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Regulations
Banking Laws
Date Issued: 09.20.2005
BSP Issuances
Guidelines on Establishing Banks CIRCULAR NO. 494
Implementation of Basel II in Series of 2005
the Philippines
The Monetary Board in its Resolution Nos. 1110 and 1194 dated 18 August 2005
Compliance with IAS and 8 September 2005, respectively, approved the following guidelines in
Other Regulations adopting the provisions of the Philippine Financial Reporting Standards (PFRS)
and Philippine Accounting Standards (PAS) effective the annual financial
Financial Sector Assessment reporting period beginning 1 January 2005, both for purposes of prudential
Program (FSAP)
reporting and audited financial statements.
Regulations Search
Section 1. Statement of Policy. It is the policy of the Bangko Sentral ng
Pilipinas to promote fairness, transparency and accuracy in financial reporting.
It is in this light that the BSP aims to adopt all Philippine Financial Reporting
Standards (PFRS) and Philippine Accounting Standards (PAS) issued by the
Accounting Standards Council (ASC) to the greatest extent possible.
Section 2. Accounting Treatment for Prudential Reporting. For prudential
reporting, financial institutions shall adopt in all respect the PFRS and PAS
except as follows:
(a) In preparing consolidated financial statements, only investments in financial
allied subsidiaries except insurance subsidiaries shall be consolidated on a line-
by-line basis; while insurance and non-financial allied subsidiaries shall be
accounted for using the equity method. Financial/non-financial allied/non-allied
associates shall be accounted for using the equity method in accordance with
the provisions of PAS 28 “Investments in Associates”. For purposes of preparing
separate financial statements, financial/non-financial allied/non-allied
subsidiaries/associates, including insurance subsidiaries/associates, shall also be
accounted for using the equity method; and
(b) Financial institutions shall be required to meet the BSP recommended
valuation reserves.
Notwithstanding these exceptions, the audited annual financial statements
required to be submitted to the BSP in accordance with the provisions of
Subsection X164.1 of the Manual of Regulations for Banks (MORB) and Section
4172Q of the Manual of Regulations for Non-Bank Financial Institutions
(MORNBFI) shall in all respect be PFRS/PAS compliant: Provided, That financial
institutions shall submit to the BSP adjusting entries reconciling the balances in
the financial statements for prudential reporting with that in the audited annual
financial statements.
Section 3. Accounting Treatment of Specific Items. The following rules
and regulations shall govern the accounting treatment of specific items for
purposes of prudential reporting and audited financial statements:
(a) Derivatives. Derivatives shall be accounted in accordance with the
provisions of PAS 39 “Financial Instruments: Recognition and Measurement”
which states that derivatives shall be reported on balance sheet with any gain or
loss from fair value changes reported in profit or loss. Derivatives and non-
derivatives financial assets and liabilities qualifying for hedge accounting shall
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likewise conform with the guidelines of PAS 39.
Accordingly, Appendix 27 of the MORB and Appendix Q-17 of the MORNBFI on
the accounting guidelines for derivatives are hereby superseded.
(b) Bank/Other Financial Institution Premises, Furniture, Fixture and
Equipment. Bank/ Other financial institution premises, furniture, fixture and
equipment shall be accounted for using the cost model under PAS 16 “Property,
Plant and Equipment.”
Outstanding appraisal increment as of the effectivity of this Circular arising from
mergers and consolidation shall be deemed part of the cost of the assets.
However, appraisal increment booked in accordance with Subsection X606.1 of
the MORB and Subsection 4651Q.1 of the MORNBFI shall be reversed.
Accordingly, Subsection X606.1 of the MORB and Subsection 4651Q.1 of the
MORNBFI, which allow the booking of appreciation or increase in the book value
of bank/NBQB premises and other fixed assets in cases where the market value
of the property has greatly increased since the original purchase subject, among
others, to the prior notification to the appropriate supervision and examination
departments of the BSP are hereby deleted.
