Subdivision Consolidated ADI group - Financial Sector (Collection of Data) (reporting standard) determination No. 20 of 2008 - ARS 220.3 - Prescribed Provisioning - Consolidated ADI group | Zoe
Financial Sector (Collection of Data) (reporting standard) determination No. 20 of 2008 - ARS 220.3 - Prescribed Provisioning
Consolidated ADI groupConsolidated ADI group
Start here
Get a plain-English read of Consolidated ADI group
Turn the raw legal text into a practical explanation grounded in Financial Sector (Collection of Data) (reporting standard) determination No. 20 of 2008 - ARS 220.3 - Prescribed Provisioning.
This refers to the consolidated group of the reporting ADI at Level 2 (i.e. the consolidated banking group level) defined in accordance with the ADI Prudential Standard APS 110 Capital Adequacy.
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 127 Consolidated and Separate Financial Statements 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;
non-financial (commercial) operations; and
SPVs whose assets have satisfied the clean sale requirements set down in AGN 120.3 (refer to Securitisation deconsolidation principle).
Reporting period
The form is to be completed as at the last day of the stated reporting quarter.
A relevant ADI that is a Credit Union, Cairns Penny Savings & Loans Limited, Building Society or SCCI (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 ADIs that apply the standardised provisioning methodology referred to in paragraph 11 of Prudential Standard APS 220 Credit Quality (APS 220) and described in Guidance Note AGN 220.3 Prescribed Provisioning (AGN 220.3) to determine its level of specific provisions must do so within 20 days after the end of the relevant quarter.
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 121 The Effects of Changes in Foreign Exchange Rates (AASB 121).
The general requirements of AASB 121 for translation are:
foreign currency monetary items outstanding at the reporting date must be translated at the spot rate at the reporting date;[3]
foreign currency non-monetary items that are measured at historical cost in a foreign currency must be translated using the exchange rate at the date of the transaction;
foreign currency non-monetary items that are measured at fair value will be translated at the exchange rate at the date when fair value was determined.
Transactions arising under foreign currency derivative contracts at the reporting date must be prepared in accordance with AASB 139 Financial Instruments: Recognition and Measurement (AASB 139). However, those foreign currency derivatives that are not within the scope of AASB 139 (e.g. some foreign currency derivatives that are embedded in other contracts) remain within the scope of AASB 121.
For APRA purposes equity items must be translated using the foreign currency exchange rate at the date of investment or acquisition. Post acquisition changes in equity are required to be translated on the date of the movement.
As foreign currency derivatives are measured at fair value, the currency derivative contracts are translated at the spot rate at the reporting date.
Exchange differences should be recognised in profit and loss in the period which they arise. For foreign currency derivatives, the exchange differences would be recognised immediately in profit and loss if the hedging instrument is a fair value hedge. For derivatives used in a cash flow hedge, the exchange differences should be recognised directly in equity.
The ineffective portion of the exchange differences in all hedges would be recognised in profit and loss; and
translation of financial reports of foreign operations.
A foreign operation is defined in AASB 121 as meaning an entity that is a subsidiary, associate, joint venture or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity.
Exchange differences relating to foreign currency monetary items that form part of the net investment of an entity in a foreign operation, must be recognised as a separate component of equity.
Translation of financial reports should otherwise follow the requirements in AASB 121.
Scope
ARF 220.3 Prescribed Provisioning (ARF 220.3) is to be completed by all ADIs applying the prescribed provisioning methodology outlined in paragraph 11 of APS 220. 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 (refer to 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); and
(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; and
(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: Standardised Approach to 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 under category three facilities, 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 facilities 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 Facilities Return (ARF 220.0 Impaired Facilities (ARF 220.0)). ADIs preparing return ARF 220.3 must ensure that data reported to APRA is consistent with that shown on the impaired facilities returns for the relevant quarter. ADIs are advised to revisit APS 220 and, in particular, Guidance Note AGN 220.1 Impaired Facility 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 AGN 220.3 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 ARF 220.0 Impaired Facilities (ARF 220.0). 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.