APRA Specifies Regulatory Treatment of AASB 9 ECL Provisions
APRA issued a letter setting out its expectations on the regulatory treatment of AASB 9 expected credit loss (ECL) provisions and possible transition arrangements. All authorized deposit-taking institutions are required to apply AASB 9 Financial Instruments (AASB 9) for annual reporting periods beginning on or after January 01, 2018.
BCBS had recently finalized an interim provisioning approach that retains the current regulatory treatment of accounting for ECL provisions. BCBS recommended that regulatory authorities should provide guidance, as appropriate, on how they intend to categorize ECL provisions as General Provisions or Specific Provisions in their jurisdiction. When applying the Prudential Standard APS 220 Credit Quality (APS 220) requirements (paragraphs 39, 42, 43, 46–49), APRA expects authorized deposit-taking institutions to adopt the following approach to the three AASB 9 provisioning stages:
Stage 1 (representing 12-month ECL provisions on performing loans)—Allocate to General Reserve for Credit Losses (GRCL), if held against future, presently unidentified losses and, therefore, freely available to meet losses that subsequently materialize.
Stage 2 (representing lifetime ECL provisions on underperforming loans)—Consider as Specific Provision for regulatory purposes. However, any portion that represents an amount for future, presently unidentified losses, would qualify as GRCL.
Stage 3 (representing lifetime ECL provisions on nonperforming loans)—Consider as Specific Provision for regulatory purposes.
The GRCL amount that may be included in tier 2 Capital, gross of tax effects, under the Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111) (paragraph 32) remains unchanged. APRA already has adopted a GRCL concept in APS 220 that reflects a lifetime ECL concept within its prudential framework. APRA’s informal consultation has indicated that regulated entities will not need transitional arrangements. However, if entities believe that their capital position will be significantly affected, they should approach APRA for discussion on possible transition arrangements. APRA intends to update APS 220 in due course to reflect the appropriate treatment of provisions under AASB 9.
Related Link: Letter on AASB 9 (PDF)
Keywords: Asia Pacific, Australia, APRA, AASB 9, IFRS 9, ECL, APS 220
Featured Experts
Scott Dietz
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
Anna Krayn
CECL adoption expert; engagement manager for loss estimation, internal risk capability enhancement, and counterparty credit risk management
Masha Muzyka
CECL, IFRS 9, and IFRS 17 expert; credit risk and insurance risk specialist; strategic planning and credit analytics solutions consultant
Previous Article
CBRC Consults on Measures for Managing Large Exposures of BanksRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
