Guidelines on the Adoption of Philippine Financial Reporting Standards 9 (PFRS 9) — Financial Instruments under Management of Trust Entities

December 4, 2018 BSP CIRCULAR NO. 1023-18 SUBJECT : Guidelines on the Adoption of Philippine Financial Reporting Standards 9 (PFRS 9) Financial Instruments under Management of Trust Entities The Monetary Board, in its Resolution No. 1964 dated 22 November 2018, approved the following amendments to Appendices 33/Q-20, 97/Q-56/N-16, T-1, and Section 4161N of the Manual of Regulations for Banks (MORB)/Manual of Regulations for Non-Bank Financial Institutions (MORNBFI), as amended under Circular No. 1011 dated 14 August 2018, on the guidelines governing the adoption of PFRS 9 Financial Instruments under management of Trust Entities (TEs). SECTION 1. The provisions of Appendix 33 of the MORB and Appendix Q-20 of the MORNBFI, including their Annexes, are hereby amended as shown in Attachment 1. SECTION 2. The provisions of Appendix 97 of the MORB and Appendix Q-56/N-16 of the MORNBFI are hereby amended as shown in Attachment 2. SECTION 3. The provisions of Section 4161N of the MORNBFI are further revised as follows: " Section 4161N. Philippine Financial Reporting Standards (PFRS) . xxx xxx xxx e. Enforcement Actions . Consistent with Sec. 4009Q of the MORNBFI, the Bangko Sentral reserves the right x x x." SECTION 4. The provisions of Appendix T-1 of the MORNBFI are amended as follows: " List of Appendices of MORB/Q Regulations Applicable to Trust Corporations Appendix Reference in T Regulations xxx xxx xxx Q-20 Guidelines on the Adoption of Philippine Financial Reporting Standards 9 (PFRS 9) Classification and Measurement Sec. 4304T Applicable Regulations on Credit and Investment Operations Sec. 4388Q Purchase of Receivables and Other Obligations" SECTION 5. Prudential Reports . The Financial Reporting Package (FRP) for Trust Corporations and FRP for Trust Institutions (FRPTI), respectively, required under Section 4191T of the MORNBFI and X421/4421Q of the MORB/MORBNBFI, including the affected prudential reports, shall be amended to align the same with the suggested account titles under PFRS 9. Pending the issuance of the revised FRP/FRPTI template and other prudential reports, the TEs shall adopt the mapping matrix provided under Annex A of Appendix 33 of the MORB and Annex A of Q-20 of the MORNBFI effective for the reporting period ending December 2018. SECTION 6. Effectivity . The Circular shall take effect 15 calendar days following its publication either in the Official Gazette or in a newspaper of general circulation. FOR THE MONETARY BOARD: (SGD.) NESTOR A. ESPENILLA, JR. Governor ATTACHMENT 1 APP 33/Q-20 Guidelines on the Adoption of Philippine Financial Reporting Standards 9 (PFRS 9) Classification and Measurement xxx xxx xxx. SECTION 5. Financial Instruments Under Management of Trust Entities . Consistent with the expectations from BSFIs on the adoption of PFRS 9, as provided under item "d" of Subsection X191.3 of the MORB, Subsection 4191Q.3 and Section 4161N of the MORNBFI, the board of directors of a trust entity (TE) shall ensure that the TE appropriately and consistently adopts PFRS 9 as part of its reporting governance process. In this respect, the board of directors shall approve policies and guidelines relative to the classification and measurement of financial assets under management of the TE. The TE shall adhere to the provisions of Sections 1 to 4 of these guidelines on the classification and measurement of financial assets, to the extent applicable to trust operations. In addition, considering that the management of financial assets under the administration of the TE shall vary for each client, the TE shall be governed by the following: a) The board of directors shall approve the business models that will be adopted by the TE for managing the financial assets of clients under its administration. Such business models shall be in accordance with pre-defined investment objectives. For this purpose, the TE may use as guide the industry convention on the mapping of investment objectives to the corresponding business models. b) The TE shall use only the board-approved business models in determining the business model/s for each client's financial assets. The assignment of the applicable business model/s, which shall be consistent with the client's investment objectives, liquidity requirement, and