(c) Real and Other Properties Acquired (ROPA)
1. Real and other properties acquired (ROPA) in settlement of loans through
foreclosure or dation in payment shall be booked initially at the carrying amount
of the loan (i.e., outstanding loan balance adjusted for any unamortized
premium or discount less allowance for probable losses computed based on PAS
39 provisioning requirements) plus booked accrued interest less allowance for
probable losses plus transaction costs incurred upon acquisition (such as non-
refundable capital gains tax and documentary stamp tax paid in connection with
the foreclosure/purchase of the acquired real estate property): Provided, That
where the booked amount of ROPA exceeds the appraised value of the acquired
property, an allowance for probable losses equivalent to the excess of the
amount booked over the appraised value shall be set up: Provided, further, That
if the carrying amount of ROPA exceeds P5 million, the appraisal of the
foreclosed/ purchased asset shall be conducted by an independent appraiser
acceptable to the BSP.
2. The carrying amount of ROPA shall be allocated to land, building, other non-
financial assets and financial assets (e.g., receivables from third party or equity
interest in an entity) based on their fair values, which allocated carrying
amounts shall become their initial costs.
3. Subsequently, ROPA shall be accounted for as follows:
(a) Land and buildings shall be accounted for using the cost model under PAS
40 “Investment Property”;
(b) Other non-financial assets shall be accounted for using the cost model
under PAS 16 “Property Plant and Equipment”;
(c) Buildings and other non-financial assets shall be depreciated over a period
not exceeding ten years and three years, respectively.
(d) Land, buildings and other non-financial assets shall be subject to the
impairment provisions of PAS 36 “Impairment”;
(e) Financial assets shall be initially booked and classified according to intention
(i.e., HFT, DFVPL, AFS, HTM, INMES, Unquoted Debt Securities Classified as
Loans or Loans and Receivable) and accounted for in accordance with the
provisions of PAS 39;
(f) ROPAs that comply with the provisions of PFRS 5 “Non-Current Assets Held
for Sale” shall be reclassified and accounted for as such.
4. Claims arising from deficiency judgments rendered in connection with the
foreclosure of mortgaged properties shall be lodged under the real account
“Deficiency Judgment Receivable”; while probable claims against the borrower
arising from the foreclosure of mortgaged properties shall be lodged under the
contingent account “Deficiency Claims Receivable”.
5. Appraisal of Properties. Before foreclosing or acquiring any property in
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settlement of loans, it must be properly appraised to determine its true
economic value. If the amount of ROPA to be booked exceeds P5 million, the
appraisal must be conducted by an independent appraiser acceptable to the
BSP. An in-house appraisal of all ROPAs shall be made at least every other
year: Provided, That immediate re-appraisal shall be conducted on ROPAs which
materially decline in value.
6. Non-Cash Payment for Interest. Financial institutions that accept non-cash
payments for interest on their borrowers’ loans shall book the acquired assets as
ROPA. The amount to be booked as ROPA shall be the booked accrued interest
less allowance for probable losses: Provided, That where the booked amount of
ROPA exceeds the appraised value of the acquired property, an allowance for
probable losses equivalent to the excess of the amount booked over the
appraised value shall be set up: Provided, further, That if the carrying amount of
ROPA exceeds P5 million, the appraisal of the foreclosed/purchased asset shall
be conducted by an independent appraiser acceptable to the BSP. The carrying
amount of ROPA shall be allocated in accordance with Item (c)2 and shall be
subsequently accounted for in accordance with Item (c)3 of this Section.
7. Sales Contract Receivable (SCR) shall be recorded based on the present
value of the installments receivables discounted at the imputed rate of interest.
Discount shall be accreted over the life of the SCR by crediting interest income
using the effective interest method. Any difference between the present value
of the SCR and the derecognized assets shall be recognized in profit or loss at
the date of sale in accordance with the provisions of PAS 18 “Revenue” Provided,
furthermore, That SCR shall be subject to impairment provision of PAS 39.
Accordingly, Section X611 and Subsections X611.1, X611.2 and X611.3 of the
MORB and Section 4109Q and Subsections 4109Q.1, 4109Q.2 and 4109Q.3 of
the MORNBFI on the accounting treatment of ROPA are hereby superseded.
8. Transitional Provisions. The provisions of Section 3(c) shall be applied to
real and other properties acquired on 1 January 2005 and thereafter. Provided:
That (a) Section 3(c)3(e) of this Circular shall be immediately adopted for all
outstanding financial assets acquired before 1 January 2005; and (b) Section
3(c)7 of this Circular shall be immediately adopted for all outstanding Sales
Contract Receivables entered into before 1 January 2005. Provided, further,
That all land, buildings and other non-financial assets acquired before 1 January
2005 shall continue to be provided with valuation reserves in accordance with
the schedule in Appendix 18 of the MORB and Appendix Q-10 of the
MORNBFI.
