CENTRAL BANK OF NIGERIA
Other Financial Institutions Supervision Department 33, Tafawa Balewa Way, Central Business District P. M. B. 0187 Garki, Abuja.

0 09-462-35439 s ofid@cenbank.org OFISD/DIR/GEN/IFR/020/101 March 5, 2019 Letter to All Other Financial Institutions GUIDANCE NOTE TO OTHER FINANCIAL INSTITUTIONS ON THE IMPLEMENTATION OF IFRS 9 (FINANCIAL INSTRUMENTS) IN NIGERIA We hereby forward the Central Bank of Nigeria's initial Guidance Note on the implementation of IFRS 9 (Financial Instruments) in the other financial institutions (OFIs) sector.

The Guidance Note communicates supervisory expectations for the implementation of the new standard, especially in areas where OFIs are expected to exercise considerable judgment and/or elect to use simplifications and other practical expedients permitted under the standard. The Note also specifies information to be submitted to CBN not later than June 30, 2019 on IFRS 9 Implementation Projects while requiring OFIs to submit monthly status updates on the implementation projects starting July 31, 2019.

To ensure a seamless implementation, the CBN has established a Project Team and OFIs are encouraged to seek clarifications, if any, on the Guidance Notes by contacting the Accounting Support Team, via email on aologunde@cbn.gov.ng or vamartins@cbn.gov.ng.

Yours faithfully,
'TOKUNBO MARTINS (MRS)
DIRECTOR OF OTHER FINANCIAL INSTITUTIONS SUPERVISION

Guidance Note For Other Financial Institutions On The Implementation Of Ifrs 9 (Financial Instruments) In Nigeria

1.0 Introduction

The International Financial Reporting Standard (IFRS) was adopted in Nigeria on January 1, 2012 as part of measures to improve reporting practices, transparency and disclosures. Nigeria's adoption of the IFRS implies that all revisions to existing standards as well as new accounting standards issued by the International Accounting Standards Board (IASB) must be adopted by all reporting entities. In July 2014, the IASB issued the final version of IFRS 9 (Financial Instruments) to replace IAS 39 (Financial Instruments: Recognition and Measurement) requiring all reporting entities that have adopted IFRS to implement the new accounting standard by January 1, 2018. IFRS 9 prescribes new guidelines for the classification and measurement of financial assets and liabilities, making fundamental changes to the methodology for measuring impairment losses, by replacing the "incurred loss" model with a forward-looking "expected loss" model. The implementation of IFRS 9 would entail the exercise of considerable judgement by Other Financial Institutions (OFIs). In order to ensure robust and consistent implementation of IFRS 9, this Guidance Note details supervisory expectations, especially in areas where OFIs are expected to exercise considerable judgment and/or elect to use simplifications and other practical expedients permitted under the Standard. Section 2.0 clarifies the Central Bank of Nigeria (CBN)'s expectations on IFRS 9 implementation while Section 3.0 details the information to be provided by OFIs to the CBN on their IFRS Implementation Projects.

2.0 Clarifications On Regulatory Expectations

In order to ensure proper application of the IFRS 9 requirements in the OFIs sector, this Section provides clarification on the CBN's expectations from OFIs on how they should exercise judgment in certain areas.

2.1 Measurement Of Financial Instruments 2.1.1 Assessment Of Significant Increase In Credit Risk

The standard requires an entity, at each reporting date, to assess whether the credit risk on a debt instrument measured at Amortised Cost and Fair Value through Other Comprehensive Income (FVOCI) has increased significantly since initial recognition, using among other factors the change in the risk of a default occurring over the expected life of the instrument. The CBN expects OFIs to put in place policies and systems as well as governance arrangements and controls to identify instances where their exposures have suffered significant increase in credit risk.

