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Prudential Guidelines
Differences between SAS 10
and the revised prudential
guidelines

July 2011
Table of Contents
Page

Introduction 1

Differences in loss recognition requirements between 2

SAS and the revised CBN prudential guidelines

Way forward for 31 Dec 2011 10

Post Dec 2011 - Impact of IFRS on loan loss provisioning 12

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Introduction
The revised CBN prudential guidelines addresses several regulatory requirements of deposit money
banks in Nigeria. This presentation focuses on the loan loss provisioning aspects of the guidelines and
areas of conflict with Nigerian Statement of Accounting Standards

The current SAS 10 – Accounting for Banks and non-Bank Financial Institutions Part 1 – which deals
with income and loss recognition on loans and advances by banks is largely based on the previous
version of the prudential guidelines

SAS 10 (para. 51c) only permits the use of regulations issued by regulatory authorities (in this case
CBN), where the regulation stipulates shorter periods for recognizing non-performing loans or higher
percentages for determining provisions for non-performing loans

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Differences in loss recognition requirements
between SAS 10 and the revised CBN prudential
guidelines
The differences in loan loss recognition between the revised prudential guidelines and SAS 10 relates
mostly to specialised loans which are not recognised by SAS 10. However, there are other areas of
differences

The revised prudential guidelines generally prescribes longer periods and lower percentages in
recognising and determining provisions respectively for non-performing specialised loans

Other areas of conflict include requirement for general provisions on performing loans, collateral
adjustments for loans classified as lost, and treatment of restructured agricultural

The following pages highlights these differences

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 Differences in loss recognition requirements
between SAS 10 and the revised CBN prudential
guidelines
Topic Per SAS 10 Per revised prudential guidelines
Classes of Loans & advances are categorised Loans are classified based on performance and
loans primarily into performing and non- into specialised and non-specialised with
performing differing loan loss recognition and measurement
criteria
Disclosure No specific requirement for These are:
requirement specialised loans •Total loans outstanding under each specialised
for loan and provision against the loan;
specialised •Non-performing loans by loan type and its
loans percentage to total specialised loans, and
movement of specific provision under each
category;
•The non-performing loans should be classified
into:
i. Watchlist
ii. Substandard
iii. Doubtful
iv. Very doubtful
v. Lost
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 Differences in loss recognition requirements
between SAS 10 and the revised CBN prudential
guidelines
Topic Per SAS 10 Per revised prudential guidelines
Classification Non-performing loans are not Non-performing loans are
of non- classified into bands. categorised/classified.
performing
loans However, loan loss criteria are •Non-performing, non-speacilised loans are
specified for loans on which: classified into:
• interest is overdue by more than 90 i. Substandard (overdue>90days);
days; and ii. Doubtful (180-360days); and
•principal and/or interest is over due iii. Lost (>360days).
by more than 120, 180 and 360 days
respectively •Non-performing specialised loans are classified
into
i. Watchlist;
ii. Substandard;
iii. Doubtful;
iv. Very doubtful; and
v. Lost.

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 Differences in loss recognition requirements
between SAS 10 and the revised CBN prudential
guidelines
Topic Per SAS 10 Per revised prudential guidelines
Margin Margin loans are not treated Margin facilities should be marked to market on
facilities differently from other types of loans. a daily basis. The excess of loan balance over
Recognition of credit losses is based the market value should be provisioned and
on the number of days by which charged to the profit and loss account
payments are overdue

Collateral Collateral adjustments limited to 50% Haircuts specified for different types of
adjustments of the estimated net realisable value collateral. Haircut adjustment is available for
for loans (NRV) of the security, provided that only 1 year
classified as principal repayment is not overdue by
lost more than 2 years However there seem to be some inconsistency
within the guidelines as paragraph 12.2b(2)
requires 100% provision on non-specialised
loans classified as lost irrespective of NRV of
security, while paragraph 12.2b(4) allows for
collateral adjustment

