Central Bank of Jordan Instructions for Implementing IFRS 9 No. 13/2018

CENTRAL BANK OF JORDAN

البنك المركزي الأردني

البنك المركزي الأردني

تعليمات تطبيق المعيار الدولي للتقارير المالية (9)

رقم ( 13 / 2018 )

نموذج (1/1/09)

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CENTRAL BANK OF JORDAN
البنك المركزي الأردني

Contents

Scope of Application ................................................................................................................. ٣

Item One: Governance Requirements ............................................................................................... ٤

Item Two: Classification and Measurement .............................................................................................. ٦

First: Financial Assets ...................................................................................................... ٦

Second: Financial Liabilities ..................................................................................................... ١٠

Third: Derivatives for Trading ............................................................................................ ١٠

Fourth: Hedge Accounting ...................................................................................................... ١٠

Item Three: Expected Credit Loss (ECL) ........................................................................ ١١

First: Scope of Application/Expected Credit Loss .......................................................................... ١١

Second: General Framework for Standard Application ......................................................................................... ١٣

Third: Measurement of Credit Risk and Expected Credit Loss (ECL) ..................................................... ٢٠

Item Four: Required Disclosures .......................................................................................... ٢٥

Item Five: Statements for the Central Bank ......................................................................... ٢٥

Appendix No. (1): Required Quantitative and Qualitative Disclosures ................................................................... ٢٦

Appendix No. (2): Statements to be filled with financial statements for the Central Bank purposes ............................. ٥٢

نموذج (1/1/09)

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CENTRAL BANK OF JORDAN
البنك المركزي الأردني

Scope of Application

The International Financial Reporting Standard (9) instructions apply to all banks and all levels as follows:

• Jordan branches.
• Foreign branches.
• Jordan and foreign branches.
• Subsidiaries.
• Consolidated bank.

For Islamic banks, the part related to Expected Credit Loss applies to them, while the remaining aspects apply to them the requirements of Islamic Accounting Standard No. (25) and until the issuance of specific instructions for Islamic banks according to the requirements of Islamic Accounting Standard No. (30).

نموذج (1/1/09)

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CENTRAL BANK OF JORDAN
البنك المركزي الأردني

Item One: Governance Requirements

Standard (9) in its essence represents one aspect of the risk management system in banks (in addition to the accounting framework) in the three axes covered by Standard (9), which are (Classification and Measurement), (Expected Credit Loss/Impairment) and (Hedge Accounting).

• Standard (9) aims in the impairment axis to measure expected credit losses through a forward-looking perspective based on historical information and current and expected information about credit exposures, unlike previous methodologies that relied on the occurrence of losses in order to record them (IAS 39). Furthermore, the application of the new standard will have reflections and overlaps with other supervisory requirements (such as: Basel III, capital adequacy, liquidity and ICAAP) as well as with the bank's credit exposure management mechanism in terms of product type, pricing, or collateral against them or the relationship with customers. This requires effective supervision by the Board of Directors and its relevant committees and executive management on the proper application of the new standard and working to provide and protect the systems used in application.

Accordingly, the Board of Directors bears the responsibility of providing a suitable governance structure and procedures that ensure the proper application of the standard by defining the roles of committees, departments, and work units in the bank and ensuring the integration of work among them and providing the appropriate infrastructure.

In this context, the bank must take into account the following:

1. The application of the general framework for calculating Expected Credit Loss requires a large amount of quantitative and qualitative information, whether historical, representing the current situation, or regarding future forecasts or macroeconomic indicators. Therefore, the bank must work on developing the necessary systems to provide sufficient and accurate information securely, so that it provides the bank's ability to calculate accurately and is shared by all relevant work units in the bank under the supervision of the Board of Directors and its relevant committees.
2. As shown in the text of these instructions, calculating Expected Credit Loss according to the requirements of Standard (9) requires the application of automated systems. Therefore, the systems must be of high quality and reliability, whether in terms of inputs, operational processes, or extracted results.
   Consequently, bank management must commit to not making any modifications to the results and outputs of the systems regarding the calculation and measurement of Expected Credit Loss and the variables being calculated, except according to a policy approved by the Board of Directors that specifies the exceptional and justified cases in which the system outputs are modified and designates an independent body that has the authority to make the decision in

نموذج (1/1/09)

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CENTRAL BANK OF JORDAN
البنك المركزي الأردني

exceptions or modifications and present these cases to the Board of Directors or its emanating committees at their first meeting and obtain their approval.
3. Consideration must be given [in addition to these instructions and the requirements of Standard (9)] to the guidelines issued by the Basel Committee on Banking Supervision under the paper titled [Guidance on Credit Risk and Accounting for Expected Credit Losses]
http://www.bis.org/bcbs/pub/d350pdf
4. The Board of Directors must adopt the business model(s) through which the objectives and bases for acquiring and classifying financial instruments are determined, ensuring integration with other work requirements, as shown in the item related to this within these instructions.
5. The Board of Directors must ensure that the supervisory units in the bank, specifically risk management and internal audit management, carry out all necessary work to verify the validity and integrity of the methodologies and systems used within the framework of applying Standard (9) and work to provide the necessary support to these supervisory units.

