Conservatism principle requires that losses are recognized when they are quantified and that gains are recorded when they are realized. But measuring impairment on financial instruments under the old financial reporting standards is not conservative enough to ensure the reliability of the financial reporting system. Impairment on financial instruments is recognized after rather than before the default, which overstates assets and earnings and understates liabilities and expenses. How unfortunate that this liberal recognition of impairment on financial instruments has been tolerated by the accounting profession to the detriment of the users of financial statements. But the days of overstated assets and earnings and understated liabilities and expenses are gone after the Bangko Sentral ng Pilipinas (BSP) approved the guidelines on the adoption of Philippine Financial Reporting Standards (PFRS 9) – Financial Instruments for BSP-supervised Financial Institutions (BSFIs). 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 as a replacement to the International Accounting Standards (IAS 39) – Financial Instruments: Recognition and Measurement. PFRS 9 requires BSFIs to incorporate material information in measuring impairment on financial instruments under the new financial reporting standards. BSFIs are required to assess the impact of PFRS 9 on business strategies and credit risk management systems to be able to adopt policies and procedures to ensure the reliability of the financial reporting system. Based on the guidelines on the adoption of PFRS 9, the BSP will evaluate the consistency of sales activities and metrics being used in monitoring the performance of financial instruments with the business model for holding the instrument. This will align the accounting treatment with the credit risk management systems to strengthen governance over the financial reporting system. PFRS 9 requires the adoption of an Expected Credit Loss (ECL) model in recognizing impairment on financial instruments to provide accurate information to the users of financial statements under the Guidelines on Sound Credit Risk Management. Under the ECL model, an allowance for credit losses at any balance sheet date is calculated by recognizing probable defaults within the next 12 months or for the entire remaining life of the financial instrument. The estimation of ECL will be a remarkable change in the financial reporting standards. Given the importance of BSFIs in the Philippine capital market, it is important for stakeholders to develop reasonable ECL estimates to ensure the accuracy of financial statement disclosures.
