This accounting alert is issued to circulate the guidelines governing the reclassification of debt securities that are measured at fair value to the amortized cost category as part of the relief measures extended by the BSP in managing the financial impact of the corona virus disease 2019 (COVID-19) pandemic.
Introduction
The Monetary Board, in its Resolution No. 511 dated April 7, 2020, approved the guidelines governing reclassification of debt securities as part of the relief measures extended by the BSP to BSP-supervised financial institutions (BSFIs). Pursuant to this, the BSP, in its Memorandum No. M-2020-022, allowed BSFIs, for prudential reporting purposes, to reclassify its investments in debt securities that are booked under a fair value category to the amortized cost category, except for debt securities that are part of assets under management of a trust entity.
Guidelines
1. Debt securities recorded under the Other Financial Assets Mandatorily Measured at Fair Value Through Profit or Loss (FVPL) and Financial Assets Measured at Fair Value Through Other Comprehensive Income (FVOCI) accounts may be reclassified to the Debt Securities Measured at Amortized Cost account.
2. Debt securities may be reclassified out of the Financial Assets Held for Trading account into the Debt Securities Measured at Amortized Cost account due to the COVID-19 situation but should only be done if the debt securities shall no longer be used for trading purposes.
3. The reclassification of debt securities from a fair value category to the amortized cost category shall be done all at the same time.
4. A BSFI may reclassify the subject debt securities from March 1, 2020 to September 30, 2020.
a. A BSFI may retrospectively reclassify its debt securities measured at fair value until April 30, 2020. A BSFI may value date the reclassification as of any day from March 1, 2020 to April 30, 2020. Unrealized losses arising from the change in fair value of reclassified debt securities from the effective date of reclassification to the exercise date, or the date when the reclassification is effected in the BSFI’s books, should be reversed.
b. Reclassifications made after April 30, 2020 shall take effect only from the date when the reclassification is made.
5. The accounting for the reclassification shall be done in accordance with the following provisions:
a. In the case of transfers out of the financial assets measured at FVPL account, the fair value of the debt security at the effective date of reclassification shall be its new gross carrying amount. The effective interest rate of the debt security will be determined on the basis of its fair value at the effective date of reclassification. For purposes of applying the impairment provisions to the debt security, the effective date of reclassification is treated as the date of initial recognition of the debt security.
b. In the case of transfers out of the financial assets at FVOCI account, the financial asset is reclassified at its fair value at the effective date of reclassification date. The cumulative gain or loss previously recognized in other comprehensive income is removed from equity and adjusted against the fair value of the debt security at the effective date of reclassification. As a result, the debt security is measured at the effective date of reclassification as if it had always been measured at amortized cost. The recognition of interest revenue will not change and the BSFI will continue to use the same effective interest rate. The measurement of expected credit losses will also not change, however, a loss allowance should be recognized as an adjustment to the gross carrying amount of the debt security from the effective date of reclassification.
6. The BSFI shall not restate any recognized gains, losses (including impairment gains or losses) or interest prior to the effective date of reclassification.
7. A BSFI that reclassifies debt securities from the fair value category to the amortized cost category shall submit a report using the format prescribed in Annex A of the Memorandum. The said report shall be submitted to the Department of Supervisory Analytics of the BSP on or before October 31, 2020.
8. A BSFI which avails of the look-back provision under item 4(a) above and which has submitted prudential reports to the BSP need not submit re-stated prudential reports covering the affected reporting periods.
The adoption of the foregoing alternative accounting treatment in the audited financial statements of a BSFI will warrant a qualified opinion from the external auditor, if deemed to have a material effect on the financial statements.
See attached BSP Memorandum for complete details of this publication.