نموذج (1/1/09)

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CENTRAL BANK OF JORDAN
البنك المركزي الأردني

Item Two: Classification and Measurement

First: Financial Assets a. Equity Instruments:-

• Equity instruments are always recorded at fair value within one of the following two portfolios:

1. Financial assets at fair value through profit or loss:- Where equity instruments are recorded within this portfolio at fair value and subsequent changes in fair value are recorded in the statement of profit or loss.
2. Financial assets at fair value through other comprehensive income:- Where equity instruments are recorded within this portfolio at fair value and subsequent changes in fair value are recorded in the statement of other comprehensive income.

• General Provisions:
  The bank must comply with the requirements of Standard (9) and the following items as a minimum:

1. In the event of the actual disposal of equity instruments listed within the portfolio of financial assets at fair value through other comprehensive income or derecognition, the balance of changes in fair value is not recycled to the statement of profit or loss and is transferred to the retained earnings item within equity.
2. Dividends received on equity instruments listed within either of the above portfolios are recorded in the statement of profit or loss.
3. Reclassification from or to the above two portfolios is not allowed after initial classification of these financial assets (equity).
4. Equity instruments are not allowed to be classified within the portfolio of financial assets at fair value through profit or loss unless the instruments are listed in an active market and actual trading can be conducted on them, and in this stage, they must be traded within a maximum period of (6) months from the acquisition date; otherwise, those instruments are recorded within the portfolio of financial assets at fair value through other comprehensive income upon initial acquisition.
5. The requirements of International Financial Reporting Standard (13) (Fair Value) must be complied with for the purpose of measuring fair value, where Standard (9) requires measuring financial instruments at fair value, including those instruments for which a market price is not available.
6. It is worth noting that cost does not represent fair value except in very limited cases (such as contributions to newly established companies), and therefore models for measuring fair value must be developed and provided to the Central Bank with the bank's final and interim financial statements.

نموذج (1/1/09)

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CENTRAL BANK OF JORDAN
البنك المركزي الأردني

methods for measuring the fair value of financial assets for which there is no market price, attached to the bank's final and interim financial statements.
7. Recording exchange rate differences according to the requirements of International Financial Reporting Standards (exchange rate policy).

b. Debt Instruments:-
Recording debt instruments within one of the following three portfolios and according to the requirements of Standard (9):-

Portfolio One: Amortized Cost

1. Financial assets (debt instruments) are recorded within this portfolio at cost and are not subject to fair value measurement requirements.

2. Instruments listed within this portfolio must meet the conditions stipulated in Standard (9), which can be summarized as follows:
   2,1 Contractual Cash Flows:- Where the objective of acquiring instruments listed in this portfolio must be exclusively to collect contractual cash flows consisting of both principal and interest (return) on that asset.
   2,2 Business Model Test:- Where these instruments must be compatible with the business model(s) available at the bank [the business model(s) must be approved by the bank's Board of Directors].

3. The bank must comply with the requirements of Standard (9) and the following items as a minimum:
   3,1 The bank should not have the intention to dispose of these instruments before the agreed maturity date. [Except to the extent permitted by Standard (9) such as insignificant or non-recurring sales or sales close to maturity].
   3,2 If the offering statement contains a right for the issuer to redeem debt instruments before their maturity date in whole or in part or the convertibility of debt instruments into shares, the presence of such conditions prevents the inclusion of debt instruments within the amortized cost portfolio. 3,3 It is worth noting in this regard that the concept of risk management and working to avoid it is an integral part of the requirements for applying Standard (9), and therefore, in cases where the bank faces high levels of credit risk in those instruments according to the risk management methodology applied by the bank, it may dispose of them before their maturity date without this being considered a breach of the concept of applying the business model.

نموذج (1/1/09)

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CENTRAL BANK OF JORDAN
البنك المركزي الأردني

3,4 Instruments listed in this portfolio are subject to impairment (Expected Credit Loss) calculation according to what is stipulated in the application requirements of Standard (9) and according to these instructions. The Expected Credit Loss measured is recorded in the statement of profit or loss. 3,5 Debt instruments issued by the Jordanian government or guaranteed by it are exempted, as stipulated in the paragraph on measuring probability of default. 3,6 Interest (return) earned on these instruments is recorded in the statement of profit or loss. 3,7 Changes in exchange rates on these instruments are subject to the accounting policy related to exchange rates according to the requirements of International Financial Reporting Standards. 3,8 When the bank disposes of any of the debt instruments within this portfolio before the agreed maturity date, the bank must attach a statement with the financial statements detailing those cases, including clarifying the reasons for disposal.

Portfolio Two: Debt Instruments through Other Comprehensive Income The bank must comply with the requirements of Standard (9) and the following items as a minimum:

1. Debt instruments are included in this portfolio where the bank's intention towards them is either to hold them until maturity to collect their contractual cash flows or to sell them (a portfolio for liquidity management) according to the business model(s) applied by the bank in this regard.
2. These instruments are measured at fair value and subsequent changes in fair value are recorded in the statement of other comprehensive income.
3. Interest (return) earned on these instruments is recorded in the statement of profit or loss, as well as for changes in exchange rates related to these instruments (exchange rate policy).
4. Instruments within this portfolio are subject to impairment (Expected Credit Loss) calculation according to what is stipulated in the application requirements of Standard (9) and according to these instructions, where the Expected Credit Loss is recorded in the statement of profit or loss.
5. Since these instruments are recorded at fair value and are simultaneously subject to Expected Credit Loss calculation, there is a set-off between the change in fair value and the Expected Credit Loss, such that impairment (Expected Credit Loss) takes precedence in recognition/recording.
6. It was previously mentioned that subsequent changes in fair value for these instruments are recorded in the statement of other comprehensive income, but upon disposal of these instruments or derecognition, the balance of fair value recorded in the statement of other comprehensive income is recycled to the statement of profit or loss.

نموذج (1/1/09)

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CENTRAL BANK OF JORDAN
البنك المركزي الأردني

Portfolio Three: Debt Instruments at Fair Value through Profit or Loss The bank must comply with the requirements of Standard (9) and the following items as a minimum:

1. Debt instruments are recorded in this portfolio according to the business model(s) applied by the bank in this regard, where these instruments are not included in the previous two portfolios.
2. Subsequent changes in fair value for these instruments are recorded in the statement of profit or loss.
3. Interest (return) earned on these instruments is recorded in the statement of profit or loss, as well as for changes in exchange rates related to these instruments (exchange rate policy).
4. Instruments within this portfolio are usually not subject to Expected Credit Loss measurement.
5. According to the business model(s) specific to this portfolio, instruments recorded within this portfolio have trading in an active market and must be traded within a maximum period of (6) months from the acquisition date.

• Business Model(s) Provisions:-
  The bank must comply with the requirements of Standard (9) and the following items as a minimum:

1. As mentioned, the bank may have more than one business model, provided that each meets the conditions stipulated in the requirements of Standard (9) and is approved by the bank's Board of Directors.
2. According to the requirements of Standard (9), there are factors (internal and external to the bank) that affect the effectiveness of the bank's business model(s), and these factors may require modifications to the bank's business model(s). In this case, which is assumed to be limited and non-recurring, a modification to the business model(s) can be made.
3. Accordingly, reclassification operations for debt instruments listed in different portfolios can be performed according to the bank's business model(s), provided that the reclassification process takes place in the financial year following the financial year in which the business model(s) was modified.
4. When preparing the business model(s), the bank must ensure that risk management activities and objectives are included within that model in advance, including considering stress cases or unusual circumstances and liquidity management conditions, capital adequacy, and other supervisory requirements.
5. Instruments issued by the same entity or carrying the same characteristics can be included in more than one portfolio according to the business model(s) applied by the bank.
6. When performing reclassification operations as mentioned previously, a summary must be attached detailing the reclassification cases and their accounting impact with the interim or final financial statements submitted to the Central Bank, clarifying the motivations for the reclassification operations and the modifications made to the bank's business model(s).

نموذج (1/1/09)

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CENTRAL BANK OF JORDAN
البنك المركزي الأردني

When preparing the business model(s) and performing classification operations for financial instruments within different portfolios, the implications of each option from various aspects of the bank's work and other supervisory requirements such as liquidity management requirements, Basel (3) applications, ICAAP, and capital adequacy requirements should be studied.

Second: Financial Liabilities

• Financial liabilities are generally recorded and measured at amortized cost.
• If the bank chooses to apply the concept of measuring financial liabilities at fair value through profit or loss, in this case, this type of financial liabilities is measured at fair value and subsequent changes in fair value are recorded in the statement of profit or loss, while changes resulting from credit risks associated with those liabilities are recorded in the statement of other comprehensive income and are not recycled to the statement of profit or loss even if those amounts are realized or those liabilities are disposed of.

Third: Derivatives for Trading
Derivatives that do not qualify for hedge accounting and whose objective is trading are recorded at fair value and any subsequent changes in fair value are recorded in the statement of profit or loss according to the requirements of Standard (9).

Fourth: Hedge Accounting
The requirements of Standard (9) related to hedge accounting are complied with, where the accounting framework aims to record hedging activities according to Standard (9) to make those activities more aligned with the bank's risk management activities.

نموذج (1/1/09)

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CENTRAL BANK OF JORDAN
البنك المركزي الأردني

Item Three: Expected Credit Loss (ECL)

This item includes a presentation of the requirements of Standard (9) and the Central Bank's requirements for measuring Expected Credit Loss (credit impairment loss/provisions) for credit exposures falling within the scope of Standard (9), in terms of how and the mechanism of including debt instruments/credit exposures as well as the methodology for calculating Expected Credit Loss, as follows:-

First: Scope of Application/Expected Credit Loss a. According to the requirements of Standard (9), the Expected Credit Loss measurement model is applied within the following framework (except for those measured at fair value through profit or loss):-

• Loans and credit facilities (direct and indirect).
• Debt instruments recorded at amortized cost.
• Debt instruments recorded at fair value through other comprehensive income.
• Financial guarantees stipulated according to the requirements of Standard (9).
• Lease receivables within the requirements of International Accounting Standard (17) and International Financial Reporting Standard (16).
• Trade receivables.
• Islamic financing products carrying debt characteristics (principal and return).
• Credit exposures to banks and financial institutions [except current balances used to cover bank operations such as transfers, guarantees, and letters of credit during a very short period (days)].
• Receivable balances resulting from sales with a commitment to repurchase.
• Other receivables (balances) not measured at fair value.

b. Regarding leasing grants by Islamic banks, the part subject to Expected Credit Loss (ECL) calculation represents the outstanding (unpaid) obligation of the counterparty (lessee), and the treatment of leasing assets continues as currently applied.

نموذج (1/1/09)

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CENTRAL BANK OF JORDAN
البنك المركزي الأردني

[Occurs at each financial statement preparation]

Improvement in Credit Quality

Change in Credit Quality

Deterioration in Credit Quality

Regular credit exposures/debt instruments
Interest/return is calculated based on gross credit exposure/debt instrument Expected Credit Loss weighted by probability of default for the credit exposure/debt instrument over the next (12) months Stage One

Regular credit exposures/debt instruments with a significant increase in credit risk since initial recognition Interest/return is calculated based on gross credit exposure/debt instrument Expected Credit Loss for the entire life of the credit exposure/debt instrument Stage Two

Non-performing credit exposures/debt instruments Interest/return is suspended Expected Credit Loss for the entire life of the credit exposure/debt instrument Stage Three

Default Occurrence

General Framework *
General Framework specified according to the requirements of Standard (9) for measuring Expected Credit Loss:

نموذج (1/1/09)

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CENTRAL BANK OF JORDAN
البنك المركزي الأردني

Second: General Framework for Standard Application

a. According to the general framework, all credit exposures/debt instruments subject to Expected Credit Loss measurement and calculation must be included (classified) within one of the three stages shown below:
(Note that this entire process must be updated at each preparation of interim and final financial statements).

Stage One:

1. Includes credit exposures/debt instruments where there has been no significant or material increase in their credit risk since initial recognition of the exposure/instrument [taking into account that credit risks occur gradually over time and may not occur suddenly] or that have low credit risk at the financial statement preparation date. Credit risk is considered low if the following conditions are met:-
   1,1 Low default risk.
   1,2 The debtor has a high ability in the short term to fulfill its obligations.
   1,3 The creditor (bank) does not expect adverse changes in the economy and in the business environment in the long term that negatively affect the debtor's ability to fulfill its obligations (macroeconomic indicators and stress tests).
2. Expected Credit Loss represents the potential loss resulting from default events that may occur over the next (12) months from the financial statement preparation date (note: this does not represent the shortfall in expected cash flows over the next (12) months, meaning the credit exposure and the amount of debt loss are for the entire life of the credit exposure/debt instrument).
3. For the purpose of revenue recognition for exposures listed in this stage, interest/return is calculated based on the gross value of the credit exposure/debt instrument recorded in the books.

Stage Two:

1. Includes credit exposures/debt instruments where there has been a significant (material) increase in their credit risk since initial recognition, but they have not yet reached the stage of default due to the lack of objective evidence confirming the occurrence of default.
2. Expected Credit Loss is calculated for the entire life of the credit exposure/debt instrument, representing the Expected Credit Loss resulting from all default probabilities over the remaining time period of the life of the credit exposure/debt instrument [the weighted average of credit losses, taking into account default risks that occur, such that the three variables are calculated: probability of default, exposure at default, and loss given default assuming default for the entire life of the credit exposure/debt instrument].
3. For the purpose of revenue recognition for credit exposures listed in this stage, interest/return is calculated based on the gross value of the credit exposure/debt instrument recorded in the books.
4. Standard (9) includes some indicators - by way of example, not limitation - which are considered appropriate to assess the occurrence of a significant increase in credit risk level (indicators of occurrence of significant negative changes in credit risk):
   4,1 Actual or expected downgrade of the borrower's internal credit rating or the credit exposure/debt instrument according to the internal rating system applied by the bank.
   4,2 Actual or expected significant downgrade of the external credit rating of the credit exposure/debt instrument.
   4,3 Significant negative changes in the borrower's performance and behavior such as delay in paying installments or unwillingness to cooperate with the bank.
   4,4 The need to restructure the debtor's obligations (obligation structuring) due to weak repayment ability or declining cash flows or the need to modify contractual terms with the debtor or cancel (waive) some existing contractual terms due to actual/expected breaches of current conditions due to the debtor's inability to continue with the bank within the existing contractual framework, such as granting the debtor grace periods either for interest or for the principal of the instrument/exposure that were not originally (contractually) agreed upon or increasing interest/return rates for future periods. 4,5 Information about outstanding amounts owed by the debtor, whether at the bank or by any other creditor party. 4,6 Increase in interest rates on the credit exposure/debt instrument due to increased credit risk of the debtor in the current stage (risk premium increase) compared to prices at the time of acquisition (creation or purchase) of the credit exposure/debt instrument. 4,7 Actual or expected negative changes in the borrower's operational activity such as (decrease in revenue/actual or expected profit margin, increased operational risk, working capital deficit, decline in asset quality, increased leverage, weakness and decline in liquidity, managerial problems, cessation of part of the client's activities, etc.) which may significantly affect the borrower's repayment ability.

نموذج (1/1/09)

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CENTRAL BANK OF JORDAN
البنك المركزي الأردني

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4.8 Change in the Bank's credit management methodology for a credit exposure/debt instrument due to the emergence of negative indicators and changes in credit risk for the exposure/instrument, such that credit risk management for the exposure/instrument is expected to become more focused and diligent, keeping it under close monitoring, or for the Bank to intervene with the debtor to manage the exposure/instrument.

4.9 Significant (material) changes in the terms of the credit exposure/debt instrument (Rates or Terms) which would have been set differently if this exposure/instrument had been issued (created) newly or on the financial statement preparation date (such as tightening of terms, increase in collateral and guarantees, increase in income coverage), due to the increase in credit risk for the exposure/instrument since initial recognition.

4.10 A material increase in credit risk for other credit exposures/debt instruments belonging to the same borrower from other lenders.

4.11 Negative changes in the value of any collateral, guarantees provided by a third party, or credit enhancements provided against obligations, which may lead to a decrease in the borrower's economic incentive to fulfill its obligations or have a negative impact on the probability of default (PD), such as a decline in the value of mortgaged property for home purchase financing.

4.12 Negative changes in the quality of guarantees provided by shareholders or the parent company if they have the incentive or financial capacity to prevent default through capital or cash injection.

4.13 Negative changes resulting from a reduction in financial support from the parent company or affiliated entities, or actual or expected negative changes in the quality of credit enhancements (Credit Enhancements) which are expected to negatively affect the borrower's economic incentive to fulfill its contractual obligations. (Consideration is given regarding the financial guarantees of the guarantor).

4.14 Significant negative changes in external market indicators of credit risk for a specific debt instrument/credit exposure or for a similar instrument/exposure with the same maturity, such as (widening of the credit spread, increase in CDS prices), the duration for which the fair value of the financial instrument is below its amortized cost, taking into account the magnitude of that decline, the decline in prices of financial instruments issued by the borrower such as bonds and shares, and other negative market information about the borrower).

4.15 Negative changes in internal credit price indicators resulting from the increase in credit risk since the beginning of the relationship (creation/purchase), including, for example, an increase in the credit spread (Credit spread) that would have resulted if a new credit exposure were issued with the same terms and the same debtor or issued on the financial statement preparation date.

Form (1/1/09)

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CENTRAL BANK OF JORDAN

4.16 Actual or expected negative changes in the business environment and financial and economic conditions which are expected to negatively affect the borrower's ability to repay its obligations, such as (actual or expected increase in interest rates, actual or expected material increase in unemployment rates).

4.17 Actual or expected negative changes in the legislative, economic, or technological environment in which the borrower operates, which may result in a significant negative decline in the borrower's repayment capacity, such as a decrease in the volume of demand for the borrower's products due to technological changes.

4.18 Graduation of current and demand accounts with overdrafts into this stage if the non-payment period exceeds (90) days and is less than (90) days.

• In addition to what was mentioned above, Central Bank Instruction No. (2009/47) dated 2009/12/10 included a set of indicators (Item Second/C) indicating the existence of a significant increase in credit risk, which must also be adhered to [with the use of a days past due period of (60) days as a clear indicator for inclusion in this stage, noting that this period will decrease by a rate of (10) days annually to become (30) days within (3) years from the date of application].

If conditions indicating a significant increase in credit risk from the above conditions are met, the debt instrument/credit exposure is graduated into Stage 2, and if there is an overlap between the available indicators (Items [1-19] and the items mentioned in Central Bank Instruction No. (2009/47) dated 2009/12/10 (Item Second/C)), the more severe of the two is taken.

Stage 3:

1. Includes debt instruments for which there is evidence that they have become non-performing (irregular), in which case the Expected Credit Loss (ECL) for the entire life of the credit exposure/debt instrument is calculated.
2. Interest/return on accounts included in this stage is suspended, and the Bank continues to suspend it as long as the accounts remain in this stage.
3. Standard (9) indicated a set of factors that affect and provide evidence of credit default, including, but not limited to, the following:-
   3.1 The debtor is facing significant financial difficulties (severe weakness in financial data).
   3.2 Non-compliance with contractual terms, such as the existence of receivables equal to or exceeding (90) days.
   3.3 The Bank writing off part of the liabilities due to the debtor due to financial difficulties facing the debtor and its inability to repay the full liabilities on time.
   3.4 Clear indicators showing the proximity of the debtor's bankruptcy.

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CENTRAL BANK OF JORDAN

3.5 No active market for a financial instrument due to financial difficulties faced by the debtor (issuer of the credit exposure/debt instrument).
3.6 Acquisition (purchase or creation) of a debt instrument at a large discount representing a credit loss.

• In addition to what was mentioned above, Central Bank Instruction No. (2009/47) dated 2009/12/10 (Item Second/D) included a number of indicators indicating the existence of a default situation, which must also be adhered to.

If one or more of the above conditions are met, indicating the existence of a significant increase in credit risk (default), the debt instrument/credit exposure is graduated into Stage 3, and if there is an overlap between the available indicators (Items [1-6] and the items mentioned in Central Bank Instruction No. (2009/47) dated 2009/12/10 (Item Second/D)), the more severe of the two is taken.

B. General Provisions:

1. No credit exposures classified in Stage 3 (Stage 3) or any part thereof may be settled by granting (entering with) other customers related to the customer or having an influential interest or relatives up to the third degree in any new exposures or increasing existing exposures.
2. No new credit exposures may be granted (entered with) the customer or existing exposures increased for any customer whose accounts were included in Stage 3 (Stage 3).
3. No credit exposures may be granted (entered into) to a customer whose credit exposures have been previously written off partially or in full, unless the written-off amount is settled.
4. The Bank must study, evaluate, and estimate the credit risks of all customer accounts whose credit exposures were included in Stage 3 (Stage 3), so that the Bank has sufficient knowledge of the size of those risks and ensures the consistency of the classification of those accounts, such that if it is confirmed that all the customer's accounts are linked together (in terms of repayment sources/cash flow, collateral, financing the same project (projects)...), the Bank must classify them in Stage 3 (Stage 3) as long as the conditions apply to one of them.
5. The Bank must study, evaluate, and estimate the credit risks of all customer accounts whose credit exposures were included in Stage 3 (Stage 3), so that the Bank has sufficient knowledge of the size of those risks and ensures the consistency of the classification of the customer's other exposures [in Stage 2 (Stage 2) at least] and monitor adequate impairment losses against them. It is worth noting that the procedure is allowed only

Form (1/1/09)

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CENTRAL BANK OF JORDAN

if the customer's other exposures are not directly linked to the exposures included in Stage 3 (Stage 3) [such as accounts related to the execution of projects that have independent accounting and are secured by rights of pledge or specific repayment sources and sufficient cash flows].
6. Any collections of credit exposures classified in Stage 3 (Stage 3) are used to settle the principal of the exposures first, and after the principal of the exposures is fully satisfied, subsequent collections are recorded as received interest.
7. New credit exposures may be increased/granted by no more than (25%) of the existing exposure balance for a customer whose exposures or any of them were classified in Stage 2 (Stage 2), provided that this is not done except after an in-depth study of the exposure/customer's risks and that the increase/grant is not used to settle existing/receivable exposures of the customer or related customers.
8. The Audit Committee (or equivalent for non-Jordanian banks) must verify the sufficiency of the Expected Credit Loss (impairment loss) monitored by the Bank and ensure its sufficiency in every financial statement.
9. In the event of an improvement in credit quality and the availability of sufficient and documented reasons making it possible to transfer credit exposures from Stage 3 to Stage 2 or from Stage 2 to Stage 1, the transfer process must not take place except after verifying the improvement in the credit status of the exposure and complying with the repayment of (3) monthly installments or two quarterly installments or at least one semi-annual installment on time, meaning that early repayment of installments is not considered for the purpose of transferring the debt to a better stage, and it is based on fundamental financial data reflecting expected cash flows professionally and carefully studied and completed after the transfer process.
10. According to the requirements for applying Standard (9), the primary source for repaying liabilities due to any debtor is the cash flow derived from the customer's activity. Therefore, credit studies must show expected cash flows professionally and carefully studied, based on fundamental financial data reflecting the debtor's ability to provide those cash flows, as stated in Circular No. (1271/1/10) dated 2016/1/25 and Circular No. (14233/1/10) dated 2015/11/18.
In this regard, exposures granted a grace period require the Bank to prepare a detailed study of the cash flows showing the debtor's repayment capacity to enable it to prove the degree of credit risk for those exposures.
11. Credit risk assessment and the ability to fulfill obligations for the debtor must be done regardless of the collateral or risk mitigants provided by the debtor.
12. Credit risk for certain debt instruments should not be considered low because they have lower credit risk than those existing in other instruments at the Bank or in the business environment or in the countries where the Bank operates.

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CENTRAL BANK OF JORDAN

13. If there is evidence of a significant increase in credit risk - regardless of the current stage in which the credit exposure/debt instrument is classified - the Bank must re-include the exposure/instrument in either Stage 2 or Stage 3 in a manner consistent with the degree of risk it carries and monitor the necessary impairment losses against it.
    It is worth noting that Standard (9) requires taking into account absolute criteria (such as credit rating grade) and relative criteria (decline in credit rating) for the purpose of determining the existence of a significant increase in credit risk, and banks must determine the significant increase based on whichever is more severe (change in rating grade or decline in rating). (This usually considers a decline in the credit rating of the credit exposure/debt instrument by two grades on a (10)-grade credit rating system since initial recognition as evidence of a significant decline in credit risk).

Form (1/1/09)

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CENTRAL BANK OF JORDAN

Third: Measurement of Credit Risk and Expected Credit Loss (ECL)

A. Mathematical Model for Calculating Expected Credit Loss:
According to Standard (9), the mathematical model is:

Expected Credit Loss (ECL) = PD% × EAD (JOD) × LGD%

• PD: Probability of Default
• EAD: Exposure at Default
• LGD: Loss Given Default

It is worth noting that Standard (9) did not provide a specific computational methodology for calculating the inputs of the Expected Credit Loss (ECL) equation but presented trends and guidelines on the possible methods to be used in the Expected Credit Loss calculation methodology.

B. Measurement on an Individual or Aggregate Basis (Portfolio):

1. Standard (9) included that credit risk and Expected Credit Loss can be measured on an individual basis (credit exposure/debt instrument) or on an aggregate basis (portfolio of credit exposures/debt instruments). Therefore, if the Bank chooses to measure credit risk and Expected Credit Loss on an aggregate basis (portfolio), the credit exposures/debt instruments included in the same portfolio must carry similar credit risks, such as credit instruments sharing several of the following elements - including, but not limited to, the following:
   i. Credit product type (type of exposure/instrument).
   ii. Internal credit rating.
   iii. Quality of collateral (risk mitigants).
   iv. Acquisition date.
   v. Remaining time to maturity.
   vi. Sector.
   vii. Geographic region.
   viii. Interest rate/return.
2. It is worth noting that practically there may be more than one portfolio for certain exposures/instruments or credit products, such as distributing car loans to more than one portfolio, so that each is representative and similar in a convincing manner in its risks and credit characteristics.

Form (1/1/09)

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CENTRAL BANK OF JORDAN

3. The principle of measuring credit risk and Expected Credit Loss on an aggregate basis may be applied to one or more credit exposures, provided that the size of a single credit exposure for any of the portfolio components does not exceed (250) thousand dinars (or its equivalent) at the Bank.
   [In special cases, and if the Bank has certain products/credit exposures for which the Expected Credit Loss is calculated on a portfolio basis and for an amount exceeding (250) thousand dinars for any of the portfolio components, the Bank must submit a request to the Central Bank to obtain its approval].

C. Measurement of Credit Quality and Deterioration in Credit Quality:-

1. As mentioned previously, when preparing financial statements, the level of credit risk on the financial statement date is compared with that existing since initial recognition for each credit exposure/debt instrument within the scope of Standard (9) to calculate the Expected Credit Loss, as credit risks usually appear gradually and build up over time and do not appear all at once.
2. It is assumed that the credit exposure/debt instrument subject to Expected Credit Loss measurement is of good quality at initial recognition and is recorded in debt instruments in Stage 1, unless there is objective evidence of a significant deterioration in credit quality (at initial recognition) (such as purchasing or acquiring a debt instrument/credit exposure at a large discount).

D. Unclassified Credit Debts:-
Standard (9) requires comparing the risk degree of each debt/credit exposure on the financial statement date with its risk degree since granting (initial recognition). In practice, this requires the existence of an internal credit rating system relied upon; otherwise, any lack of information about the history and performance of the debt implies including it in Stage 2 (Stage 2) (taking into account the material effect of that), which necessitates the documentation of historical risk information for each debt if not available or the lack of a system reflecting it reliably; otherwise, it is included in Stage 2 (Stage 2). In this regard, it is noted that if there are debts granted for years and the Bank does not have an internal credit rating system covering previous time periods, it is sufficient to document information about the risks and performance of those debts for the last (5) years in a manner that allows comparing the quality of those debts on the financial statement preparation date with their historical quality.

Form (1/1/09)

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CENTRAL BANK OF JORDAN

E. Measurement of Probability of Default (PD):

1. According to what Standard (9) included regarding credit exposures/debt instruments included in Stage 1, for the purpose of calculating Expected Credit Loss, the probability of default for the exposure/instrument for the next (12) months from the financial statement date is taken into consideration.
2. However, for the purpose of calculating Expected Credit Loss for credit exposures/debt instruments included in Stages 2 and 3, the probability of default over the remaining life of the credit exposure/debt instrument from the financial statement date is taken into consideration (taking into account what is required regarding renewable or revolving credit exposures/debt instruments such as current accounts, where the behavior of renewable exposures is studied to determine their expected life, which extends beyond their contractual date).
3. As previously mentioned, the applications of Standard (9) regarding the measurement of Expected Credit Loss are forward-looking [unlike what was prevalent previously, such as IAS (39) requirements]. Therefore, it is mandatory for banks, when developing their systems, to take the following factors into consideration:
   3.1 Historical data: which express historical default rates added to the relationship with macroeconomic indicators.
   3.2 Adjusting historical data with information about the current conditions of credit exposures/debt instruments (quantitative and qualitative financial and non-financial indicators).
   3.3 Adjusting historical and current data with overall and partial future forecasts (macroeconomic indicators and credit exposure indicators), including the effect of stress test scenarios and their results, as mentioned in Item (Z) later.
4. Treatment of credit exposures to the Jordanian Government and its guarantee without credit loss.
5. Treatment of credit exposures to governments in countries hosting the external presence of Jordanian banks according to the instructions of the regulatory authorities in those countries, provided that they are in the local currency of those countries; otherwise, or in the absence of instructions issued by the host regulatory authority, the Expected Credit Loss against them is calculated according to the requirements of these instructions and Standard (9).