In assessing significant increase in credit risk, OFIs are to consider quantitative, qualitative and 'backstop' (30 days past due presumption) indicators. However, OFIs with loan facilities with tenor of not more than 180 days should use 7 days past due presumption. In the same vein, 90 days past due presumption should be used for long term financial instruments such as mortgage loans with tenor longer than 10 years. In using quantitative elements, OFIs should consider the change in lifetime Probability of Default (PD) by comparing the lifetime PD at the reporting date with the lifetime PD at initial recognition. The criteria for relative quantitative increases in PD indicative of a significant increase in credit risk should be defined and documented by OFIs. The assessment by OFIs should among others consider changes in credit risk at counterparty and individual credit level. Generally most qualitative factors indicative of a significant increase in credit risk are reflected in PD models and therefore, are included in the quantitative assessment. However, where it is not possible to include all current information about qualitative factors in the quantitative assessment, OFIs should recalibrate PDs or adjust estimates when assessing significant increase in credit risk or calculating Expected Credit Losses (ECLs). In addition to the criteria provided in B5.5.17 of the Standard, OFIs are advised to consider the following qualitative factors in assessing significant increase in credit risk:
Classification of the exposure by any of the licensed private credit bureaux or the Credit Risk Management System; Deterioration of relevant credit risk drivers for an individual obligor (or pool of obligors); Expectation of forbearance or restructuring due to financial difficulties;Evidence that full repayment of interest and principal without realisation of collateral is unlikely, regardless of the number of days past due; and Deterioration in credit worthiness due to factors other than those listed above. The CBN expects that financial assets which are more than 30 days past due (7 days past due for loans below 180 days tenor) or have been granted forbearance should be considered to have significantly increased in credit risk. However, the CBN expects OFIs not to rely solely on the 30 days/7days past due presumption, but to incorporate reasonable and supportable forwardlooking information. The 30 days/7days past due presumption can only be applied if the forward looking information is not available without undue cost or effort. Where the 30 days/7days past due presumption is rebutted on the basis that there has not been a significant increase in credit risk, the OFI shall accompany the assertion by documented, reasonable and supportable information that a more lagging criterion is appropriate. The CBN, however, expects that this would only be used in limited circumstances. Where an OFI sets its transfer threshold for groups of financial assets, it is important that all financial instruments in that portfolio must have similar credit risk characteristics at initial recognition such as a credit rating within a relatively narrow band. In assessing whether there is significant increase in credit risk or not, OFIs are required to consider macroeconomic indices and sector/industry/geographical peculiarities and ensure that economic assumptions are consistent across all risk management and capital planning documents (i.e. RRP, ICAAP, ECL, ILAAP, ERMF, Budget, etc.).

To ensure appropriate identification of significant increase in credit risk, OFIs should avoid applying general PD or credit rating threshold to all exposures in a portfolio except the exposures are of a similar credit risk at initial recognition. The use of general threshold is only permitted if it would appropriately capture significant increase in credit risk since initial recognition in a manner consistent with the requirements of IFRS 9.

OFIs should consider both counterparty and individual exposures of the obligor and connected obligors, in determining significant increase in credit risk. This would ensure that the impact of multiple exposures to the same obligor originated at different periods with different initial PDs have been taken cognisance of in compliance with IFRS 9.

2.1.2 Staging And Transfer Criteria

At transition, OFIs are expected to place financial instruments without significant increase in credit risk in the 12-month ECL bucket irrespective of the obligor's credit risk rating at origination. However, where significant increase in credit risk has been observed, such credits are moved to Lifetime ECL. At origination/transition, where the tenor of the credit facility is less than 12 months, OFIs are still expected to compute the ECL for the duration of the loan in place of the 12- month ECL and place the facility in 12-month ECL bucket. Where there is evidence that there is significant reduction in credit risk, OFIs would continue to monitor such financial instruments for a probationary period of 90 days (30 days for loan facilities with less than 180 days tenor) to confirm if the risk of default has decreased sufficiently before upgrading such exposure from Lifetime ECL (Stage 2) to 12-months ECL (Stage 1). In addition to the 90 or 30 days probationary period above, OFIs are expected to observe a further probationary period of 90 or 30 days to upgrade from Stage 3 to 2. For the avoidance of doubt, OFIs are required to observe a probationary period of 180 or 60 days before upgrading financial assets from Lifetime ECL (Stage 3) to 12-months ECL (Stage 1).