investment horizon, shall no longer require a separate approval. The classification of financial assets for each client shall be aligned with the business model/s determined by the TE. c) For existing accounts, the TE shall assess the impact of the new classification of financial assets on the performance indicator/s set for the client. i. If the new classification will have a significant unfavorable impact on the performance indicator/s set for the client, a consent or conforme shall be obtained from the client or the authorized signatory/ies of the client, as applicable. The consent or conforme shall document in plain and clearly understandable language: (a) the business model/s determined by the TE in the management of the client's financial assets; (b) a brief description of the new classification; and (c) the corresponding impact on the performance indicator/s set for the client. A negative consent or conforme may be allowed, subject to the following conditions: (a) the TE has an adequate monitoring process to ensure actual receipt of the notification by the client; (b) the client shall be given a reasonable time to respond to the negative consent or conforme or to raise concern/query, if any; and (c) the client is allowed to amend the business model determined by the TE in the management of the client's portfolio within a reasonable period. ii. If the new classification will not have a significant unfavorable impact on the performance indicator/s set for the client, the TE shall provide appropriate disclosure in the financial reports provided or made available to the client. The disclosure shall document in plain and clearly understandable language: (a) the business model/s determined by the TE in the management of the client's financial assets; and (b) a statement allowing the client to discuss with the TE any concern/query on the change in the classification of the financial assets of the client. d) For new accounts opened after the effectivity of these guidelines, the business model/s determined by the TE in the management of the client's financial assets shall be documented in plain and clearly understandable language in the investment policy statement or letter of instruction, whichever is applicable. e) Reclassification of assets may be allowed if there is a change in the business model/s determined in the management of the client's financial assets. Any change in the business model/s determined by the TE in the management of the client's financial assets shall be supported by a change in the client's investment objective. In order to strengthen controls and prevent potential abuse, the TE shall have adequate policies and procedures, duly approved by the board of directors, covering, among others, the review process, minimum required documentation, and monitoring mechanism for the change in the business model/s determined by the TE in the management of each client's financial asset/s. SECTION 6. Reporting Guidelines . Prudential reports shall be prepared using the existing templates of the Financial Reporting Package (FRP)/FRP for Trust Institutions (FRPTI). The mapping of PFRS 9 based accounts to the existing FRP/Consolidated Statement of Condition (CSOC), Consolidated Statement of Income and Expenses (CSIE) and FRPTI template is provided in Annex A. ATTACHMENT 2 APP 97/Q-56/N-16 Guidelines on the Adoption of Philippine Financial Reporting Standards 9 (PFRS 9) Financial Instruments Impairment xxx xxx xxx. SECTION 12. Expectations from Trust Entities . Consistent with the expectations from BSFIs on the adoption of PFRS 9, as provided under item "d" of Subsection X191.3 of the MORB, Subsection 4191Q.3 and Section 4161N of the MORNBFI, the board of directors of a trust entity (TE) shall ensure that the TE appropriately and consistently adopts PFRS 9 as part of its reporting governance process. In this respect, the board of directors shall approve policies and guidelines relative to the impairment of financial assets under management of the TE. The TE shall adhere to the requirements of PFRS 9 on impairment and the guidelines provided herein, to the extent applicable to the trust operations. Pursuant to item c of Section 1 of these guidelines (Expected Credit Loss Model), a TE shall promptly recognize and maintain adequate allowance for credit losses at all times. Consistent with the provisions under Section 10 of these guidelines (Application to simple BSFIs), the following provisions shall apply to TEs: 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 the revised Appendix 18/Q-10/N-11 of the MORB/MORNBFI. APPENDIX 33 ANNEX A Mapping of Philippine Financial Reporting Standards 9 (PFRS 9) Accounts in the Financial Reporting Package (FRP)/FRP for Trust Institutions (FRPTI) Banks, including their trust departments, shall report financial assets and financial liabilities using the existing account titles of the FRP/FRPTI based on the mapping of accounts provided below: 1. Banks Table 1. Financial Assets Measured at Fair Value through Profit or Loss xxx xxx xxx 2. Trust Departments Table 1. Financial Assets Measured at Fair Value through Profit or Loss PFRS 9 Accounts FRPTI Accounts Financial Assets Measured at Fair Value through Profit or Loss a. Debt and Equity Securities b. Derivatives with Positive Fair Value Financial Assets at Fair Value through Profit or Loss a. Debt and Equity Securities b. Derivatives with Positive Fair Value Table 2. Financial Assets Measured at Fair Value through Other Comprehensive Income (FVOCI) PFRS 9 Accounts FRPTI Accounts 1. Financial Assets Measured at Fair Value through Other Comprehensive Income (FVOCI) 1. Available for Sale (AFS) Financial Assets (a) Debt Securities at FVOCI (a) AFS Debt Securities Unamortized Discount/Premium Unamortized Discount/Premium Debt Securities at FVOCI (at amortized cost) AFS Debt Securities (at amortized cost) Accumulated Market Gains/Losses Accumulated Market Gains/Losses Debt Securities at FVOCI (Fair Value) AFS Debt Securities (Fair Value) (b) Equity Securities at FVOCI (b) AFS Equity Securities i. Designated at FVOCI ii. Mandatorily Measured at Fair Value Accumulated Market Gains/Losses Accumulated Market Gains/Losses Equity Securities at FVOCI (Fair Value) AFS Equity Securities (Fair Value) (FRP Account will no longer be used) Allowance for Credit Losses FVOCI Net of Accumulated market gains/losses AFS Financial Assets Net PFRS 9 Accounts FRPTI Accounts Accountabilities Accountabilities 1. Net Unrealized Gains/(Losses) on Financial Assets at FVOCI 1 1. Net Unrealized Gains/(Losses) on AFS Financial Assets a. Debt Securities at FVOCI a. Debt Securities b. Equity Securities at FVOCI b. Equity Securities 2. Realized and Cumulative/Gains/(Losses) on Equity Securities Designated at FVOCI 2. Miscellaneous Liabilities Table 3. Financial Assets Measured at Amortized Cost PFRS 9 Accounts FRPTI Accounts 1. Debt Securities Measured at Amortized Cost 1. Held-to-Maturity (HTM) Financial Assets Unamortized Discount/Premium Unamortized Discount/Premium Debt Securities Measured at Amortized Cost Net of Amortization HTM Financial Assets Net of Amortization Less: Allowance for Credit Losses Less: Allowance for Credit Losses Debt Securities Measured at Amortized Cost Net HTM Financial Assets Net (FRP Account will no longer be used) 2. Unquoted Debt Securities Classified as Loans (FRP Account will no longer be used) 3. Investments in Non-Marketable Equity Securities APPENDIX Q-20 ANNEX A Mapping of Philippine Financial Reporting Standards 9 (PFRS 9) Accounts in the Consolidated Statement of Condition (CSOC), Consolidated Statement of Income and Expenses (CSIE), Financial Reporting Package (FRP) and FRP for Trust Institutions (FRPTI) Quasi-banks (QBs), non-bank financial institutions (NBFIs), stand-alone Trust Corporations and trust departments of NBFIs shall report financial assets and financial liabilities using the existing account titles of the CSOC/CSIE/FRP/FRPTI based on the mapping of accounts provided below: 1. Quasi-banks (QBs) and non-bank financial institutions (NBFIs) Table 1. Financial Assets Measured at Fair Value Through Profit or loss xxx xxx xxx. 2. Trust Corporations (proprietary assets and liabilities) Table 1. Financial Assets Measured at Fair Value through Profit or Loss PFRS 9 Accounts FRP Accounts Balance Sheet Accounts Financial Assets Measured at Fair Value through Profit or Loss Financial Assets Designated at Fair Value through Profit or Loss Table 2. Financial Assets Measured at Fair Value through Other Comprehensive Income (FVOCI) PFRS 9 Accounts FRP Accounts Balance Sheet Accounts 1. Financial Assets Measured at Fair Value through Other Comprehensive Income (FVOCI) 1. Available for Sale (AFS) Financial Assets Securities at FVOCI AFS Securities Unamortized Discount/Premium Unamortized Discount/Premium