Financial Sector (Collection of Data) determination No. 71 of 2005 - Reporting Standard ARS 220.0 (2005) - Impaired Assets
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The Impaired Assets form is to be completed by all ADIs (other than Specialist Credit Card Institutions (SCCIs) that engage only in credit card acquiring activities) on both a Licensed ADI and Consolidated ADI Group basis (where applicable).
Foreign ADIs[1] and Specialist Credit Card Institutions (SCCIs) operating through branches in Australia are required to complete this form for the Australian branch only.
Licensed ADI
This refers to the operations of the reporting ADI on a stand-alone basis.
Consolidated ADI group
This refers to the global operations of the ADI and all its controlled entities (where relevant), consolidated in accordance with Australian accounting standards (AASB 1024 ‘Consolidated Accounts’).
‘Controlled entity’, ‘parent entity’. These terms are defined in accordance with AASB.
The basis of consolidation required in this form is in accordance with the prudential Consolidated ADI Group. The prudential consolidated group should also be determined in accordance with Australian accounting standards, notably AASB 1024 with the following modifications:
(1) Include the following:
all controlled banking entities, securities entities and other financial entities (e.g. finance companies, money market corporations, stockbrokers and leasing companies.
(2) Exclude subsidiary entities involved in the following business activities:
insurance businesses (including friendly societies and health funds);
acting as manager, responsible entity, approved trustee, trustee or similar role in relation to funds management or the securitisation of assets; and
non-financial (commercial) operations.
Reporting period
The form is to be completed as at the last day of the stated reporting quarter. Locally incorporated banks, Foreign ADIs and Special Service Providers should submit the completed form to APRA within 20 business days after the end of the relevant reporting quarter. Credit Unions, Cairns Penny Savings & Loans Limited, Building Societies and Specialist Credit Card Institutions (SCCIs) should submit the completed form to APRA within 15 business days after the end of the relevant reporting quarter.
Unit of measurement
Banks are asked to complete the form in millions of Australian dollars rounded to one decimal place, and for other ADIs, in whole Australian dollars (no decimal place).
Amounts denominated in foreign currency are to be converted to AUD in accordance with AASB 1012 ‘Foreign Currency Translation’.
The general requirements of AASB 1012 for translation are:
Foreign currency monetary items outstanding at the reporting date must be translated at the spot rate at the reporting date.
Other items outstanding at the reporting date must not be retranslated subsequent to initial recognition of the transaction.
Monetary items are defined to mean money held and assets and liabilities that are to be received or paid in fixed or determinable amounts of money.
Monetary items arising under foreign currency derivative contracts at the reporting date must be translated as follows:
Where the exchange rate is fixed in the contract, at that fixed exchange rate; and
Where the exchange rate varies, at the spot rate at the reporting date.
Reporting basis
Parts 1A and 2A are to be completed on an “audited” basis while Parts 1B and 2B are to be completed on a “best endeavours” basis.
Classification schema
The classification scheme used in ARF 220.0 Impaired Assets is consistent with the classification scheme used in ARF 320.0 Statement of Financial Position (Domestic Books) and ARF 323.0 Statement of Financial Position (Licensed ADI).
Resident/non-resident classification
An Australian resident is any individual, business or other organisation domiciled in Australia. Australian branches and Australian subsidiaries of foreign businesses are regarded as Australian residents.
A non-resident is any individual, business or other organisation domiciled overseas. Foreign branches and foreign subsidiaries of Australian businesses are regarded as non-residents.
Sector definitions
Households
This comprises individuals, or groups of individuals, resident in Australia whose dealings with other sectors are for personal or household purposes.
Exclude
Sole proprietors, partnerships, family trusts, and any other unincorporated enterprises owned by households (record as private unincorporated businesses).
Community Service Organisations
Include
Institutions financed mostly by members’ contributions, e.g. trade unions, professional societies, consumer associations, political parties, churches and religious societies, and social, cultural, recreational and sports clubs; and
Charities and aid organisations financed by voluntary transfers.
Exclude
Community service organisations and non-profit institutions controlled and mainly financed by government (record as other).
Non-financial corporations
This comprises private trading corporations and private unincorporated businesses.
Private trading corporations
Private trading corporations are those owned and controlled by the private sector whose main activity is producing goods or non-financial services for sale.
Include
All resident private corporate trading enterprises, and non-profit institutions that are market producers of goods or non-financial services;
Intra-group financiers (Financial Sector (Collection of Data) Act 2001 category I), Retailers (Financial Sector (Collection of Data) Act 2001 category H) and parent companies with significant holdings of shares in private trading companies;
Privately owned schools and hospitals;
Any unincorporated unit that is a branch in Australia of a non-resident company and which is not included in the financial sector; and
Any unincorporated business owned and operated by trading corporations (e.g. joint ventures).
Exclude
Unincorporated businesses, except for branches of non-resident companies and joint ventures or partnerships owned by corporations; and
Non-resident enterprises.
Private unincorporated businesses
This comprises individuals acting as sole proprietors or in partnerships, for commercial or professional purposes. The major businesses to be included in this sub-sector are unincorporated farms, unincorporated retailers, unincorporated professional practices (medical, legal, dental, accounting, etc.), unincorporated businesses of tradesmen such as plumbers, carpenters, etc.
Financial corporations
Authorised deposit-taking institutions
Authorised deposit-taking institutions refers to corporations in relation to which an authority under subsection 9(3) is in force.
Include
Development banks; and
Foreign banks licensed to operate in Australia under the Banking Act 1959.
Exclude
Merchant banks (record as registered financial corporations); and
Non-resident banks (record as non-resident counterparties).
Registered Financial Corporations
Registered Financial Corporations refers to corporations registered under the Financial Sector (Collection of Data) Act 2001 that are classified to Categories D through G and cash management trusts.
Include
Money market corporations (also referred to as "merchant banks") (D);
Pastoral finance companies (E);
Finance companies (F);
General financiers (G); and
Cash management trusts.
A list of corporations registered under the Financial Sector (Collection of Data) Act 2001 and their classification are available on request.
Exclude
Intra group financiers and retailers registered under the Financial Sector (Collection of Data) Act 2001 Categories H and I (record as private trading corporations); and
Other financial corporations registered under the Financial Sector (Collection of Data) Act 2001 Category J (record as other financial institutions).
Insurance corporations
The insurance corporations sector includes all corporations that provide insurance. Included are life, general, fire, accident, employer liability, household and consumer credit insurers and health insurance funds. These companies must be registered with the Australian Prudential Regulation Authority.
Include
Benefit fund friendly societies that are regulated under the Life Insurance Act 1995; and
Export Finance Insurance Corporation.
Exclude
Health benefit funds of friendly societies that are regulated under the National Health Act 1959.
Pension funds
The pension funds sub-sector includes all superannuation funds that are regarded as complying funds for the purposes of the Superannuation Industry Supervision Act and other autonomous funds established for the benefit of public sector employees. Superannuation funds with all of their assets invested with insurance offices are included.
Superannuation funds and Approved Deposit Funds (ADFs) are established to provide benefits for their members on retirement, resignation, death or disablement. Superannuation funds and ADFs usually take the legal form of trust funds.
Include
Pooled Superannuation Trusts;
Public sector superannuation funds (including SIS-exempt funds);
Private sector superannuation funds;
Approved Deposit Funds; and
Superannuation funds established by life insurance companies.
Exclude
Retirement savings accounts
Other financial institutions
The other financial institutions sector includes all financial institutions not recorded in the above financial corporations categories.
Include
Financial auxiliaries such as fund managers as principal, stock brokers and insurance brokers;
Securitisers;
Mortgage, fixed interest and equity unit trusts;
Economic development corporations owned by governments;
Co-operative housing societies;
Other financial corporations registered under the Financial Sector (Collection of Data) Act 2001 Category J;
Investment companies; and
Common funds including cash common funds.
Exclude
Cash management trusts (record as RFC); and
Property and trading trusts (record as private trading corporations).
Other
This comprises all other entities not classified as households, community service organisations, non-financial corporations, and financial corporations.
Scope
The form covers the full range of problem exposures, which ADIs hold, and is not limited to problem loans.