OFIs are required to adopt a definition of "default" consistent with the provisions of the paragraph 12.1(b) (2) of the Prudential Guidelines 2010.

2.1.3 Impairment Of Financial Instruments

OFIs are required to put in place appropriate policies to ensure sound credit risk assessment and measurement processes as well as systems, tools and data that appropriately aid the assessment of credit risk and computation of ECLs. In accordance with Section 5.5.1 of the Standard, OFIs are to determine ECL for financial assets measured at amortised cost, FVOCI, lease receivables, contract asset, loan commitment and financial guarantee contract.

OFIs shall adopt sound ECL methodologies commensurate with their size, complexity, structure and risk profile. ECL should reflect the probability-weighted outcome, time value of money and best available forward-looking information.

OFIs should consider such factors as extent of systemic risk posed by the institution level and volatility of historical credit losses, complexity of products and other lending related modelling methodologies in determining the level of sophistication required in implementing the ECL model. Irrespective of the approach adopted, OFIs are expected to ensure that ECL measurements are unbiased (neutral and not biased towards optimism or pessimism) and determined by evaluating a range of possible outcomes.

OFIs are required to compute ECLs on significant exposures and credit-impaired loans individually while ECLs for retail exposures and exposures to small and medium-sized enterprises that have less borrower-specific information may be measured on collective basis. To measure ECL on collective basis, OFIs should have credit risk rating processes in place to appropriately group exposures on the basis of shared credit risk characteristics. ECLs could either be 12-month or Lifetime depending on whether there has been significant increase in credit risk since initial recognition. OFIs are required to carry out credit review and update their ECLs, at least quarterly, to reflect changes in credit risk since initial recognition. The methodologies and assumptions underlying the ECL methodology should be reviewed at least annually.

OFIs may adopt simpler approaches1 in the computation of ECL. In view of the fact that most ECL models require the determination of PD, Loss Given Default (LGD), Exposure at Default (EAD) and Discount Rate, OFIs are required to take cognisance of the following factors:

Probability Of Default

OFIs that are already using the Internal Rating Based (IRB) models for their internal credit assessment purposes may use the outputs from the models as a starting point for calculating IFRS

1 These may include Term to Maturity Approach, Loss Rate Approach, etc. Term to Maturity Approach does not estimate PD, EAD and LGD for separate time intervals but uses a single measure for PD, EAD and LGD for the remaining term to measure ECL.

In the Loss Rate Approach, the PD and LGD are assessed as a single combined measure, based on past losses, adjusted for current and forecasts of future conditions.
9 PDs. The output from the IRB models should, however, be validated based on reasonable and supportable information to ensure that they are fit for purpose under IFRS 9. They are also required to make adjustments that would make the PDs comply with the requirements of the standard where necessary, such as conversion to an unbiased estimate, removal of bias towards historical data, aligning definition of default used in the model with that of IFRS 9, etc. Where the OFI determines lifetime ECL from the 12-months ECL, it should reflect expected movements in default risk by sourcing historical default data, perform vintage analysis to understand how default rates migrate over time and extrapolate trends to longer periods. In developing models to produce PDs, OFIs are required to ensure that all key risk drivers and their predictive power are identified and calibrated based on historical data for at least three years. Those that do not have three years historical data may utilise data sourced externally. The developed models are to be submitted to the CBN for approval before implementation. OFIs are not permitted to assume a constant marginal rate of default over the remaining lifetime of a financial instrument without appropriate supporting analysis. As provided under paragraph B5.5.5 of IFRS 9, only exposures that have similar credit risk characteristics can be grouped together for the purpose of calculating the PDs.