(d) Goodwill. Goodwill shall be accounted for in accordance with the
provisions of PFRS 3 “Business Combination”, and shall be subject to impairment
provisions of PAS 36 “Impairment”. In this regard, financial institutions with
outstanding goodwill arising from mergers and consolidation approved by the
Monetary Board shall apply PFRS 3 prospectively. Therefore the financial
institution shall:
1. beginning the annual period beginning on 1 January 2005 shall discontinue
amortizing such goodwill;
2. at the beginning of the annual period beginning on 1 January 2005,
eliminate the carrying amount of the related accumulated amortization with a
corresponding decrease in goodwill; and
3. from the beginning of the first annual period beginning on 1 January 2005
test the goodwill for impairment in accordance with PAS 36.
Accordingly Subsection X112.e of the MORB and Appendix 4112Q.e of the
MORNBFI are hereby deleted.
(e) Foreign Exchange Transactions. Foreign exchange transactions shall be
accounted for in accordance with the provisions of PAS 21 “Effects of Changes in
Foreign Exchange Rates”. In this regard, revaluation of foreign currency
monetary items shall be done at least monthly, using the Philippine Dealing
System (PDS) Peso/US Dollar closing rate and the New York US Dollar/Third
currencies closing rates. Foreign borrowings booked under bills payable, the
foreign exchange risk of which is shouldered by the National Government and
past due accounts shall be revalued in accordance with the provisions of PAS 21.
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(f) Redeemable Preferred Shares. Redeemable preferred shares and
preferred shares of similar nature shall be accounted for as a liability or equity
instrument in accordance with the provisions of PAS 32 “Financial Instruments:
Disclosure and Presentation.” For this purpose, mandatorily redeemable
preferred shares and preferred shares of similar nature accounted for as a
financial liability shall be booked as a debt instrument in the books of both the
issuer and the investor.
(g) Interest Accrual on Past Due Loans. Interest income on past due loans
arising from discount amortization (and not from the contractual interest of the
accounts) shall be accrued as provided in PAS 39.
Accordingly, Subsections X305.4 and X320.5 of the MORB and Subsections
4307Q.7, 4311Q.2 and 4301N.5 are hereby amended.
(h) Fair Value Option. The use of the fair value option in accordance with the
criteria set forth in the amendments to PAS 39 shall be allowed subject to the
following conditions:
1. Financial institutions shall have in place appropriate risk management
systems (including related risk management policies, procedures and controls)
prior to initial application of the fair value option for a particular activity or
purpose and on an ongoing basis;
2. Financial institutions shall apply the fair value option only to instruments for
which fair values can be reliably estimated; and
3. Financial institutions shall provide BSP with supplemental information as
may be necessary, to enable BSP to assess the impact of the financial
institution’s utilization of the fair value option.
(i) Other Clarifications on Circular No. 476 dated 16 February 2005
1. Only quoted debt securities can be classified under HTM. Unquoted debt
securities that are not classified as HFT nor DFVPL nor AFS or other than those
for which the holder may not recover substantially all of its initial investment,
other than because of credit deterioration, which shall be classified as AFS, may
be booked under the account Unquoted Debt Securities Classified as Loans.
Accordingly, securities held in compliance with BSP regulations may likewise be
classified under the said account.
2. Credit Linked Notes (CLNs) may be booked under HFT or DFVPL or if the
embedded derivative is separated from the host instrument, under AFS, but not
under HTM nor Unquoted Debt Securities Classified as Loans.
3. A puttable bond (i.e., a debt security with an embedded put option giving
the holder of the note the right to require the issuer to repay or redeem the
security before maturity) cannot be classified under HTM.
4. A debt security that is callable by the issuer can generally be classified as
HTM as long as the holder intends and is able to hold the security until it is
called or until maturity. However, the holder is precluded from classifying the
said callable bond under HTM, if the holder would not be able to recover
substantially all of the carrying amount of its investment.
5. Quoted loans and receivables shall be classified as debt securities which
may be booked under HFT, DFVPL. AFS or HTM.