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 Differences in loss recognition requirements
between SAS 10 and the revised CBN prudential
guidelines
Topic Per SAS 10 Per revised prudential guidelines
Restructured There is no specific treatment for Where natural calamities impair the repayment
agricultural restructured agricultural loans. capacity of agricultural borrowers, agricultural
loans loans to the borrowers can be resheduled and
classified as However, provisions for non- the resheduled loans immediately treated as
lost performing revolving and overdraft performing loans
loans should continue until it is clear
the rescheduling is working
Facilities There are no specific requirements on Loans without approval that are not regularised
without provisioning for loans without approval within 90 days are required to be classified in
approval accordance with the requirements of non-
specialised loans

General Minimum of 1% general provision General provisioning guidelines to be issued by

provisions required for loans and advances not CBN on ad-hoc basis.
specifically provided for
For financial year that ended in 2010, the CBN
issued a circular suspending the requirement for
general provision
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 Differences in loss recognition requirements
between SAS 10 and the revised CBN prudential
guidelines
Topic Number Per SAS 10 Per revised prudential guidelines
of days
payment’
s overdue
Loss >90 days Suspend interest when overdue by Suspend interest
recognition more than 90 days (or such shorter
criteria for period specified by regulatory
specialised authorities)
loans
90 – 180 Full provision for principal repayments 25% provision for total outstanding
days overdue by more than 120 days (or balance required for only SME and
such shorter period specified by Agriculture financing loans where
regulatory authorities). No provision interest/principal is overdue by 90
required for balance not due. days to1 year.
However, old prudential guidelines
require 10% for balance not due No provision required for other
categories of specialised loans

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 Differences in loss recognition requirements
between SAS 10 and the revised CBN prudential
guidelines
Topic Number of Per SAS 10 Per revised prudential guidelines
days
payment’s
overdue
Loss 180 - 360 When principal repayments are Provision required for all categories
recognition days overdue for between 180 - 360 days of specialised loans does not exceed
criteria for (or such shorter period specified by 25% of total outstanding balance
specialised regulatory authorities), full provision is
loans made for overdue amount and 50%
provision required for principal not
due
> 360 days When principal repayments are Provision rate ranges between 25%
overdue for over 360 days (or such and 100% depending on the type of
shorter period specified by regulatory the specialised loan
authorities), full provision is made for
overdue amount and 100% provision
for principal not due

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 Differences in loss recognition requirements
between SAS 10 and the revised CBN prudential
guidelines
Topic Number of Per SAS 10 Per revised prudential guidelines
days
payment’s
overdue
Loss > 2 years 100% provision for outstanding Required provision ranges between
recognition balance irrespective of security held 50% and 100% of total outstanding
criteria for balance depending on the category
specialised of the specialised loan
loans
Where collateral adjustment is taken,
the adjustment is available for a
maximum of 1 year

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Way forward for 31 Dec 2011
The revised prudential guidelines is not as stringent as SAS 10 with respect to the following areas:

1. General provisioning for performing loans

2. Loan loss recognition criteria for specialised loans
3. Collateral adjustment for loans classified as lost
4. Restructured agricultural loans

Paragraph 51© of SAS 10 forms the basis for which the old prudential guidelines became an integral
part of SAS 10.

As the application of the requirements of the revised prudential guidelines in the 4 aspects mentioned
above will result in financial statements that are non-compliant with paragraph 51© of SAS 10, the
financial statements cannot be deemed to have complied with Nigerian GAAP.

It is pertinent to note that the Nigerian Accounting Standards Board is the only recognized body in
Nigeria responsible for developing and issuing accounting standards.

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Way forward for 31 Dec 2011

Open to discussion!

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Post Dec 2011 - Impact of IFRS on loan loss
provisioning
Little or no similarity exists between the recognition and measurement criteria of loan loss provisions
per Nigerian GAAP (SAS and prudential guidelines) and IFRS. Highlights of the differences between
IFRS and Nigerian GAAP include:

Topic SAS/CBN Prudential guidelines IFRS

Identifying Specifies a predetermined policy for No prescriptive requirement for identifying impaired
impaired loans identifing impaired loans based on financial assets (loans). However, an entity is
number of days outstanding and the required to assess at each balance sheet date
nature of the loan whether there is any objective evidence of
impairment. An impairment can only arise as a
result of one or more events that occurred after the
initial recognition of the asset.

