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Last two minutes to adopt PFRS 9

Anton Ng

This past week has been a roller-coaster ride of emotions for Filipino sports fans like myself. The University of the Philippines Fighting Maroons, after more than three decades, are finally back in the UAAP Men’s Basketball finals against the Ateneo de Manila University Blue Eagles. The jubilation was somewhat dampened by the heartbreaking losses of our national basketball team, Gilas, against Kazakhstan and Ira while our national football team, the Azkals, lost the first leg of their semifinals match against Vietnam.

Life as a sports fan can sometimes be emotionally taxing, even irrational at times.

My desire to enjoy being a fan without much emotional investment led me to fantasy sports. Fantasy sports, such as fantasy basketball, allows fans to simulate the role of the general manager of their own basketball team. I will join a league composed of other individuals whom I may or may not know; we will compete using real National Basketball Association (NBA) players that we put together to complete our respective teams.

Our individual performance in our fantasy league, whether you win or lose, depends on the actual performance of the players in our fantasy teams. I create and modify the composition of my team based on three factors: first, the player’s performance during past NBA seasons; second, the player’s current performance; and third, the player’s projected performance for the remainder of the NBA season. There are trillions of internet statistics and analyses that can help me make decisions about my team. As a sports fan, participating in fantasy basketball leagues is less emotional than rooting for a real-life team. Decisions made within fantasy basketball are mostly based on historical and projected data, but still allow a participant to make use of one’s expert judgment.

Fantasy basketball, or at least the factors considered in decision making, is much like an entity’s expected credit loss (ECL) model. The ECL model was brought about by the adoption of Philippine Financial Reporting Standards (PFRS) 9, Financial Instruments, in the Philippines beginning Jan. 1, 2018. The ECL model allows an entity to measure the required amount of provision as it holds financial instruments that are either measured at amortized costs or at fair value through other comprehensive income (FVOCI). Under this impairment model, entities recognize impairment losses even prior to the incurrence of a credit event. This means that, even in the absence of any indications of impairment, entities are required to recognize impairment losses on its receivables. By now, almost all entities in the Philippines that are preparing their financial statements in accordance with PFRS should already be well underway in creating their respective ECL models in time for the filing of their financial statements no later than April 2019.

Banks and other financial institutions are significantly affected by this new impairment methodology. Entities outside banking, however, are also affected by PFRS 9, even if their financial assets are only composed of cash and trade receivables.

Here are some important reminders to entities reporting under the PFRS framework:

The date of initial application of PFRS 9 is Jan. 1, 2018. Even though an entity will only be computing its impairment requirements using the new ECL model during the last quarter of 2018, an entity still needs to prepare a transition adjustment as of Jan. 1, 2018.

The entity’s trade receivables will also be subject to the new ECL model. Impairment for trade receivables can be measured using a simplified approach. The simplified approach will not require the assessment on the changes of credit risk. However, it will always require the recognition of a lifetime ECL.

Don’t forget to incorporate forward-looking information. One of the significant changes introduced by PFRS 9 compared to the incurred loss model being implemented under Philippine Accounting Standards (PAS) 39 is to include forward-looking information in the model design. This forward-looking information is a component of the ECL model, regardless of whether an entity is using the general approach or the simplified approach.

Equity investments are no longer tested for impairment. Since equity investments are either measured at fair value through profit or loss or FVOCI, there is no need to determine the impairment of these financial instruments.

Offstatement of financial position accounts (e.g., financial guarantee contracts, unused loan commitments) are subject to impairment. Let us say your organization is a parent entity, and one of your subsidiaries obtained a loan from a bank. As part of the subsidiary’s loan agreement, the parent entity committed to guarantee the settlement of the loan. Though the subsidiary pays its loan amortization on time, the parent entity needs to assess the amount of provision it needs to recognize in relation to the financial guarantee contract.

If credit risk information is available at the instrument level, the credit risk assessment can be made on an individual basis at the instrument level. If such credit risk information is not available, though, the credit risk assessment will be made on a collective basis based on shared credit risk characteristics.

No matter how compliant the model is with PFRS 9, if the inputs used by an entity are wrong or insufficient, the result of the ECL model will also be inappropriate. Therefore, those adopting PFRS 9 must identify the limitations and issues with the historical data that will be used in the ECL model so that those can be addressed accordingly. Much like my reliance on historical data to compete in my fantasy sports leagues, the ECL model will also heavily depend on historical information about the behavior and performance of an entity’s receivables portfolio.

Speaking of impairments that would ultimately lead to writing off receivables, I hope my beloved UP Fighting Maroons will not be fully written off in their second match against the Ateneo Blue Eagles later today.

UP fight!

Anton Ng is a Partner for the Audit and Assurance Division of P&A Grant Thornton. P&A Grant Thornton is one of the leading Audit, Tax, Advisory, and Outsourcing firms in the Philippines, with 21 Partners and over 900 staff members. We’d like to hear from you! Tweet us: @PAGrantThornton, like us on Facebook: P&A Grant Thornton, and email your comments to or For more information, visit our Website: