Pursuant to Republic Act No. 11494 or the “Bayanihan to Recover as One Act”, the Securities and Exchange Commission (“SEC”) issued Memorandum Circular No. 35 dated 28 December 2020 (“MC 35-2020”) providing relief to licensed financing companies (“FCs”), lending companies (“LCs”), and accredited microfinance NGOS (“MF-NGOS”) in the form of the staggered booking of provision for credit losses for the annual period ending on or after 31 December 2020 for a maximum period of five (5) years using the straight-line amortization method to be recognized in the profit or loss statement.
MC 35-2020 requires FCs, LCs, and MF-NGOs to continue to include actual past due and non-performing loans and provisions for credit losses in their reports submitted to the SEC’s Corporate Governance and Finance Department to facilitate the generation of industry statistics and to provide the SEC with information on the true health of these institutions.
In order to avail of the relief, FCs, LCs, and MF-NGOs should prepare their respective Audited Financial Statements (“AFS”) in accordance with an industry-specific framework, to be referred to as the Philippine Financial Reporting Standards (“PFRS”), the PFRS for Small and Medium-Sized Entities (“SMEs”), or the PFRS for Small Entities (“SEs”), as modified by the application of the financial reporting reliefs issued and approved by the SEC. Furthermore, FCs, LCs, and MF-NGOs should indicate in the “Basis of Preparation of the Financial Statements” section of the financial statements the relief availed of and indicate that the relief availed of covers only current-year transactions. The subject entities should comply with the following prescribed wording:
“The accompanying financial statements have been prepared in accordance with (state the applicable financial reporting framework), as modified by the application of the following financial reporting relief issued and approved by the Securities and Exchange Commission in response to the COVID-19 pandemic: (state the relief availed of). The relief covers only current-year transactions/events and do not impact the comparative period/s.”
A qualitative disclosure of the impact of the relief availed of should also be specified. The following information should be provided in tabular format in the Note to Financial Statements that contains the Basis for Preparation of the Financial Statements:
- Impact of on the affected financial statement line items if the provision for credit losses was measured and recorded in accordance with PFRS, PFRS for SMEs, or PFRS for SEs, as applicable (loans and receivables, allowance for credit losses, provision for credit losses, retained earnings, deferred tax asset and expenses, earnings per share [for listed companies], etc.)
- Amount of allowance recognized or amortized for the period
- Balance of unrecognized or unamortized allowance.
FCs, LCs, and MF-NGOs that may avail of the relief but the impact on the financial statements is deemed not material may still represent in the Notes to Financial Statements that the financial statements are presented in full compliance with the applicable financial reporting framework. Under such circumstance, the disclosure requirements for such relief are not mandatory.
MC 35-2020 also states that where an external auditor has been engaged to perform an audit on these annual financial statements, the external auditor shall reflect in the opinion paragraph that the financial statements are prepared in accordance with the compliance framework described in the Notes to the Financial Statements. Furthermore, the external auditor shall also include an “Emphasis of Matter” paragraph in the auditor’s report to give emphasis to the basis of accounting that has been used.
Finally, the subject entities must comply with the requirements of the financial reporting standards in applying the adjustments when they revert to full PFRS, PFRS for SMEs, or PFRS for SEs, as applicable, after the period of relief.