Section 4. The following sections of the MORB/MORNBFI are likewise hereby
amended:
(a) Subsections X161.2 of the MORB and Subsections
4161Q.2/4161S.2/ 4161P.2 of the MORNBFI. Philippine Financial
Reporting Standards/Philippine Accounting Standards
“Banks/Financial institutions shall adopt the Philippine Financial Reporting
Standards (PFRS) and Philippine Accounting Standards (PAS) which are in
accordance with generally accepted accounting principles in recording
transactions and in the preparation of financial statements and reports to BSP.
However, in cases where there are differences between BSP regulations and
PFRS/PAS as when more than one (1) option are allowed or certain maximum or
minimum limits are prescribed by the PFRS/PAS, the option or limit prescribed
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by BSP regulations shall be adopted by all banks/financial institutions.
“For purposes hereof, the PFRS/PAS shall refer to issuances of the Accounting
Standards Council and approved by the Professional Regulation Commission.”
(b) 1. Subsection X162.9 of the MORB. Publication, Posting of
Statement of Condition.
“x x x.
“a(1)(a) The CSOC of the banks and its subsidiaries and associates shall
conform with the guidelines of PAS 27 “Consolidated and Separate Financial
Statements”, except that for purposes of consolidated financial statements, only
investments in financial allied subsidiaries except insurance subsidiaries shall be
consolidated on a line-by-line basis; while insurance and non-financial allied
subsidiaries shall be accounted for using the equity method. Financial/non-
financial allied/non-allied associates shall be accounted for using the equity
method in accordance with the provisions of PAS 28 “Investments in
Associates”. For purposes of separate financial statements, investments in
financial/non-financial allied/non-allied subsidiaries/associates, including
insurance subsidiaries/associates, shall be accounted for using the equity
method. x x x”
2. Section 4181Q of the MORNBFI. Publication Requirements.
“The quarterly consolidated statement of condition of an NBQB/trust entity and
its subsidiaries and associates shall be published side-by-side with the
statement of condition of its head office and its branches/other offices as of such
dates as the BSP may require, within twenty (20) working days from receipt of
call letter, in any newspaper of general circulation in the country in the
prescribed format.
“The consolidated statement of condition of an NBQB/trust entity and its
subsidiaries and associates shall conform with the guidelines of PAS 27
“Consolidated and Separate Financial Statements”, except that for purposes of
consolidated financial statements, only investments in financial allied
subsidiaries except insurance subsidiaries shall be consolidated on a line-by-line
basis; while insurance and non-financial allied subsidiaries shall be accounted for
using the equity method. Financial/non-financial allied/non-allied associates
shall be accounted for using the equity method in accordance with the provisions
of PAS 28 “Investments in Associates”. For purposes of separate financial
statements, investments in financial/non-financial allied /non-allied
subsidiaries/associates, including insurance subsidiaries/associates, shall be
accounted for using the equity method.
“a. The following information shall be disclosed in the Statements of Condition :
x x x.”
Appendix Q-3-b of the MORNBFI is hereby deleted.
(c) Subsection X162.10 of the MORB. Consolidated financial statements of
banks and their subsidiaries engaged in financial allied undertakings.
“ x x x For purposes of this Subsection, the consolidated financial statements
shall conform to the guidelines of PAS 27 “Consolidated and Separate Financial
Statements” except that for purposes of consolidated financial statements, only
investments in financial allied subsidiaries except insurance subsidiaries shall be
consolidated on a line-by-line basis; while insurance and non-financial allied
subsidiaries shall be accounted for using the equity method. Financial/non-
financial allied/ non-allied associates shall be accounted for using the equity
method in accordance with the provisions of PAS 28 “Investments in
Associates”. x x x”
Appendix 9 of the MORB is hereby deleted.
(d) Subsections X164.2 of the MORB and 4172Q.1 of the MORNBFI.
Posting of Audited Financial Statements.
“ x x x shall post in a conspicuous place in all their branches and other banking
offices, their latest audited financial statements consisting of the following:
(a) Balance Sheet;
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(b) Income Statement;
(c) Statement of Changes in Equity;
(d) Cash Flow Statement;
(e) Notes to Financial Statements, which shall include, among other things,
disclosure of the volume of past due loans as well as loan-loss provisions; and
(f) Auditor’s Opinion.”
This Circular shall take effect within fifteen (15) days following its publication in
the Official Gazette or in a newspaper of general circulation.
FOR THE MONETARY BOARD
AMANDO M. TETANGCO, JR
Governor
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