In measuring off balance sheet credit exposures the following measurement policies should be adopted:
Include under balances outstanding for the appropriate impaired asset category (i.e. non-accrual or restructured items), the following:
any direct credit substitutes (e.g. guarantees, letters of credit, credit derivatives and endorsed bills of exchange as described in the ADI Off Balance Sheet Business Form). For example, where an ADI has guaranteed the financial obligations of a client, and there is reasonable doubt about the ultimate collectability of principal or interest, which the ADI has a contractual obligation to pay under the guarantee, it should be included in the appropriate impaired asset category.
any commitments, as described in the ADI Off Balance Sheet Business Form. For example, where there is reasonable doubt about the ultimate collectability of principal and interest relating to such commitments, or a provision established, then the balance of the outstanding commitment should be included in the appropriate impaired asset category.
the credit equivalent amounts of market related off balance sheet transactions in the ADI Off Balance Sheet Business Form, which meet the definitions of impaired assets. The credit equivalent amount must be calculated using the current exposure or mark-to-market method unless another method has been approved in advance by APRA. Potential credit add‑ons should reflect the nature of the individual exposure involved. Derivative transaction exposures should be revalued regularly so as to maintain reasonably current assessments of the extent of credit risk attaching to those transactions.
When reporting the extent of specific provisions raised against all off balance sheet credit exposures, include those recorded in the notes to ADIs' published financial statements as "other liabilities".
Unless otherwise instructed report:
outstanding balances net of interest and other income not taken to profit, and net of any amounts written off;
all items without any adjustment for credit conversion factors (except for market related off balance sheet transactions), risk weights, provisions (specific or general), and/or collateral arrangements; and
amounts net of offsetting balances available under legally eligible netting arrangements as outlined in Guidance Note AGN 112.3 Netting.
Separately report amounts, where requested, recorded on Australian and overseas books. Guidance on the meaning of “on Australian and overseas books” is provided in the Instruction Guide ARF 320.0 Statement of Financial Position (Domestic books).
Specific instructions
Part 1A – Impaired assets
Impaired assets are defined as those items for which the ultimate collectability of principal and interest is compromised. APRA’s prudential standard on credit quality requires ADIs to classify their impaired assets as (1) non‑accrual items, (2) restructured items or (3) other assets acquired through security enforcement (including other real estate owned).
Non-accrual items
The term "non-accrual items" applies to those facilities on which income may no longer be accrued ahead of its receipt. The following should be considered in classifying a facility as a non‑accrual item:
a reasonable doubt about the ultimate collectability of all or part of the principal and interest but the facility is not classified as “restructured” or as an “asset acquired through security enforcement”. Non-accrual items include, by definition, all facilities against which a specific provision has been established, or a write-off has been taken even if the facility is not currently in breach of contractual requirements;
facilities, not included in (1), which are “90 days past due” and for which the “net current market value” of associated security, is unlikely to be sufficient to cover payment of principal and interest. A facility subject to a regular repayment schedule is regarded as “90 days past due” when: (a) at least 90 calendar days have elapsed since the due date of a contractual payment which has not been met in full; and (b) the total amount outside contractual arrangements is equivalent to at least 90 days worth of contractual payments. “Net current market value” is defined as the amount that an asset could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm’s length transaction after proper marketing of the asset, and deduction of all disposal costs (including taxation liabilities). In the case of facilities that do not have a preset repayment schedule (e.g. overdrafts and revolving credit facilities), “90 days past due” refers to the period where facilities have remained continuously outside initially approved arrangements (i.e. 90 consecutive days, including any temporary excess approvals). Approved arrangements include limits that are unadvised to the counterparty, internally authorised excesses or extensions approved as part of the initial credit extension process; and
facilities where it is evident that full or partial recovery of the exposure, including interest, is unlikely even though the full extent of the loss cannot be clearly determined. Include any facilities on which the customer/counterparty is currently meeting contractual arrangements but which is maintained on a cash basis by the ADI because of a significant deterioration in the financial performance or position of the borrower/counterparty.