Loss Given Default

Under IFRS 9, LGD reflects credit enhancements that are integral to the terms of the exposure and are not accounted for separately. Therefore, OFIs are required to analyse relevant macroeconomic indicators that influence LGD or its components to aid estimation of collateral values when modelling the term/structure of LGD. OFIs that intend to use Basel LGD values should effect necessary adjustments to comply with IFRS 9. The modelling methodology for LGD where appropriate should be designed at a component level with the calculation of LGD broken down into drivers. For secured exposures, at a minimum the OFI should consider forecasts of future collateral valuations (including expected sale discount), time to realisation of collateral (and other recoveries), allocation of collateral across exposures where there are several exposures to the same obligor, cure rates and external costs of realisation of collateral.

Exposure At Default

OFIs are to ensure that the period of exposure in the model is not shorter or longer than the maximum contractual period over which the entity is exposed to credit risk. To determine the period of exposure that equals the historical average life of loans, OFIs are required to evaluate whether it is consistent with forward-looking expectations based on reasonable and supportable information.

For revolving credit facilities within the scope of IFRS 9.5.5.20 (loan and undrawn loan commitment) an OFI shall estimate 12-month ECL based on its expectations of the portion of the loan commitment that will be drawn within 12 months of the reporting date while lifetime ECL is calculated based on the expected portion of the loan commitment that will be drawn over the expected life of the loan commitment. In determining the period of exposure for revolving credit facilities, OFIs shall take cognisance of their expected credit risk management measures which serves to mitigate credit risk, including terminating or limiting credit exposure.

ECL computation for financial guarantee contracts shall consider expected payments to reimburse the holder for a credit loss that it incurs, less any amount the OFI expects to receive from the holder, debtor or any other party. OFIs are not permitted to use the legally enforceable contractual period for revolving credit facilities unless analysis of historical data shows that, in practice, management action consistently limits the period of exposure to the contractual period. OFIs are expected to consider all relevant historical information that is available without undue cost and effort when determining the exposure period of a revolving credit facility. OFIs are required to demonstrate that their EAD models are fit for purpose under IFRS 9. The basis for inputs and adjustments should be documented. OFIs should not use 12-month EAD as a proxy for lifetime EAD without appropriate justification.

Discount Rate

OFIs are required to make appropriate adjustments to the discount rate employed for regulatory purposes when computing IFRS 9 ECL/LGD, reflect the effect of time value of money in ECL and ensure that the discount rate used approximates the EIR.

For a financial guarantee contract, the discount rate should reflect the current market assessment of time value of money and risks specific to the cash flows. Assumptions about prepayments, extensions and utilisation during the period of exposure used in the ECL calculations shall be updated to reflect currently available information consistent with that used in estimating interest income.

2.1.4 Model Validation

OFIs should have policies and procedures in place to validate models used to assess and measure ECL. They should ensure that the validation process allows for systematic evaluation of robustness, consistency and accuracy of the model as well as its relevance to the underlying portfolio.

The scope for validation should include review of assumptions, inputs, design and outputs. The scope of validation should also establish thresholds for model performance which, if breached, should lead to remedial actions such as model recalibration or redevelopment. Model validation should be conducted when the ECL models are initially developed and when significant changes are made to the models. Model validation should be performed independently of the model development process and by experienced personnel(s) with requisite expertise. The outcome of the validation process should be documented and subjected to review by the OFI's internal and external auditors. The findings and outcomes of model validation should also be reported in a prompt and timely manner to senior management and board. Above notwithstanding, OFIs should conduct reviews to ensure that their ECL models are appropriate at least annually. The CBN would periodically evaluate the effectiveness of OFI's credit risk management practices to ensure among others, that the methods used for determining accounting allowances lead to appropriate measurement of ECLs in line with the Standard.

2.1.5 Low Credit Risk Simplification

IFRS 9 permits that a financial instrument, which is considered to have low credit risk on the reporting date, needs not be assessed for significant increase in credit risk since its initial recognition. CBN expects OFIs to exercise this simplification in limited circumstances. Accordingly, OFIs are required to use this simplification for only risk free and gilt edged securities.

