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 1024.
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..
A relevant ADI that is a locally-incorporated Credit Union, Cairns Penny Savings & Loans Limited, locally-incorporated Building Society or Specialist Credit Card Institution (whether locally-incorporated or not) must submit the completed form to APRA within 15 business days after the end of the relevant reporting quarter.
Other relevant ADIs must do so within 20 days after the end of the relevant quarter.
(For these purposes, ‘relevant ADI’ means an ADI that applies the standardised provisioning methodology referred to in paragraph 11 of Prudential Standard APS 220 Credit Quality and described in Guidance Note AGN 220.3 Prescribed Provisioning to determine its level of specific provisions.)
Unit of measurement
Use whole Australian dollars (no decimal place) when completing this form.
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 (e.g. claims payments, reinsurance recoveries).
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.
Scope
ARF 220.3 Prescribed Provisioning is to be completed by all ADIs applying the prescribed provisioning methodology outlined in paragraph 11 of Prudential Standard APS 220 Credit Quality. In general, those ADIs using the standardised provisioning approach will be those where APRA accepts that a more sophisticated approach is not warranted or it judges an ADI’s own provisioning practices to be inadequate in view of its credit risk profile and system capabilities. Those ADIs currently adopting this approach are at liberty to discuss any plans they might have to adopt an alternative methodology with APRA.
ADIs applying the prescribed provisioning methodology are asked to categorise their activities giving rise to credit risk into four categories (see below). Where an exposure maintained by an ADI does not fall into one of the four categories outlined and it is an impaired asset, the amount of specific provision to be held against this item shall be agreed with APRA. The prescribed provision attaching to each category is calculated by reference to the relevant provision percentages, and represents the minimum specific provision that is to be raised. Where the ADI believes that the prescribed provision raised does not adequately cover the expected loss outcome, further specific provisions should be raised.
Outstanding balances should be reported net of interest and other income not taken to profit, and net of any amounts written off. For overdraft facilities and revolving lines of credit, the outstanding balance is to be reported as the total amount of the facility outstanding, and not the amount that the facility exceeds the previously approved limit. For overdrawn savings accounts, the outstanding balance represents the debit balance of the account.
Specific instructions
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. An item shall cease to be classified as 90 days past due when arrears have been reduced so that the exposure no longer represents 90 days’ worth of contractual payments outstanding post the date the facility becoming past due.
For other facilities (e.g. overdrafts, other items of a revolving nature and overdrawn savings accounts), the basis of determining the period of irregularity will be the number of consecutive days that the facility has been outside contracted arrangements. For example, an overdrawn savings account is to be regarded as say 16 days irregular when it has been overdrawn for 16 calendar days.
Category one facilities
Category One facilities include:
(a) an exposure that is secured by a registered first mortgage against a residential property and is insured by an eligible lenders mortgage insurer for 100 per cent of the outstanding balance;
(b) an exposure that is secured by a registered first mortgage against a residential property, where the ratio of the outstanding balance, less the amount of mortgage insurance, to the valuation of the security is no more than 80 per cent (where the exposure is 6 months or more worth of payments past due, the valuation must be no older than 12 months);
(c) an exposure that is secured by a qualifying registered second mortgage where:
(i) the ratio of the outstanding balances of the facilities secured by both first and second mortgages to the valuation of the residential property does not exceed 80 per cent, and the first mortgage cannot be extended without it being subordinated to the second mortgage; or
(ii) where the ratio of the outstanding balances of the facilities secured by both first and second mortgages to the valuation of the residential property exceeds 80 per cent, and the first mortgage cannot be extended without it being subordinated to the second mortgage, and the outstanding balance is 100 per cent mortgage insured by an eligible lenders mortgage insurer.
Category two facilities
A Category Two facility is defined as an exposure that is secured by a registered first mortgage against a residential property, where the ratio of the outstanding balance, less the amount of mortgage insurance, to the valuation of the security is greater than 80 per cent but no more than 100 per cent (where the loan is 6 months or more worth of payments past due, the valuation must be no older than 12 months).
For Category Two facilities, the prescribed provision shall be a percentage of the balance outstanding, where the percentage depends upon the term of payments past due as outlined in the following table. The balance outstanding should not be adjusted for any collateral value.
Term of payments past due
Amount of provision (%)
Less than 90 days
0
90 days and less than 182 days
5
182 days and less than 273 days
10
273 days and less than 365 days
15
365 days and over
20
Where the provision calculated under Category Two facilities is greater than the provision that would have been calculated under Category Three facilities, the latter should be taken as the prescribed provision.
Category three facilities
This category applies to all facilities that do not fall into Categories One and Two above, or Category Four below. Category Three facilities include personal and commercial loans (both secured and unsecured), and mortgage loans where the ratio of the outstanding balance, less the amount of mortgage insurance, to the valuation of the security is greater than 100 per cent.
