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
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