Securities at FVOCI Net of Amortization AFS-Securities Net of Amortization Accumulated Market Gains/(Losses) Accumulated Market Gains/(Losses) (FRP Account will no longer be used) Allowance for Credit Losses Securities at FVOCI (Fair Value) AFS Financial Assets Net 2. Other Comprehensive Income 2. Other Comprehensive Income a. Net Unrealized Gains/(Losses) on Financial Assets at FVOCI 1 a. Net Unrealized Gains/(Losses) on AFS Financial Assets Table 3. Financial Assets Measured at Amortized Cost PFRS 9 Accounts FRP Accounts 1. Debt Securities Measured at Amortized Cost 1. Held-to-Maturity (HTM) Financial Assets Unamortized Discount/Premium Unamortized Discount/Premium Debt Securities Measured at Amortized Cost Net of Amortization HTM Financial Assets Net of Amortization Less: Allowance for Credit Losses Less: Allowance for Credit Losses Debt Securities Measured at Amortized Cost Net HTM Financial Assets Net (FRP Account will no longer be used) 2. Unquoted Debt Securities Classified as Loans Table 4. Financial Liabilities Measured at Amortized Cost PFRS 9 Accounts FRP Accounts Balance Sheet Accounts Financial liabilities measured at amortized cost under PFRS 9 shall be booked based on corresponding liability accounts in the FRP. Table 5. Financial Liabilities Measured at Fair Value Through Profit or Loss PFRS 9 Accounts FRP Accounts Balance Sheet Accounts 1. Financial Liabilities Measured at Fair Value Through Profit or Loss 1. Financial Liabilities Designated at Fair Value through Profit or Loss 2. Other Comprehensive Income 2. Other Comprehensive Income a. Net Unrealized Gains/(Losses) on Financial Liabilities Designated at FVPL attributable to changes in credit risk a. Others 3. Trust Corporations and trust departments of NBFIs, with or without QB license (assets under management) . Table 1. Financial Assets Measured at Fair Value through Profit or Loss PFRS 9 Accounts FRPTI Accounts Financial Assets Measured at Fair Value through Profit or Loss a. Debt and Equity Securities b. Derivatives with Positive Fair Value Financial Assets at Fair Value through Profit or Loss a. Debt and Equity Securities b. Derivatives with Positive Fair Value Table 2. Financial Assets Measured at Fair Value through Other Comprehensive Income (FVOCI) PFRS 9 Accounts FRPTI Accounts 1. Financial Assets Measured at Fair Value through Other Comprehensive Income (FVOCI) 1. Available for Sale (AFS) Financial Assets (a) Debt Securities at FVOCI (a) AFS Debt Securities Unamortized Discount/Premium Unamortized Discount/Premium Debt Securities at FVOCI (at amortized cost) AFS Debt Securities (at amortized cost) Accumulated Market Gains/Losses Accumulated Market Gains/Losses Debt Securities at FVOCI (Fair Value) AFS Debt Securities (Fair Value) (b) Equity Securities at FVOCI (b) AFS Equity Securities i. Designated at FVOCI ii. Mandatorily Measured at Fair Value Accumulated Market Gains/Losses Accumulated Market Gains/Losses Equity Securities at FVOCI (Fair Value) AFS Equity Securities (Fair Value) (FRP Account will no longer be used) Allowance for Credit Losses FVOCI Net of Accumulated market gains/losses AFS Financial Assets Net Accountabilities Accountabilities 1. Net Unrealized Gains/(Losses) on Financial Assets at FVOCI 2 1. Net Unrealized Gains/(Losses) on AFS Financial Assets a. Debt Securities at FVOCI a. Debt Securities b. Equity Securities at FVOCI b. Equity Securities 2. Realized and Cumulative/Gains/(Losses) on Equity Securities Designated at FVOCI 2. Miscellaneous Liabilities Table 3. Financial Assets Measured at Amortized Cost PFRS 9 Accounts FRPTI Accounts 1. Debt Securities Measured at Amortized Cost 1. Held-to-Maturity (HTM) Financial Assets Unamortized Discount/Premium Unamortized Discount/Premium Debt Securities Measured at Amortized Cost Net of Amortization HTM Financial Assets Net of Amortization Less: Allowance for Credit Losses Less: Allowance for Credit Losses Debt Securities Measured at Amortized Cost Net HTM Financial Assets Net (FRP Account will no longer be used) 2. Unquoted Debt Securities Classified as Loans (FRP Account will no longer be used) 3. Investments in Non-Marketable Equity Securities Footnotes APPENDIX 33 1. Loss allowance should also be recognized in Other Comprehensive Income. APPENDIX Q-20 1. Loss allowance should also be recognized in Other Comprehensive Income. 2. Loss allowance should also be recognized in Other Comprehensive Income.