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 (BSFIs) 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, BSFIs 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.
The BSP in its Circular No. 915 dated 05 July 2016 Deviations between local and international accounting standards only apply to the preparation of prudential reports to the BSP and these are, as follows:
- Consolidated financial statements
Under PAS 27, all bank/quasi-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/QB 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, BSFIs adopt the provisions of PFRS/PAS in booking provisions for credit losses.
For prudential reporting purposes, however, BSFIs are required to adopt the expected credit loss model in measuring credit impairment in accordance with the provisions of PFRS 9. BSFIs are also required to 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.
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) account. Deemed cost of real and other properties acquired in settlement of loans (ROPA)
In computing the deemed cost of ROPA, BSFIs 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.
- Accrual of interest income on non-performing loans
Interest income is allowed to be recognized on non-performing exposures for purposes of preparing the general purpose financial statements/audited financial statements.
For prudential reporting purposes, however, BSFIs are not allowed to recognize interest income on non-performing exposures, except when payment is received.
The accounting treatment for prudential reporting aims to ensure that the financial statements provide a suitable basis for measuring risks and ratios of BSFIs.