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Post Dec 2011 - Impact of IFRS on loan loss
provisioning
Topic SAS/CBN Prudential guidelines IFRS

Measurement of Specifies the amount of provision The amount of impairment loss is measured as
loan loss required based on the impairment the difference between the asset's carrying amount
provisions classification of the loan, i.e. 25%, and the present value of estimated cash flows
50%, 75% or 100% of the discounted at the asset's original effective interest
outstanding amount, with provisions rate.
for collateral adjustments A collective impairment is required for:
a) individually insignificant assets where an
impairment indicator was identified; and b) all
other assets where no indicator was identified
(IBNR)
Interest in Requires that interest be No requirement to suspend interest.
suspense suspended on non-performing
loans

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Post Dec 2011 - Impact of IFRS on loan loss
provisioning
Topic SAS/CBN Prudential guidelines IFRS

Intervention of CBN can mandate banks to make Provision for impairment loss is based only on
regulators additional provisions based on objective evidence of impairment and the
CBN's analysis of the bank's difference between the carrying amount and the
portfolio estimated cash flows
Disclosures Disclosure requirements are similar Extensive disclosures on credit risks required such
to that of IFRS in certain respects as maximum amount of exposure, description of
such as movement in loan loss collateral, credit quality of financial assets that are
provisions, however, they are not as neither past due nor impaired, and credit quality of
extensive financial assets whose terms have been
renegotiated

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Post Dec 2011 - Impact of IFRS on loan loss
provisioning
Section 12.4 of the CBN prudential guideline prescribes the following treatment for the difference
between loan loss provisions determined per IFRS and per the CBN prudential guidelines:

a) Where prudential provisions is greater than IFRS provisions; transfer the difference from the
general reserve to a non-distributable regulatory reserve

b) Where prudential provisions is less than IFRS provisions; the excess charges resulting should be
transferred from the regulatory reserve account to the general reserve to the extent of the non-
distributable reserve previously recognized.

This treatment is similar to the practice in other African countries that have adopted IFRS such as
Ghana, Uganda, Tanzania, and Zambia.

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Post Dec 2011 - Impact of IFRS on loan loss
provisioning
Extracts of accounting policies and notes on differences between loan loss provisions under prudential
guidelines and under IFRS:

A Commercial Bank in Zambia

Note on general banking reserve:

“The balance in the general banking reserve represents the excess of impairment provisions
determined in accordance with the Central Bank Prudential Regulations over the impairment
provisions recognised in accordance with International Financial Reporting Standards (IFRS ). The
reserve is not distributable.”

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Post Dec 2011 - Impact of IFRS on loan loss
provisioning
Extracts of accounting policies and notes:

A Bank in Uganda

Accounting policy on statutory reserve:

“IAS 39 requires the bank to recognise an impairment loss when there is objective evidence that loans
and advances are impaired. However, BOU prudential guidelines require the bank to set aside
amounts for impairment losses on loans and advances in addition to those losses that have been
recognised under IAS 39. Any such amounts set aside represent appropriations of retained earnings
and not expenses in determining profit or loss. These amounts are dealt with in the statutory
reserve.”

Note on statutory reserve:

“The statutory reserve represents an appropriation from retained earnings to comply with Bank of
Uganda's prudential guidelines on impairment of loans and advances. It represents the excess of loan
provision as computed in accordance with Bank of Uganda prudential guidelines over the
impairment of loans and advances arrived at in accordance with IAS 39. The revaluation surplus
and statutory reserve are not distributable.”
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Post Dec 2011 - Impact of IFRS on loan loss
provisioning
Extracts of accounting policies and notes:

A Bank in Ghana

Note on regulatory credit risk reserve:

“Regulatory credit risk reserve represents the excess of loan impairment provision determined under
the Bank of Ghana guidelines over the provisions for loan impairment.”

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Thank You

© 2011 PwC. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers
Chartered Accountants ,which is a member firm of PricewaterhouseCoopers International
Limited, each member firm of which is a separate legal entity.