Performance
The return asks ADIs to separately report those non‑accrual items that are subject to no (or immaterial), partial or full performance. APRA’s intention is to better understand the nature of items that ADIs might report as non‑accrual and to enable it to assess the potential impact on the ADI’s overall performance.
No performance – report those exposures on which the ADI is not receiving any material payments. This category should also capture exposures on which an ADI is receiving only sporadic payments.
Partial performance – report those exposures on which the ADI is receiving partial payments relative to the required contractual obligations. Where partial performance is disclosed, ADIs should be able to identify a threshold of performance that defines this category. While it is not APRA’s intention to specify a minimum, the threshold chosen by the ADI should be sufficient to provide a meaningful distinction from the previous category (no performance).
Full performance – report those exposures on which full payments are being received, but which have been placed on a non-accrual basis for another reason. That is, because some reasonable doubt exists about ultimate collectability of the exposure, a specific provision has been raised, or write down taken or some other reasons has prompted this action.
Non‑accrual items – with and without provisions
ADIs should separately report those facilities classified as non‑accrual against which specific provisions have been created and those non‑accrual items against which no specific provision is held. For those ADIs applying the prescribed provisioning methodology described in Guidance Note AGN 220.3 Prescribed Provisioning and reported in terms of ARF 220.3 Prescribed Provisioning, provisions so created are regarded as specific in nature and should be reported as such on ARF 220.0 Impaired Assets.
Restructured items
A restructured item is defined as one in which the original contractual terms have been modified to provide for concessions of interest or principal for reasons related to the financial difficulties of a customer rendering the facility non-commercial to the ADI. In considering whether a facility is non-commercial, an ADI needs to consider whether it would extend credit on similar terms and conditions to a new borrower exhibiting similar risk characteristics. A formal (written) agreement must exist between the ADI and borrower before a facility can be classified restructured.
It is APRA’s general expectation that restructured facilities will not represent a substantial part of an ADI’s total assets.
Restructured items – with and without provisions
Restructured items should be split into those against which there are no specific provisions held and those with provisions that have arisen as part of the restructuring arrangement. The value of specific provisions held against the latter should also be reported. Report only those specific provisions raised prior to, or at the time of, the restructuring. If specific provisions are raised subsequent to the restructuring, the facility should be classified as non‑accrual. The category of restructured with specific provision is primarily designed to address those few instances where ADIs, in employing their problem asset management strategies, create a specific provision ahead of virtually certain write‑off. It is APRA’s general expectation that the extent of facilities reported in this category will be minor and unlikely to continue to be reported in this category for a long period of time.
Other real estate owned (OREO)
OREO is defined as real estate acquired by an ADI in full or partial settlement of a loan or similar facility through enforcement of security arrangements. This category excludes real estate acquired for occupation by ADI staff, and property controlled under “mortgagee in possession” rights.
Report holdings of OREO at net current market value. The assets should continue to be reported until the ADI has disposed of the holding.
Other assets acquired through security enforcement
This category covers other than real estate assets acquired by an ADI in full or partial settlement of a loan or similar facility through enforcement of security arrangements (e.g. debt-for-equity swaps). Report the value of other assets acquired through security enforcement at net current market value after taking into account any appropriate discount factor attributable to uncertain market liquidity conditions. This latter point reflects the likely lack of demand for the asset that has resulted in the ADI holding the asset as a consequence of its exposure recovery activity. Continue to report these assets until they have been sold or the entire exposure is written off.
New impaired assets
Report the value of exposures newly classified as impaired during the quarter.
Specific provisions
As noted above, report the amount of specific provisions held against the relevant categories for non‑accrual items, restructured items, OREO and other assets acquired through security enforcement.
Security held against non-accrual items
Report separately the total value of security held against non-accrual items depending upon whether specific provisions are held or not (items R00913 and R00914 respectively). Should any security held exceed the outstanding balance of an individual non-accrual item the excess should be excluded.
Security held against restructured items
Report separately the total value of security held against restructured items depending upon whether specific provisions are held or not (items R00915 and R00916 respectively). Should any security held exceed the outstanding balance of an individual restructured item the excess should be excluded.
