The Monetary Board (MB) approved the guidelines on the adoption of Philippine Financial Reporting Standards (PFRS) 9 - Financial Instruments under management of Trust Entities (TE). The guidelines expanded the recently issued Circular No. 1011, dated 14 August 2018, which provided an encompassing governance overlay on the adoption of PFRS 9 by BSP Supervised Financial Institutions (BSFIs).

Under the new circular, specific guidelines on the classification and measurement, and impairment of financial assets under the administration of TEs were provided, taking into consideration the peculiarity of the trust operations. The guidelines include: 1) provisions on the adoption of business models of the TE, 2) the assignment of business model/s for each client, and 3) actions to be taken in case of significant unfavorable impact of the new classification of financial assets under management of the TE against the performance indicators set for the client.

Consistent with the expectations from BSFIs, the guidelines require the board of directors of a TE to ensure appropriate and consistent adoption of the PFRS 9 as part of its reporting governance process and the approval of relevant policies and guidelines on the classification and measurement of financial assets under management.

The TE shall define business models to be adopted for managing the financial assets of clients under its administration based on pre-defined investment objectives. The classification of financial assets for each client shall be aligned with the business models to be determined by the TE. For this purpose, the TE may use industry guidelines as reference in the mapping of investment objectives to the corresponding business models to be approved by the board of directors.

Meanwhile, in line with the PFRS 9 requirement on the adoption of the expected credit loss (ECL) in recognizing impairment, the TE shall be required to promptly recognize and maintain adequate allowance for credit losses at all times. A TE with basic operations shall be allowed to adopt simple loan loss methodologies based on the principle of recognizing expected credit losses. A TE whose credit operations may not justify the adoption of simple loan loss methodologies may adopt the existing guidelines in setting up allowance for credit losses.

PFRS 9 is the local adoption of the International Financial Reporting Standards (IFRS) 9 - Financial Instruments, which was issued by the International Accounting Standards Board. This replaced the International Accounting Standards (IAS) 39 - Financial Instruments: Recognition and Measurement. PFRS 9 is mandatory and effective beginning January 2018.

Source: Bangko Sentral NG Pilipinas (BSP)