Trust units told to maintain allowance for credit losses

The Bangko Sentral ng Pilipinas (BSP) is now requiring trust entities to maintain adequate allowance for credit losses under the new reporting standards that took effect at the start of the year.

BSP Governor Nestor Espenilla Jr. issued Circular 1023 laying down the guidelines on the adoption of Philippine Financial Reporting Standards 9 (PFRS 9) on financial instruments under management of trust entities.

In line with the PFRS 9 requirement on the adoption of the expected credit loss (ECL) in recognizing impairment, the trust entity is required to promptly recognize and maintain adequate allowance for credit losses at all times.

Allowance for credit losses is an estimate of the debt that a trust entity is unlikely to recover.

A trust entity with basic operations will be allowed to adopt simple loan loss methodologies based on the principle of recognizing expected credit losses.

On the other hand, a trust entity 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.

Under the new circular, specific guidelines on the classification and measurement, and impairment of financial assets under the administration of trust entities were provided, taking into consideration the peculiarity of the trust operations.

The guidelines include provisions on the adoption of business models of the trust entity, and the assignment of business model/s for each client.

The rule also provides actions to be taken in case of significant unfavorable impact of the new classification of financial assets under management of the trust entity against the performance indicators set for the client.

Consistent with the expectations from BSP supervised financial institutions, the guidelines require the board of directors of a trust entity 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 trust entity is also required to define business models to be adopted for managing the financial assets of clients under its administration based on pre-defined investment objectives.