Implementation of International Financial Reporting Standard 9 (IFRS 9)

Text / Section 1 / Circular No. 143 / Date: 2024-12-31

Basic Circular for Banks No. 143
Also addressed to financial institutions and supervisory auditors.

We enclose a copy of Basic Decision No. 12713 dated November 7, 2017, regarding the application of International Financial Reporting Standard No. (9) (IFRS 9).

Beirut, November 7, 2017
Governor of Banque du Liban
Riad T. Salamé

Basic Decision No. 12713
Application of International Financial Reporting Standard No. (9) (IFRS 9)

The Governor of Banque du Liban,
Pursuant to the Monetary and Exchange Law, particularly Articles 70, 146, 174, and 182 thereof, Pursuant to the decision of the Central Board of Banque du Liban taken in its meeting held on November 2, 2017,

Decides as follows:

Article 1: Banks and financial institutions, effective January 1, 2018, shall apply International Financial Reporting Standard No. (9) (IFRS 9) regarding financial instruments, along with its related amendments to International Financial Reporting Standard No. (7) (IFRS 7) regarding financial instrument disclosures, on both individual and consolidated financial statements. This requires banks and financial institutions to establish the necessary systems, including technical systems, and complete their readiness by December 31, 2017.

Article 2: Banks and financial institutions shall prepare and document business model(s) in compliance with IFRS 9 requirements, reflecting the established strategy for managing financial assets and ensuring cash flows.

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Article 3: The sale of financial instruments subject to one of the following business models shall be conducted as follows:

• A business model whose objective is achieved by both collecting contractual cash flows and selling financial instruments.
• A business model whose objective is achieved through trading in financial instruments.
  In the event of selling financial instruments from a portfolio classified at amortized cost, such sales must be exceptional and non-recurring, meeting all sale conditions stipulated in IFRS 9, with clear documentation of the rationale for each exceptional sale and its compliance with this standard.

Article 4: When conducting financial instrument sales, banks and financial institutions must:

1. Observe the "derecognition" conditions stipulated in IFRS 9, considering whether these operations have effectively transferred substantially all risks and rewards associated with the sold financial instruments.
2. Conduct sales according to market rules and prevailing market prices (Value at Market) (i.e., based on the last announced price if listed in regulated financial markets, or based on potential sale value estimated prudently by auditors if unlisted or not subject to periodic pricing mechanisms by reliable parties).

Article 5: First, banks and financial institutions shall amortize gains/losses arising from swaps and purchase/sale operations on financial instruments over the term of the purchased instruments, if these operations aimed at realizing immediate profits against credits to premiums amortized over the term of purchased financial instruments, whether on the same instrument type or another, and whether directly between banks/financial institutions or with the same or different intermediaries.
1 Second: [Footnote 1 repealed by Intermediate Decision No. 13639 dated June 6, 2024 (Intermediate Circular No. 696).]

Article 6: Banks and financial institutions shall establish provisions based on Expected Credit Losses (ECL) according to appropriate methodologies for each type of financial asset within the balance sheet and off-balance sheet financial liabilities involving credit risk, such that the established provisions reflect the credit risks associated with these assets and liabilities and any significant changes in these risks.
To calculate Expected Credit Losses, banks and financial institutions may use the Historical Loss Approach or the Probability of Default (PD) / Loss Given Default (LGD) indicator-based methodology, or other appropriate methodologies, taking into account historical, current, and forward-looking information (Looking Forward). Exceptionally, banks and financial institutions shall apply the following minimum mechanism to establish provisions for their sovereign investment portfolios:

1. Adopt Expected Credit Loss ratios calculated systematically according to Annex No. (6) attached to Basic Decision No. 6939 dated March 25, 1998, on investment portfolios at Banque du Liban in Lebanese Lira and foreign currencies (including certificates of deposit), and on investments in bonds issued by the Lebanese State in Lebanese Lira and foreign currencies, to establish provisions in the Statement of Profit or Loss for the aforementioned portfolios. The Central Board of Banque du Liban shall periodically review the imposed ratios based on evolving current conditions.
   1 Footnote: Added by Intermediate Decision No. 13188 dated February 3, 2020 (Intermediate Circular No. 542), then amended by Article 1 of Intermediate Decision No. 13259 dated August 26, 2020 (Intermediate Circular No. 567).
   1 Footnote: Phased implementation of the aforementioned provisions shall conclude by December 31, 2026; for banks granted a 10-year grace period to establish these provisions, the implementation shall conclude by December 31, 2029.
2. Disclose in the financial statements prepared for publishing under Basic Decision No. 6574 dated April 24, 1997, the total provisions to be gradually established and the time period for such establishment.