Interest/income received
ADIs are asked to report interest, fees, etc. actually received during the quarter from borrowers/counterparties in relation to those exposures classified as impaired (non‑accrual, restructured and assets acquired through security enforcement).
In some cases, ADIs may deem to have received income if there has been a debit to some form of working account. However, in order for this income to be recognised for the purposes of this return, the working account must:
not be established for the sole purpose of meeting interest obligations;
remain within approved limits; and
exhibit the character of a working account implying that the account balance will fluctuate and not result in interest being continuously capitalised.
ADIs should calculate the effective interest rate being earned on restructured items by reference to the principal outstanding following restructuring (i.e. after taking into account write-offs, provisions that arise as part of the restructuring arrangement or repayments in the form of assets or equity). A restructured facility must be earning a rate of interest that is equal to or greater than the ADI’s average cost of funds at the date of the restructuring. If this is not the case, the facility should be classified as non-accrual.
Report the value of income brought to account during the quarter from assets acquired through security enforcement (including other real estate owned). Any income received should be reported net of identifiable expenses (apart from funding costs) incurred in generating such income. Where, in aggregate, expenses exceed income received, report a negative balance.
Interest/income forgone
For all categories of impaired assets, report all interest/income foregone during the quarter. Interest/income foregone is defined as the difference between what the ADI would have received had the exposure performed as contracted and that interest/income actually received. ADIs are asked to report the extent of interest/income foregone on non‑accrual and restructured items for the relevant quarter covered by the return.
Part 1B – Impaired assets
Part 1B classifies the total balance of impaired assets by sector.
Part 2A – Past due items
As items that are 90 days past due but well-secured[2] represent a higher degree of risk than facilities meeting contractual arrangements, APRA requires ADIs to separately report these items. A facility subject to a regular repayment schedule is regarded as “90 days past due” when: (a) at least 90 calendar days have elapsed since the due date of a contractual payment which has not been met in full; and (b) the total amount outside contractual arrangements is equivalent to at least 90 days worth of contractual payments. Such a facility is regarded as well-secured when the ADI judges that the net current market value of associated security is sufficient to ensure that the ADI will recover the entire amount owing. By way of example, and assuming monthly repayment installments, if a contractual payment was made on 30 March, the facility is past due when the payment on 30 April is not made. Assuming no further payments and monthly installments, the facility should be classified as 90 days past due on 30 July. ADIs will note that this represents 120 days since a payment was made but the equivalent of 90 days worth of contractual payments being past due.
An item ceases to be classified as past due when arrears have been reduced so that the exposure is no longer 90 days past due.
In the case of facilities that do not have a preset repayment schedule (e.g. overdrafts and revolving credit facilities), 90 days past due refers to the period where facilities have remained continuously outside approved arrangements but are well-secured.
The return asks ADIs to separately report those exposures that are individually managed and those that are managed on a portfolio basis.
Individually managed facilities
These are troublesome exposures that are managed on a transaction basis and typically subject to individual review. As discussed below, ADIs should separately report those facilities 90 days past due but well-secured in terms of different credit products common in the Australian financial system. That is, separately report these troublesome exposures as revolving credit, credit cards, housing loans, term loans, lease financing or other loans.
Portfolio managed facilities
Exposures managed on a portfolio basis are typically homogenous and often approved and managed using statistical management techniques. Portfolio managed exposures are often not subject to formal regular review other than in cases where payments are behind agreed repayment schedules or indebtedness is outside approved limits.
Any past due facilities managed on a portfolio basis can be excluded from the definition of impaired assets and remain on an accrual basis until the dollar value of contractual payments is up to 180 days past due (i.e. six months worth of repayments). The commencement of the 180 days is to take place from the date on which the contractual payment of principal and/or interest is not met. Once the dollar amount of past due amounts represent 180 days of contractual payments, an ADI should decide whether it is prepared to subject the accounts to individual review or to write them off. If the ADI chooses to conduct individual reviews, then the facilities can remain on an accrual basis if the ADI is satisfied that the facility is well-secured. Where the facility is not well-secured, the ADI should immediately create an appropriate specific provision and move the facility to a non-accrual basis.