F. Exposures within the Banking Group:-
When preparing financial statements at the Bank/Jordan branches level, credit exposures within the banking group are treated as follows:-

• Excluding exposures located at external branches.
• Treatment of exposures to subsidiaries according to the requirements of Standard (9) and these instructions.

Form (1/1/09)

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CENTRAL BANK OF JORDAN

G. Stress Testing:-
According to the requirements of Standard (9), stress tests are considered part of the requirements that must be considered as part of the calculation process for measuring Expected Credit Loss. Therefore, banks are required to conduct at least three scenarios to study future forecasts and know their impact on the variables of the Expected Credit Loss measurement model, where these scenarios represent a basic scenario, a worse scenario, and a better scenario. It is worth noting that according to the requirements of Standard (9), the calculation of Expected Credit Loss must reflect, without any bias, the Unbiased and Probability-Weighted Amount, which is determined based on the evaluation of a set of results rather than relying on the best or worst scenarios.

H. Cash Flow Shortfall:-
Cash flow shortfall represents the difference between the cash flow the Bank must receive according to the contractual terms with the debtor and the cash flows expected to be received from the debtor. Therefore, the expectation of non-compliance by the debtor to repay any amounts or to repay them at a later date than the original repayment date according to the contract must be reflected in the Expected Credit Loss.

I. Exposure at Default (EAD):-
For the purpose of calculating Expected Credit Loss and according to the requirements of Standard (9), the Exposure at Default may not necessarily represent the existing balance at the time, but it is necessary to take into consideration the amounts that may be utilized in the future by the debtor, such as:

1. Granted and unused ceilings: where the amounts that may be withdrawn by the debtor in the future are taken into consideration (the Bank's right to cancel contracts without referring to the customer is not taken into consideration), based on a study conducted within the Bank that determines the size of the utilization of ceilings such as the current account overdraft ceiling; otherwise, the entire ceiling is considered to represent the balance at default, and the same applies to other credit ceilings available to customers such as letter of credit financing ceilings and bill discounting ceilings, etc.
2. Similarly, the expected time for the debt to remain outstanding is taken into consideration, even though its contractual life may be one year, such as a current account that is renewed annually; in this case, the expected life of the debt extends beyond the contractual date based on a study within the Bank that determines the period during which the debt remains outstanding.

Form (1/1/09)

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CENTRAL BANK OF JORDAN

3. Indirect Facilities and Commitments:
   According to the requirements of Standard (9), indirect credit exposures (not yet funded) are considered credit exposures for which the Expected Credit Loss that may be realized must be calculated by calculating the probability and timing of withdrawing those amounts, their magnitude, and the probability of default, following the same methodology applied to direct commitments and exposures.

J. Time Value of Money:-
According to the requirements of Standard (9), the Expected Credit Loss represents the present value of the entire expected shortfall in cash flows over the life of the credit exposure/debt instrument.
Therefore, the discount factor used for the purpose of calculating the present value (for the financial statement date) represents the Effective Interest Rate (EIR) granted on the credit exposure/debt instrument on the calculation date.

K. Loss Given Default (LGD) (Collateral/Risk Mitigants):-

1. When calculating Expected Credit Loss, the Loss Given Default is taken into consideration after calculating the recoverable value from the credit exposure/debt instrument, the timing of recovery, and the most important part represents the collateral provided against granting the credit exposure/debt instrument and legally documented within credit contracts, with no legal barrier preventing the Bank from reaching the collateral.
2. To reach the calculation of Expected Credit Loss, the stages of reaching the collateral (timing) and converting it to cash (for the purpose of calculating the present value) (the expected cash flow to be received and its timing minus any expenses related to the process) must be taken into consideration.
   It is worth noting that according to the requirements of Standard (9), any collateral that is executed due to default is not recorded as an asset unless it meets the conditions for asset recognition according to the requirements of International Financial Reporting Standards.
3. The deduction rates specified in Debt Classification Instruction No. (2009/47) dated 2009/12/10 are applied as a minimum, and the time period and time value of money are taken into consideration for the purpose of calculating Expected Credit Loss by adding additional deduction rates representing the time period during which the collateral will be converted to cash, provided that the Bank has sufficient information to document and support the calculation process.

Form (1/1/09)

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CENTRAL BANK OF JORDAN

Article Four: Required Disclosures

Standard (9) included a set of quantitative and qualitative disclosures that must be adhered to. Also, International Financial Reporting Standard (7) was amended after the issuance of Standard (9), which requires banks, in cooperation with auditors, to adhere to those disclosures when preparing their financial statements, as shown in Annex No. (1) regarding both descriptive and quantitative disclosures.

Article Five: Statements for the Central Bank

The Bank must provide the Central Bank with the statements shown in the attached Annex No. (2) with every financial statement, provided that they are audited (reviewed) by the auditor, as well as adhering to what was stated in Circular No. (16153/1/10) dated 2015/12/28.

Form (1/1/09)

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