Article 7: Banks and financial institutions shall:

• 1 Conduct periodic (at least quarterly) assessments, whenever necessary, of credit risks for each type of financial asset within the balance sheet and off-balance sheet financial liabilities involving credit risk, particularly to confirm whether there has been a significant increase in the level of these risks and the extent of this increase.
  2 Classify these financial assets within the balance sheet and off-balance sheet financial liabilities into three categories:
• Stage 1 (Performing): Financial assets within the balance sheet and off-balance sheet financial liabilities that are productive and have not experienced a significant increase in credit risk.
• Stage 2 (Under-Performing): Financial assets within the balance sheet and off-balance sheet financial liabilities that are productive but have experienced a significant increase in credit risk.
• Stage 3 (Performing-Non / Impaired Credit): Financial assets within the balance sheet and off-balance sheet financial liabilities that are non-productive, have experienced a decline in their credit value (Impaired Credit), and include debts classified as "Sub-standard", "Doubtful", or "Bad" according to Basic Decision No. 7159 dated November 10, 1998.

Footnote: Amended by Article 4 of Intermediate Decision No. 13502 dated November 24, 2022 (Intermediate Circular No. 649).

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Article 7 bis: First: Without prejudice to the provisions of Paragraph "Second" of this Article, banks and financial institutions operating in Lebanon shall not downgrade the ratings of customers adversely affected by the spread of the coronavirus (hereinafter "the Current Situation") in case of delays in repayment of their debts (principal and interest) and/or exceeding approved/allocated facility limits, nor consider this as an indicator of a significant increase in credit risk or a decline in credit value for these customers, nor as evidence of impairment, effective from February 1, 2020, to December 31, 2021.
In this case, outstanding due bonds resulting solely from this situation may be rescheduled without triggering debt reclassification.
Second: In exceptional circumstances, if the impact of "the Current Situation" is highly negative on a customer's credit capacity to the extent that it ceases to be a going concern, banks and financial institutions operating in Lebanon shall immediately downgrade the relevant customer's debt to Stage 3. Third: Banks and financial institutions operating in Lebanon shall continue applying the established mechanism according to regulatory provisions issued by Banque du Liban for classifying customers who were not adversely affected by "the Current Situation".

Footnote 1: Added by Article 2 of Intermediate Decision No. 13259 dated August 26, 2020 (Intermediate Circular No. 567).
Footnote 2: The deadline for this paragraph was extended to December 31, 2021 by Intermediate Decision No. 1359 dated September 2, 2021 (Intermediate Circular No. 594), originally ending December 31, 2020, then extended by Basic Decision No. 12713 dated November 7, 2017 to June 30, 2021.

Article 7 ter: Fourth: Banks and financial institutions shall continue evaluating the future financial conditions of customers, with assessments to be completed by no later than December 31, 2021.
Expected credit loss provisions shall be calculated based on the classifications determined solely from this assessment after the aforementioned date, subject to Paragraph "Second" of this Article, and shall be fully recorded in the Statement of Profit or Loss for the year 2021.

Article 8: First: The Board of Directors shall approve and periodically review (at least annually) the policies and procedures related to applying IFRS 9. These policies and procedures include:

• Business model(s) and the policy for allocating financial assets according to business models.
• Policy and procedures for classifying and reclassifying financial assets within the balance sheet and off-balance sheet financial liabilities involving credit risk among the three categories mentioned in Article 7 above.
• Policy and procedures for calculating Expected Credit Losses (ECL) on financial assets within the balance sheet and off-balance sheet financial liabilities involving credit risk.
  Second: The Audit Committee and Risk Committee, as stipulated in Basic Decision No. 9956 dated July 21, 2008, each in its respective capacity, shall hold periodic meetings with the specialized committee(s) responsible for applying IFRS 9 and obtain periodic (at least quarterly or whenever necessary) reports regarding the application of the aforementioned standard, to inform the Board of Directors with all data to assist it in exercising its supervisory role, particularly regarding ensuring proper application of IFRS 9. In the absence of an audit and risk committee at a financial institution, the Board of Directors shall perform the aforementioned duties.

Footnote 1: Amended by Article 2 of Intermediate Decision No. 13330 dated May 28, 2021 (Intermediate Circular No. 584).
Footnote 2: The deadline for this paragraph was extended to December 31, 2021 by Intermediate Decision No. 1359 dated September 2, 2021 (Intermediate Circular No. 594), originally ending June 30, 2021.

Article 9: Decisions on classifying and reclassifying financial assets within the balance sheet and off-balance sheet financial liabilities involving credit risk among the three categories mentioned in Article 7, as well as determining provisions for Expected Credit Losses (ECL), shall be subject to the approval of a specialized committee at the senior executive management level, comprising members including the Chief Financial Officer and the Chief Risk Officer.

Article 10: The Risk Management Unit shall play a fundamental role in ensuring compliance with IFRS 9, particularly by monitoring the evolution of credit risks for assets within the balance sheet and off-balance sheet financial liabilities involving credit risk, and establishing an appropriate methodology for calculating Expected Credit Losses on these assets and financial liabilities.

