BSP) has approved the adoption of a new standard for financial institutions, which aims to promote the integrity of financial reporting in the country.
Over the weekend, the BSP announced that its monetary board green-lighted the guidelines on the adoption of the Philippine Financial Reporting Standards (PFRS) 9 – Financial instruments for Bangko Sentral-supervised financial institutions (BSFIs).
According to the Central Bank, the new policy sets out the supervisory expectations in classifying and measuring financial instruments and in recognizing impairment to promote prudence and transparency in financial reporting.
“In particular, the board of directors is required to assess the impact of PFRS 9 on business strategies and risk-management systems to be able to adopt appropriate policies and control measures that will ensure integrity of the reporting process,” the BSP said in its statement on the approval of the new set of guidelines.
“The Bangko Sentral also expects BSFIs to exercise sound professional judgment in implementing the provisions of the standards, considering that these are largely principles-based,” it added.
The newly approved PFRS 9 is the local adoption of the International Financial Reporting Standards (IFRS) 9—an international accounting standard, that sets the bar on accounting for financial instruments. The PFRS 9 will allow the BSP to evaluate the consistency of sales activities and metrics being used in monitoring the performance of financial instruments with the business model for holding the instrument.
“This will align the accounting treatment with risk management strategies and is seen to strengthen governance over the reporting system,” the BSP said.
The new standard also requires the adoption of the expected credit loss (ECL) in recognizing impairment. As such, local financial institutions will be required to recognize the allowance for credit losses even before the default or non-payment of the borrower.
The BSP said financial institutions with simple operations are expected to adopt simple loan loss methodologies fundamentally anchored on the principle of recognizing ECL.
Meanwhile, other BSFIs with credit operations that may not economically justify adoption of a model will only be subject to the regulatory guidelines in setting up allowance for credit losses prescribed under an earlier circular of the BSP.