CBN releases IFRS 9 implementation guidelines for other financial institutions

By Moses Obajemu

The Central Bank of Nigeria (CBN) has released a set of guidance notes on the implementation of the International Financial Reporting Standards (IFRS9) for the other financial institutions (OFIs) in the country.

According to a CBN circular dated March 5, 2019 and signed by Olatokubo Martins, Director of other financial institutions, the guidance notes became necessary in order to ensure proper application of the IFRS 9 requirements in the OFIs sector.

IFRS 9 prescribes new guidelines for the classification and measurement of financial assets and liabilities, making fundamental changes to the methodology for measuring impairment losses, by replacing the “incurred loss” model with a forward-looking “expected loss” model.

According to the notes, the CBN directs the OFIs when measuring financial instruments and assessing significant increase in credit risk, to ensure that an entity, at each reporting date, assess whether the credit risk on a debt instrument measured at amortised cost and fair value through other comprehensive income (FVOCI) has increased significantly since initial recognition, using among other factors the change in the risk of a default occurring over the expected life of the instrument.

“The CBN expects OFIs to put in place policies and systems as well as governance arrangements and controls to identify instances where their exposures have suffered significant increase in credit risk.

“In assessing significant increase in credit risk, OFIs are to consider quantitative, qualitative and ‘backstop’ (30 days past due presumption) indicators. However, OFIs with loan facilities with tenor of not more than 180 days should use 7 days past due presumption. In the same vein, 90 days past due presumption should be used for long term financial instruments such as mortgage loans with tenor longer than 10 years”, the guidance said.

The apex bank further directs that financial assets which are more than 30 days past due (7 days past due for loans below 180 days tenor) or have been granted forbearance should be considered to have significantly increased in credit risk.

It however said it expects OFIs not to rely solely on the 30 days/7days past due presumption, but to incorporate reasonable and supportable forwardlooking information. “The 30 days/7days past due presumption can only be applied if the forward looking information is not available without undue cost or effort”, it said.

On staging and credit transfer criteria, the CBN said, at transition, OFIs are expected to place financial instruments without significant increase in credit risk in the 12-month ECL bucket irrespective of the obligor’s credit risk rating at origination.

“However, where significant increase in credit risk has been observed, such credits are moved to Lifetime ECL. At origination/transition, where the tenor of the credit facility is less than 12 months, OFIs are still expected to compute the ECL for the duration of the loan in place of the 12- month ECL and place the facility in 12-month ECL bucket.

“Where there is evidence that there is significant reduction in credit risk, OFIs would continue to monitor such financial instruments for a probationary period of 90 days (30 days for loan facilities with less than 180 days tenor) to confirm if the risk of default has decreased sufficiently before upgrading such exposure from Lifetime ECL (Stage 2) to 12-months ECL (Stage 1)”, it said

The CBN said in addition to the 90 or 30 days probationary period above, OFIs are expected to observe a further probationary period of 90 or 30 days to upgrade from Stage 3 to 2. For the avoidance of doubt, OFIs are required to observe a probationary period of 180 or 60 days before upgrading financial assets from Lifetime ECL (Stage 3) to 12-months ECL (Stage 1).