Article 11: The Internal Audit Unit shall conduct an independent assessment of compliance with policies and procedures related to applying IFRS 9, particularly regarding the adopted policy and procedures for calculating Expected Credit Losses (ECL) and determining provisions in accordance with this standard.

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Article 12: Banks and financial institutions shall:

1. Record established and to-be-established provisions for any type of financial asset within the balance sheet and off-balance sheet financial liabilities immediately in the currency of these assets and liabilities.
2. Take appropriate measures to cover debit positions arising from foreign currency provisions (e.g., by utilizing positive differences in net interest, fees, and other income in foreign currencies).

Footnote: Amended by Article 3 of Intermediate Decision No. 13373 dated November 3, 2021 (Intermediate Circular No. 600).

Article 13: First: Banks and financial institutions shall cease forming the general provision stipulated in Paragraph (4) of Paragraph "Second" of Article 3 bis of Basic Decision No. 7776 dated February 21, 2001, effective from the fiscal year 2017.
Second: To establish provisions for Expected Credit Losses (ECL) as of January 1, 2018, on portfolios of financial assets within the balance sheet and off-balance sheet financial liabilities involving credit risk across their various categories mentioned in Article 7, banks and financial institutions shall use the balance as of December 31, 2017, pertaining to:

• The general provisions mentioned in Article 9 of Basic Decision No. 6939 dated March 25, 1998.
• Special and general provisions, including the general LBP provision stipulated in Paragraph "Second" of Article 2 bis of Basic Decision No. 7776 dated February 21, 2001, which must be fully established before the end of 2017, and other provisions established for applying IFRS 9 through gains from sales of LBP sovereign financial instruments and simultaneous purchases of foreign currency financial instruments.

Article 14: If the total available balance as of December 31, 2017, for special, general, and LBP general provisions mentioned in Article 13 is less than the Expected Credit Losses (ECL) as of January 1, 2018, the shortfall in provisions shall be made up by utilizing the General Reserve mentioned in Article 16 below.

Article 15: If the total available balance as of December 31, 2017, for special, general, and LBP general provisions exceeds the Expected Credit Losses (ECL) as of January 1, 2018, the difference shall be recorded under "general provisions" with the option to use it according to one of the following two scenarios:

1. Utilize the difference to form additional potential provisions against Expected Credit Losses (ECL) after January 1, 2018, by releasing an amount equivalent to the additional provisions to be established and transferring them to the Income Statement.
2. Release the unused balance of the difference, not used for forming additional provisions as mentioned in Paragraph (1) of this Article, transfer it to the Income Statement, and then fully transfer the released provisions to the General Reserve mentioned in Article 16 below.

Article 16: First: Banks and financial institutions shall cease forming the general reserve calculated based on the performing loan and financing portfolio (non-retail loans) and the general reserve calculated based on the retail loan portfolio, as mentioned in Paragraph "Second" of this Article, effective from the fiscal year 2017.
Second: Banks and financial institutions shall transfer, to the "Undistributable General Reserve" category, the balances declared as of December 31, 2017, in the following items:

• Retained prior results (Undistributable).
• Unspecified banking risk reserve subject to Basic Decision No. 7129 dated October 15, 1998.
• General reserve calculated based on the performing loan and financing portfolio (non-retail loans) stipulated in Paragraph (3) of Paragraph "First" of Article 2 bis of Basic Decision No. 7776 dated February 21, 2001.
• General reserve calculated based on the retail loan portfolio stipulated in Paragraph (5) of Paragraph "Second" of Article 3 bis of Basic Decision No. 7776 dated February 21, 2001.
  Third: No conversion operations shall be performed for the balances of the aforementioned reserves from Lebanese Lira to foreign currencies.

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Article 17: First: To establish provisions in foreign currencies against Expected Credit Losses as of January 1, 2018, banks and financial institutions shall use, according to the following order:

1. The balance of previously established foreign currency general and special/general provisions as of December 31, 2017.
2. The balance of the foreign currency general reserve as of December 31, 2017.
   Second: In case a shortfall in foreign currency provisions persists as of January 1, 2018, or any subsequent date, banks and financial institutions shall make up this shortfall from positive differences in net positions resulting from net interest, fees, and other income in foreign currencies within the permitted limits for operational net positions; any excess beyond these limits shall be subject to Article 8 of Basic Decision No. 6568 dated April 24, 1997.

Article 18: Supervisory auditors of banks' and financial institutions' accounts are requested to express their opinions on the extent to which banks and financial institutions comply with IFRS 9 requirements when preparing reports required under Decree No. 1983 dated September 25, 1971.

Article 19: Banque du Liban shall prepare balance sheet models in accordance with the provisions of this Decision, and the Banking Supervision Committee shall issue implementing instructions for it, thereby ensuring compliance by banks and financial institutions with IFRS 9 requirements.

Article 20: This Decision shall be effective upon its issuance.

Article 21: This Decision shall be published in the Official Gazette.
Beirut, November 7, 2017
Governor of Banque du Liban
Riad T. Salamé