Regulatory Alerts2019-08-11
Instruction No. 11/2019, dated August 28
The National Bank of Angola issued Instruction No. 11/2019 to mandate Banking Financial Institutions to adopt specific accounting and prudential procedures for measuring credit losses in line with IFRS 9. The directive defines key terms such as expected credit losses and effective interest rates, requiring institutions to calculate regulatory capital using the higher of either a standard methodology or IFRS 9 impairment requirements. Institutions must achieve full compliance within 180 days of publication, with non-compliance subject to administrative sanctions under the Framework Law for Financial Institutions.
INSTRUCTION NO. 11/2019 dated August 28 SUBJECT: FINANCIAL SYSTEM − Treatment of Credit Losses in the Loan Portfolio Whereas International Financial Reporting Standard 9 – Financial Instruments, which replaces International Accounting Standard 39 – Financial Instruments: Recognition and Measurement, entered into force on January 1, 2018; Whereas it is necessary to revise Instruction No. 11/2016, dated August 8, regarding the treatment of credit losses in the loan portfolio; Pursuant to the combined provisions of Article 21 and Article 51, both of Law No. 16/10 dated July 15 – the Law of the National Bank of Angola, and Article 93 of Law No. 12/15 dated June 17 – the Framework Law for Financial Institutions; I HEREBY DETERMINE:
- Objective This Instruction establishes the procedures that Banking Financial Institutions must follow in the accounting and prudential treatment of credit losses on loans granted to customers.
- Scope This Instruction applies to Banking Financial Institutions, under the terms and conditions set forth in the Framework Law for Financial Institutions, hereinafter abbreviated as Institutions.
CONTINUATION OF INSTRUCTION NO. 11/2019 Page 2 of 4 3. Definitions Without prejudice to the definitions established in the Framework Law for Financial Institutions, for the purposes of this Instruction, the following terms are understood as: 3.1. Credit loss: the difference between all contractual cash flows due to an Institution according to contractual agreements and all cash flows that the Institution expects to receive, discounted at (i) the original effective interest rate, or (ii) the credit-adjusted effective interest rate for financial assets acquired or originated in a credit-impaired state. 3.2. Expected credit losses: the weighted average of credit losses, using their respective probabilities of default as weights. 3.3. Provision for losses corresponds to: a) The provision for expected credit losses on financial assets measured at amortized cost, lease receivables, and contract assets; b) The cumulative impairment for financial assets measured at fair value through other comprehensive income; c) The provision for expected credit losses on loan commitments and financial guarantee contracts. 3.4. Recoverable amount or Fair value: the present value of estimated future cash flows from credit exposure, discounted at (i) the original effective interest rate, or (ii) the credit-adjusted effective interest rate for financial assets acquired or originated in a credit-impaired state. 3.5. Effective interest rate: the rate that exactly discounts estimated future cash payments or receipts over the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortized cost of a financial liability.
CONTINUATION OF INSTRUCTION NO. 11/2019 Page 3 of 4 3.6. Credit-adjusted effective interest rate: the rate that discounts estimated future cash payments or receipts over the expected life of the financial instrument to the amortized cost of a financial asset acquired or originated in a credit-impaired state. 4. Accounting Treatment For the purposes of measuring credit losses in the loan portfolio, Institutions must consider the provisions set forth in Instruction No. 08/2019 regarding impairment losses for the loan portfolio and the requirements set forth in International Financial Reporting Standard 9 – Financial Instruments, hereinafter abbreviated as IFRS 9. 5. Prudential Treatment For the purposes of calculating Regulatory Capital, Institutions must consider the higher amount of credit losses in the loan portfolio resulting from: a) The application of the standard methodology, as defined in Instruction No. 09/15, dated June 4, regarding methodologies for establishing provisions; and, b) The application of impairment requirements, as defined in Instruction No. 08/2019 regarding impairment losses for the loan portfolio and the requirements set forth in IFRS 9. 6. Transitional Provision Institutions must comply with the provisions of this Instruction within 180 (one hundred and eighty) days following its publication. 7. Sanctions Non-compliance with the provisions established in this Instruction constitutes an offense punishable under the Framework Law for Financial Institutions. 8. Doubts and Omissions Any doubts or omissions arising from the interpretation and application of this Instruction shall be resolved by the National Bank of Angola.