ADIs managing facilities on a portfolio basis should report the total value of facilities 90 days past due but less than 180 days past due. As for individually managed facilities, ADIs should separately report in terms of loan type. For all category of loan product sought, distinguish between those exposures that are recorded on Australian or overseas books.
To provide APRA with a basis upon which to gauge the degree of delinquency in facilities managed on a portfolio basis, ADIs should separately report the total portfolio size in terms of the individual credit product type specified below. APRA also asks those ADIs managing facilities on a portfolio basis to indicate the extent of portfolio-related provisions that have been created with respect to those facilities that are less than 90 days past due.
Revolving credit
A revolving credit is a credit facility that is typically approved for a given period of time but does not have a fixed repayment schedule.
Report the total outstanding balance of loans of a revolving credit nature that fall within the definition of the relevant category of past due reporting. Exclude loans to Australian householders for the purpose of housing (e.g. equity lines of credit secured by residential property). Facilities of this nature should be reported under “Housing loans”.
Credit cards
Credit cards are a common consumer credit arrangement that allows the consumer the option of borrowing against a pre‑approved line of credit. They are typically unsecured.
Report the total outstanding balance of credit card facilities that are outside contractual arrangements for more than 90 consecutive days but are well-secured under the heading “Individually managed facilities”. Any credit card facility that is not well-secured but is outside contractual arrangements for more than 90 consecutive days should be classified as non‑accrual unless it is managed as part of a portfolio as described in paragraph 4 of Guidance Note AGN 220.1 Impaired Assets Definitions.
Report the total outstanding balance of credit card facilities that are managed on a portfolio basis but are more than 90 days past due and less than 180 days past due.
Housing loans
For the purpose of this return, housing loans are those facilities, both amortising and line of credit that are primarily secured by a registered mortgage over a residential property. They may be for any purpose including the construction, purchase of dwellings for owner occupation or investment or commercial ventures. ADIs should note that this definition differs from that used in the Statement of Financial Condition Reports (ARF 322.0 Exposures to Related Entities and ARF 323.0 Statement of Financial Position).
Report the total outstanding balance of housing loans that are past due in accordance with whether facilities are managed on an individual or portfolio basis.
Term loans
Report the total outstanding balance of loans that have a fixed term and are past due in terms of the above guidance. Exclude loans to householders for the purpose of housing.
Lease financing
Leasing finance is a method of financing the acquisition of an asset (e.g. motor vehicle or business equipment) by the user under which the ADI buys the asset from a third party and leases it to the user in return for lease rental payments. A component of the lease rental payment relates to interest and another component to the reduction of principal.
Report the total outstanding balance of lease financing that is outside contractual arrangements in line with the preceding guidance.
Other loans
Report the total outstanding balance of loans that satisfy the preceding criteria with respect to being 90 days past due or more that cannot be readily classified in the other credit product types.
Facilities for which a prescribed provision is raised
All facilities against which an ADI is required to raise a prescribed provision in terms of Guidance Note AGN 220.3 Prescribed Provisioning will need to be recognised as a non‑accrual item for the purposes of this return and in its financial accounts. ADIs applying the prescribed provisioning methodology should be particularly alert to those Category Four Facilities that are irregular for more than 14 days. Facilities in this category must be reported as non‑accrual from the date that the prescribed provision is struck (i.e. once the facility is irregular for more than 14 days).
Part 2B – Past due items
Part 2B classifies the total amount of past due items by sector.
Note on References to Accounting Standards
This Note is about references in these instructions to an accounting standard or accounting standards, e.g. where the instructions say that something must be done in accordance with a particular AASB or international accounting standard, or must be done in accordance with the accounting standards (however described) generally.
Where you see such a reference, you must read it as meaning the version of the accounting standard, or versions of the accounting standards, applying to reporting periods (within the meaning of the accounting standards) beginning immediately before 1 January 2005.
Accordingly, the new AASB standards for 2005 are not to be applied.
Similarly, a reference to principles or conventions (however described) governing an accounting procedure or treatment shall be taken to refer to principles or conventions applicable in relation to reporting periods (within the meaning of the accounting standards) that began immediately before 1 January 2005.