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Media Releases

BSP Approved the Guidelines on the Adoption of Philippine Financial Reporting Standards 9
(PFRS 9) - Financial Instruments
08.03.2018

The Monetary Board (MB) approved the guidelines on the adoption of Philippine Financial Reporting
Standards (PFRS) 9 - Financial Instruments for Bangko Sentral supervised financial institutions (BSFIs).
The policy sets out the supervisory expectations in classifying and measuring financial instruments and
in recognizing impairment to promote prudence and transparency in financial reporting.

The guidelines provide the overarching governance overlay on the adoption of the standard. 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 Bangko Sentral also expects BSFIs to exercise sound
professional judgment in implementing the provisions of the standards considering that these are largely
principles-based.

The guidelines present a holistic approach in assessing the appropriateness of classification of financial
instruments. Specifically, the Bangko Sentral will 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.

Meanwhile, PFRS 9 requires the adoption of the expected credit loss (ECL) in recognizing impairment.
The said model requires early recognition of allowance for credit losses even before the default or non-
payment of the borrower. This approach has been adopted by the BSP as embodied in the “Guidelines
on Sound Credit Risk Management”. The BSP’s earlier issuance amending the definitions of past due
and non-performing loans likewise paved the way for the implementation of the ECL methodology in
booking allowance for credit losses.

In keeping with the principle of proportionality, BSFIs with simple operations are expected to adopt
simple loan loss methodologies fundamentally anchored on the principle of recognizing ECL. Other FIs
with credit operations that may not economically justify adoption of a model will be subject to the
regulatory guidelines in setting up allowance for credit losses prescribed under Circular No. 855.

The International Financial Reporting Standards (IFRS) 9 - Financial Instruments, which was issued by
the International Accounting Standards Board (IASB), replaced the International Accounting Standards
(IAS) 39 - Financial Instruments: Recognition and Measurement. PFRS 9 is the local adoption of IFRS
9. The standard is mandatorily effective for periods beginning on or after 1 January 2018. The BSP
flagged the adoption of PFRS 9 under Circular No. 912 dated 27 May 2016.