BSP Provides Prudential Relief on the Treatment of Loss Arising from the Sale/Transfer of Non-Performing Assets

The Bangko Sentral ng Pilipinas (“BSP”) issued Memorandum No. M-2022-28 (“Memorandum”) on 6 June 2022, providing all BSP-Supervised Financial Institutions (“BSFIs”) prudential relief on the treatment of loss arising from the sale/transfer of nonperforming assets (“NPAs”) under Republic Act No. 11523, otherwise known as the Financial Institutions Strategic Transfer (“FIST”) Act.

Under this Memorandum, a BSFI has the option to defer loss arising from the sale/transfer of NPAs under the FIST Act up to a maximum period of five (5) years from the date of sale/transfer of the NPAs for prudential reporting purposes, subject to prior approval of the Bangko Sentral. 

The said Memorandum requires that the financial instruments, received by a BSFI as consideration for the sale/transfer of NPAs, be recorded in accordance with the provisions of Philippine Financial Reporting Standards (PFRS) 9, Financial Instruments. If the fair value of the said financial instrument/s cannot be readily determined, the BSFI shall ensure that it can provide the BSP with the basis for the fair valuation in accordance with the provisions of PFRS 13, Fair Value Measurement. Such basis shall be supported by the opinion of a third-party external auditor acceptable to the BSP and shall be made available to the appropriate supervising department of the BSP upon request. If the fair value cannot be established in accordance with these requirements, the BSFI shall record these financial instrument/s upon initial recognition at the net carrying amount of the NPAs sold/transferred less cash received. No gain or loss shall be recorded by the BSFI on the sale/transfer transaction.

As defined in the Memorandum, Deferred Charges shall refer to the actual loss incurred on the sale/transfer of NPAs to Financial Institutions Strategic Transfer Corporations under the FIST Act, which should be written down up to a maximum period of five (5) years in accordance with existing regulations.

Lastly, Memorandum No. M-2022-28 mandates those banks that are allowed to avail of the prudential relief measure, to provide the following disclosures:

1. In the Published Balance Sheet, the amount of Deferred Charges not yet written down as of the reporting period; and
2. In the Annual Report, the following information shall be disclosed:
   1. A description of the prudential relief measure under the FIST Act, including the financial year when the prudential relief measure is first applied and the duration of the application
   2. Impact on the financial statements:
      1. affected line items if the loss arising from the sale/transfer of NPAs was measured and recorded in accordance with PFRS;
      2. amount of loss on sale/transfer of NPAs recognized for the period, and
      3. balance of deferred charges; and
   3. Comparison of the:
      1. risk-based capital adequacy ratios computed in accordance with the prudential relief measure; and
      2. risk-based capital adequacy ratios had said prudential relief measure not been applied.