Document Properties
- Type of Publication: Guideline
- Category: Accounting
- Date: July 2007
- Revised: July 2010
- No: C-1
- Audiences: Life / P&C
In accordance with the Basel Committee on Banking
Supervision’s (BCBS) June 2006 paper Sound Credit Risk Assessment
and Valuation for Loans (SCRAVL) an institution’s senior management is responsible for ensuring that the institution has appropriate credit risk assessment processes and effective internal controls to consistently determine provisions in accordance with the institution’s stated policies and procedures, the applicable accounting framework and supervisory guidance.
This Guideline provides federally regulated financial institutions with
additional guidance to IAS 39,
of the International Accounting Standards Board’s (IASB) International
Financial Reporting Standards. This Guideline is
intended to supplement, but not contradict, the guidance contained in IAS
39. In addition, OSFI encourages the incorporation of the principles
detailed in the BCBS SCRAVL paper in the credit risk assessment process.
This Guideline applies to financial instruments classified at amortized
cost under IAS 39. While off balance sheet instrument are not within the
scope of this guideline, OSFI expects that an equally robust process would
be followed to support provisions for credit losses for off-balance sheet
exposures that are not at fair value such as certain guarantees and
bankers acceptances, letters of credit, undrawn commitments, and loan
substitutes. Provisions for credit losses for off-balance sheet exposures
are recorded in accordance with IAS 37 in other liabilities.
The Guideline does not need to be applied to amortized cost financial
instruments of immaterial amounts. Refer to the Framework for the
Preparation and Presentation of Financial Statements paragraphs 29-30 of
the IASB’s International Financial Reporting Standards on materiality.
Recognition of Impairment
Impairment should be recognized in accordance with IAS 39 and
should consider the loss events detailed therein. Given the loss events
described in IFRS (IAS 39.59a-f), and in particular the impact of
significant financial difficulty of the issuer or obligor, a breach of
contract, such as a default or delinquency in interest or principal
payments, and adverse changes in the payment status of borrowers, OSFI
considers the below listed conditions to be indicative of non performing
status. OSFI further recognizes that the below listed conditions should
not limit the earlier recognition of impairment losses incurred in
accordance with IAS 39:
-
a payment on a deposit with a regulated financial
institution or a restructured loan is contractually 90 days in
arrears;
-
a payment on any other loan (excluding credit card
loans) is contractually 90 days in arrears unless the loan is fully
secured, the collection of the debt is in process and the collection
efforts are reasonably expected to result in repayment of the debt or
in restoring it to a current status within 180 days from the date a
payment has become contractually in arrears; or
-
a payment on any loan is contractually 180 days in
arrears. Any credit card loan that has a payment 180 days in arrears
should be written off.
These conditions are not considered indicative of non performing status
for up to 365 days from the date a loan is contractually in arrears where
the loan is guaranteed or insured by the Canadian government (federal or
provincial) or a Canadian government agency, the validity of the claim is
not in dispute, and as a consequence the loss event does not have an
impact on the estimated future cash flows of the amortized cost financial
instrument or group of amortized cost financial instruments.
Measurement of Impairment
The measurement of impairment of financial instruments at amortized cost
is governed by IFRS’s IAS 39 s.58-65 and AG84-AG93.
In reviewing the adequacy of the allowance for impairment of financial
instruments held at amortized cost, in each case where the estimated
realizable amounts have been measured by discounting the expected future
cash flows, OSFI examination staff will want to be able to easily identify
the following:
-
the shortfall between the undiscounted expected future cash flows of the
amortized cost financial instrument and the instrument’s carrying value;
and
-
the amount resulting from discounting the expected future cash flows at
the effective interest rate inherent in the amortized cost financial
instrument.
In addition, OSFI examination staff may elect to obtain information
through on site examination, or through information requests, to evaluate
whether:
-
the institution’s internal review function is robust and provides
adequate testing and documentation of internal compliance with the
institutions credit risk grading criteria;
-
the quality of the institution’s processes and systems for
identifying, classifying and monitoring and addressing amortized cost
financial instruments with credit quality problems in a timely manner
is adequate;
-
appropriate information about the credit quality of the portfolio and
related allowances and provisions is provided to senior management on a regular and timely basis;
-
procedures used by the institution to establish allowances on
individually impaired amortized cost financial instruments are prudent
and take into account criteria such as updated valuation of collateral
and cash flow predictions based on current assessment of economic
conditions; and
-
allowances are appropriate in relation to total credit risk exposure
in the portfolio.
It is the responsibility of senior management
of each institution to oversee and monitor the credit risk assessment and
impairment processes. This includes ensuring the appropriateness of credit
risk assessment processes and internal controls in place to determine
impairments. Institutions should use consistent credit risk assessment and
valuation policies and procedures from period to period and consistent
measurement concepts and procedures for related items.
Please refer to OSFI’s Corporate Governance Guideline for OSFI’s expectations of institution Boards of Directors in regards to operational, business, risk and crisis management policies.
Income Recognition
To maintain a complete record of write-offs and recoveries in the
allowance for impairment account for financial instruments held at
amortized cost, OSFI expects write-offs and recoveries related to impaired
financial instruments held at amortized cost to be recorded through this
account rather than being recorded directly as a charge or credit for
impairment in the income statement. Write-offs and recoveries, that are
charged or credited to the allowance account during an accounting period,
are reflected as a charge or credit for impairment in the income statement
at the end of the period when the ending balance in the allowance account
is established.
Where subsequent payments (whether designated as interest or principal)
are received on an impaired financial instrument held at amortized cost,
OSFI expects this to be recorded as a reduction of the financial
instruments’ carrying value. When the carrying value in the amortized
cost financial instrument is completely written off, the subsequent
payments are credited to the allowance account.
OSFI expects interest income to be recognized on impaired financial instruments held at amortized cost using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.