2.1.6 Reasonable And Supportable Information Without Undue Cost And Effort

The CBN recognizes that data quality, granularity and availability are significant challenges faced by OFIs in migrating to the ECL model. Consequently, OFIs are encouraged to identify data gaps early to aid the design of new data fields that would track market data required for measurement and assessment of significant increase in credit risk. In this vein, OFIs should conduct detailed analysis of their risk assets on a regular basis using all available and reliable data (internal and external), incorporating expert credit judgment and all known relevant factors (regulatory, industry, geographical, economic, political, etc.) that may affect these assets. The CBN expects that management's judgment should align with established parameters set by the board and are consistently applied across the OFI's risk management and capital planning processes e.g. RRP, ICAAP, ILAAP, ERMF, budget, ECL etc. The Standard requires consideration of forward-looking information in the ECL model and that reporting entities would apply sound judgment in forecasting macroeconomic parameters. Consequently, OFIs are enjoined to avoid the following:
Application of a single future economic scenario for a portfolio with no separate adjustments to take account of non-linear impacts, unless the portfolio has no potential material asymmetric exposures to ECL; Use of only internally developed forecasts or reference to a single external source; Development of ECL methodologies that are not commensurate with the OFIs complexity, structure, economic significance and risk profile; and Use of inconsistent macroeconomic parameters across risk management and capital planning processes (RRP, ICAAP, ILAAP, ERMF, ECL etc.).

OFIs should monitor whether their approaches to analysing forward-looking information continues to be appropriate in the light of changing circumstances. For the avoidance of doubt, the forward looking information integrated into OFIs' ECL models must be related to the credit risk drivers for particular exposures of portfolios.

2.1.7 Write-Off Of Non-Performing Facilities

Paragraph 5.4.4 of IFRS 9 requires an entity to write-off the portion of the gross carrying amount of a financial asset for which the entity has no reasonable expectations of recovery, with such write-off considered as a de-recognition event.

In determining that there is no reasonable expectation of recovering a non-performing financial asset or any part thereof, OFIs are required to abide by relevant extant regulations guiding write off of non-performing financial assets.

2.1.8 Modified Financial Assets

The contractual terms of a financial asset may be modified or renegotiated for a number of reasons, including factors not related to current or potential credit deterioration of the customer (e.g. changing market conditions, customer retention, etc.)
Modifications or renegotiations can however, mask increases in credit risk, thereby resulting in ECL being underestimated, and/or delaying the transfer to lifetime ECL for obligors whose credit risk has significantly deteriorated. Credit modifications may also result in inappropriate movement from lifetime ECL to 12-month ECL. Consequently, OFIs are enjoined to treat the modification of a distressed asset as an originated credit-impaired financial asset requiring recognition of lifetime ECL after the modification. It is pertinent to state that the credit risk on a financial asset will not automatically decrease merely because the contractual cash flows have been modified. The probationary requirements as detailed in Section 2.1.2 of this Guidance Notes shall also apply to modified financial assets. Financial assets transferred to lifetime ECL but subsequently renegotiated or modified should not be moved to 12-months ECL unless there is sufficient evidence that there had been no significant increase in credit risk over the life of the exposure compared with that upon initial recognition and the OFI demonstrates history of up-to-date and timely payment of principal and interest against the modified contractual terms for the required probationary period..

OFIs are required to fully disclose all modified financial assets that result in de-recognition in its financial statements in line with the requirements of IFRS. Furthermore, OFIs are required to submit quarterly returns to the CBN, to be received within 10 days of the end of the quarter effective 2nd quarter of 2019, on all financial assets derecognized during the affected quarter as a result of modification.

2.2 Transition Requirements And Other Arrangements Restatement Of Comparatives

Although IFRS 9 generally requires reporting entities to apply the standard retrospectively, it only permits an entity to restate prior periods only if it is able to do so without the use of hindsight. OFIs are encouraged to embrace the exception to retrospective application contained in the Standard.

Other Arrangements

OFIs that are yet to adopt IFRS 9 are expected to engage External Auditor/Independent Consultant's to setup, validate/certify of their IFRS 9 accounting policies/systems and model by second quarter of 2019.