The minimum provision for these items shall be a percentage of the balance outstanding, where the percentage depends upon the dollar equivalent of a given term of contracted payments being past due as detailed below:
Term of payments past due
Amount of provision (%)
Less than 90 days
0
90 days and less than 182 days
40
182 days and less than 273 days
60
273 days and less than 365 days
80
365 days and over
100
Where an exposure falling within this category is secured by a mortgage over a residential property, the provision may be adjusted to reflect a part of the collateral value. When this occurs, the minimum provision percentage in the table shall be applied to the difference between the outstanding balance (less any loan insurance) and 70 per cent of the security value (where the exposure is 6 months or more worth of payments past due, the valuation must be no older than 12 months). Where an exposure is secured by other than residential property, an ADI may approach APRA to discuss an appropriate basis upon which to value security held.
Where an exposure is otherwise secured by equivalent or better security arrangements than that described above, an ADI may, on application to APRA, seek to have the provision adjusted to reflect the whole or part of the collateral value. The following guidelines apply to these security arrangements:
(a) guarantees provided by Commonwealth or State Governments, or ADIs, may be deducted from the exposure at full value prior to applying the prescribed provisioning requirements;
(b) crown leases involving property used for residential purposes may be adjusted in accordance with paragraph 7 of these instructions;
(c) bank bills and Government Securities held as collateral if subject to enforceable security in favour of the ADI, may be deducted from the exposure at net current market value prior to applying the prescribed provisioning requirements;
(d) cash on deposit with the ADI may only be deducted for the purposes of prescribed provisioning where the deposits are secured by appropriate contractual arrangements that satisfy the eligible collateral provisions contained in Prudential Standard APS 112 Capital Adequacy: Credit Risk. A right of offset is not considered to provide appropriate security per se.
Category four facilities
This category applies to overdrawn savings accounts and overdrawn limits on credit cards, overdrafts and line of credit advances. The minimum provision on these items shall be a percentage of the balance outstanding, where the percentage depends on the number of consecutive days the facility has been outside contracted arrangements (i.e. the period of irregularity). In calculating the minimum provision for each item, except for overdrawn savings accounts, the full amount of the credit drawn is to be included in the balance outstanding. For overdrawn savings accounts, the provision is only applied to the overdrawn amount.
The minimum provision for Category Four facilities will be set in accordance to the following table:
Period of Irregularity
Amount of provision (%)
Less than 14 days
0
14 days and less than 90 days
40
90 days and less than 182 days
75
182 days and over
100
Adjusted balances
For Category Three Facilities, where the collateral satisfies the requirements detailed in paragraphs 7 and 8 above, or APRA has agreed on an appropriate basis to ascribe value for security purposes, the net amount of the exposure is to be reported in the ‘Adjusted balances’ column.
For example, where there is an outstanding balance of $100,000, with an assessed security value of $70,000, the net amount of $30,000 is to be reported in the ‘Adjusted balances’ column. The outstanding balance of $100,000 should be reported in the ‘Outstanding balances’ column in these cases.
Delinquency trends
To provide APRA with greater insight into delinquency trends within ADIs applying the prescribed provisioning methodology, ADIs are required to separately report past due facilities in time buckets below that triggering prescribed provisioning. APRA is particularly interested in those Category Two and Three facilities that are 30 days and less than 60 days and 60 and less than 90 days worth of payments past due and asks ADIs to report accordingly.
Impaired assets return
From the cessation of the transition period following the harmonised prudential standards released in September 2000, all ADIs operating in Australia are required to complete the Impaired Assets Return (ARF 220.0 Impaired Assets). ADIs preparing return ARF 220.3 Prescribed Provisioning must ensure that data reported to APRA is consistent with that shown on the impaired assets returns for the relevant quarter. ADIs are advised to revisit Prudential Standard APS 220 Credit Quality and, in particular, Guidance Note AGN 220.1 Impaired Assets Definitions which provides the key definitions of impairment to ensure that they operate in accordance with prudential reporting requirements.
ADIs applying the prescribed provisioning approach should be particularly alert to reporting requirement of a non-accrual item triggered as a consequence of a specific provision having been raised against that item. Given APRA defines all provisions prescribed in terms of Guidance Note AGN 220.3 Prescribed Provisioning as specific provisions for prudential supervisory purposes, ADIs must report items against which it holds a prescribed provision as non-accrual. Particular care needs to be taken to ensure that any Category Four facilities for which a provision is prescribed prior to it being 90 days irregular are reported as a non‑accrual item.
APRA also encourages ADIs to take particular care in reporting those facilities defined as being individually managed and 90 days worth of contracted payments are past due although these facilities might be regarded as well-secured. Such facilities need to be reported in Part B of AFR 220.0 Impaired Assets. Although not non‑accrual by definition, these items represent a higher risk of default than facilities operating within contractual terms. Facilities categorised as Category one for prescribed provisioning purposes are potential candidates to be reported in Part B of ARF 220.0 Impaired Assets.
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.