Instructions for the Implementation of International Financial Reporting Standard (9) No. (13/2018)

In the Name of Allah, the Most Gracious, the Most Merciful

Central Bank of Jordan

Ref: 1/10/7702 Date: 21/9/1439 AH Corresponding to: 6/6/2018 AD

Instructions for the Implementation of International Financial Reporting Standard (9) No. (13/2018)

Greetings,

Based on the provisions of Article (99/b) and Article (42/a - 2, 3) of Banking Law No. (28) of 2000 and its amendments, and with reference to our circular No. (1/10/7037) dated 18/5/2016 regarding the requirements of the general framework for the implementation of Standard (9), and our circulars No. (1/10/15583) dated 23/11/2017 and No. (1/10/1359) dated 25/1/2018 and their attachments, the draft instructions for the implementation of Standard (9), through which we requested your comments, and subsequently the meeting held on 14/12/2017 attended by the heads of boards of directors and general managers of banks, and the meeting held on 24/12/2017 attended by risk managers and financial managers in banks to discuss the topic of implementing Standard (9) and its requirements, we attach herewith a compact disc (CD) containing the instructions for the implementation of Standard (9), noting the following:-

First: The implementation of International Financial Reporting Standard (9) consists in its content (in addition to the accounting framework) of a methodology for risk management, specifically credit risk management, in order to preserve the safety and robustness of the bank's financial position. This requires the bank's board of directors and the relevant committees emanating from it to verify the existence and application of appropriate credit risk management policies, which entails the existence and application of effective internal control systems, internal credit rating systems, and automated systems for calculating expected credit losses, and appropriate examination procedures, so that this system is capable of reaching results that ensure adequate hedging against expected credit risks. Therefore, the Board of Directors must provide the appropriate governance structure to ensure the proper implementation of the requirements of Standard (9).

Second:

1. Record the material impact resulting from the first-time implementation of Standard (9) on the opening balance of the equity account/retained earnings item as of 1/1/2018.
2. Transfer the accumulated balance of the General Banking Risk Reserve item as of 31/12/2017 to the retained earnings item as follows:-

a. Maintain any surplus balance of the General Banking Risk Reserve item (if any) as restricted and not distributable as dividends to shareholders, nor may it be used for any other purposes except with prior approval from the Central Bank. b. For the purpose of calculating regulatory capital (Tier 2 Capital), the amount equivalent to the balance of provisions required for debt instruments/credit exposures classified in Stage 1 shall be taken into account, not exceeding (1.25%) of the total risk-weighted credit assets calculated according to the standard method, provided that the value of such provisions shall not be deducted from the amount of credit exposures (denominator of the capital adequacy ratio), except to the extent that it exceeds (1.25%) of the total risk-weighted assets according to the standard method. 3. Regarding Islamic banks, they are committed to applying the above to financings and liabilities (credit exposures) funded from the bank's own funds. As for financings and liabilities (credit exposures) funded from joint investment accounts, expected credit losses against them shall be calculated and the results of the calculation shall be provided to the Central Bank to take the appropriate decision regarding them. 4. The Central Bank's instructions No. (47/2009) dated 10/12/2009 and its amendments shall continue to be in force, and the more stringent results shall be taken into account [by comparing the results for provisions calculated for Stage 2 and Stage 3 separately (total of each stage)] through a mapping between Stage 2 and Stage 3 according to the requirements of Standard (9) with credit exposures under supervision and non-performing credit exposures respectively according to instructions No. (47/2009). 5. Reclassification operations for financial instruments between the three categories specified by Standard (9) [Amortized Cost, Fair Value through Profit or Loss, Fair Value through Other Comprehensive Income] may be performed once at the beginning of 2018 for the purpose of achieving the proper implementation of the requirements of Standard (9), and thereafter complying with the requirements of Standard (9) as stated in the instructions regarding transfer and reclassification operations. 6. Any adjustment in the expected credit loss balance resulting from a change in the methodology and systems applied by the bank shall be recorded as a difference within the retained earnings balance/equity. 7. It is the responsibility of the external auditor to verify the bank's procedures regarding the methodology and calculation of expected credit losses, and to provide the Central Bank with a certificate from the external auditor regarding the safety of procedures and the sufficiency of the expected credit loss amount calculated by the bank with each set of financial statements. 8. The Central Bank will take the necessary measures to verify the safety of the methodologies and mechanisms applied by banks for calculating expected credit losses through field visits to banks, where each bank will be informed of the arrangements to be followed. 9. It is necessary to comply with the quantitative and qualitative disclosures attached to the instructions and any other disclosures required by International Financial Reporting Standards, as well as providing the Central Bank with the schedules attached to these instructions with each set of financial statements.

Third: The work of our circulars No. (1/10/1359) dated 25/1/2018 and No. (1/10/15583) dated 23/11/2017 is repealed.

Please accept our highest respect,

Governor Dr. Ziad Frieze

Attachments:

1. Instructions for the Implementation of International Financial Reporting Standard (9).
2. Required quantitative and qualitative disclosures.
3. Required schedules for the purposes of the Central Bank.