The CBN remains committed to the principles of IFRS 9 and would update the Prudential Guidelines in due course. Meanwhile, the provisions of the relevant OFI Guidelines remain extant.

3.0 Information To Be Submitted To Cbn On Other Financial Institutions' Ifrs 9 Implementation Projects

OFIs are required to have in place adequate arrangements, processes and systems to effectively support transition to the new reporting requirements. Consequently, OFIs are required to submit their IFRS implementation plans covering the areas below to the Director, Other Financial Institutions Supervision Department not later than June 30, 2019 with soft copies forwarded to the Accounting Support Team via email: aologunde@cbn.gov.ng or vamartins@cbn.gov.ng.

3.1 Project Governance Structure

OFIs are required to set up appropriate governance structure to ensure that the standard is effectively implemented within the expected timeframe. Accordingly, OFIs are required to describe the project structure, governance and delivery timelines including the role of the board, senior management, project supervisor, key project members (internal and external) and training plan.

3.2 Ifrs 9 Gap Analysis And Impact Assessment

Details of IFRS 9 Gap analysis and impact assessment conducted to ascertain the quantitative and qualitative impacts of the standard on the OFI should include, among others, changes in accounting policy, credit risk rating system and capital plan.

3.3 Expected Credit Loss Model

Detailed information on existing and/or proposed model(s) for ECL calculation by each OFI should include:
Number of years loss data available to the bank; Supporting analyses, input, assumptions and rationales in ECL model;Macroeconomic metrics (types and sources) for forecasting;Haircut policy for LGD valuation;Policy for classifying financial assets into stages 1, 2 and 3 using the format below:

Stage	Description	Criteria	Criteria	Criteria
	(Quantitative)	(Qualitative)	(others)
Stage 1	12-Month ECL
Stage 2	Lifetime ECL - Loans that have witnessed significant increase in credit risk
Stage 3	Lifetime ECL - default

Policy for upgrading/downgrading financial assets in the various stages;Detailed information for the valuation of equity investments inclusive of details of valuation models; and Policies for modification and renegotiation of financial assets.

3.4 Classification Of Financial Assets And Liabilities

In addition to the above, OFIs are required to provide information on the

classification/designation of their financial assets/liabilities as at December 31, 2017, to IFRS 9 classifications, in line with the template below:
.

S/N	Financial	IFRS 9
IAS 39
Assets	Classification N	N
	Debt instruments	Equity	Derivative
	BM - 1	BM - 2	BM-3	FVTPL	FVOCI	FVTPL
	HTC	FVOCI	FVTPL
S/N	Financial	IAS 39	IFRS 9
Liabilities	Classification	N
N	N
	FVTPL	Other Liabilities

4.0 Project Status Report

OFIs that have adopted IFRS 9 in 2018 are required to submit their ECL models along with their 2018 Audited Accounts to the CBN. However, beginning from July 2019, OFIs that are yet to adopt IFRS 9 are required to submit monthly updates on the project implementation status to the CBN. The status report should show all major aspects of the implementation plan that are running on schedule, ahead of schedule, or behind schedule. If behind schedule, banks should indicate remedial steps being taken. The report should reach the Director, Other Financial Supervision Department not later than the 10th day of the subsequent month.

5.0 Abbreviations And Terms Used

IRB	Internal Rating Based
CBN	Central Bank of Nigeria
OFI	Other Financial Institutions
EAD	Exposure at Default
ECL	Expected Credit Loss
EIR	Effective Interest Rate
ERMF	Enterprise Risk Management Framework
FVOCI	Fair Value through Other Comprehensive Income
FVTPL	Fair Value through Profit or Loss
IAS 39	Financial Instruments: Recognition and Measurement
IASB	International Accounting Standards Board
ICAAP	Internal Capital Adequacy Assessment Process
IFRS	International Financial Reporting Standard
IFRS 9	Financial Instruments
ILAAP	Internal Liquidity Adequacy Assessment Process
LGD	Loss Given Default
PD	Probability of Default
RRP	Recovery and Resolution Plan