According to the Polish Accounting Standards, loans are measured after initial recognition at amortized cost using the effective interest rate (Ministry of Finance Regulation on specific accounting principles for banks of 1 September 2010 as amended: § 2 point 19 and 20 and § 36 para. 1 point 2). Amortized cost of financial assets or financial liabilities is the amount, at which a financial asset or financial liability was first entered into the accounting books, reduced by repayment of receivables, appropriately adjusted by the accumulated amount of the discounted difference between the initial value of the component and its value at maturity or due date, calculated using the effective interest rate method, reduced by impairment losses and specific provisions.

According to the Polish Accounting Standards, interest income from impaired loans to be recognized in the Profit and Loss Account, is accounted on the loans gross amount. Simultaneously, specific provisions and impairment losses for impaired loans, including interest, are expensed in the Profit and Loss Account (§ 8 of the Ministry of Finance Regulation on the principles of creating provisions for risk related to the activities of banks).

At the same time, according to the Polish Accounting Standards:

• loans classified in the watch category are subject to 1,5% provision,
• there are no provisions for standard loans (except for loans for individuals which are subject to 1,5% provision).

Referring to the EBA Q&A 2017_3126 in particular:

“For institutions applying accounting standards established by Directive 86/635/EEC, Article 316(1) of the Regulation (EU) No 575/2013 (CRR) determines the basis for the calculation of the Relevant Indicator (RI). Article 316(2) specifies that when institutions apply different accounting standards the relevant indicator is determined on the basis of data that best reflect the definition set out in Article 316(1).

The specification in Article 316(1)(a) that the relevant indicator should be calculated ‘before the deduction of any provisions…’ should be understood to refer to credit risk adjustments as defined in Article 4(95) CRR.

It should be noted that: a) own fund requirements for operational risk address the risk of income loss due to operational risk events; and b) in general the amount of income related to certain activities that can be lost is the amount of income recognized in accounting terms.

Regarding the specific question on how impaired loans should be treated in the calculation of the relevant indicator (RI), it should be highlighted that these assets can generate the recognition of interest revenue and, as such, this income should still be considered in the calculation of the RI. Under IFRS 9 (replacing IAS 39), the amount of interest revenue to be recognized for impaired loans (classified in Stage 3) is calculated based on the amortized cost (i.e., the gross carrying amount adjusted for the loss allowance) or, in other words, on a net basis. In practice, this means that the amount of income that can be potentially lost is the amount of interest recognized on a net basis and, therefore, this net amount of interest should be the one considered in the calculation of the RI. (…)

As a general rule, for the purposes of calculating the RI in the context of own funds requirements for operational risk under Article 316, the interest revenue amount should correspond to the amount recognized under the respective applicable accounting framework.“,

financial institution applying the Polish Accounting Standards considers the deduction of results on provision and impairment losses for interest on impaired loans, which are expensed in the Profit and Loss Account, from basis for RI, to be a correct treatment for calculation of the operational risk capital requirements under BIA.

As the institution indicates, according to EBA Q&A 2017_3126, the amount of income, that can be lost under operational risk and should be included in RI, is accounted on the loans net amount. The Polish Accounting Standards require to include interest income on gross loan amount and then to adjust the result by the amount of credit risk. Regarding interest the indicated adjustment takes the form of a specific provision or impairment loss, which according to § 8 of the Ministry of Finance Regulation on the principles of creating provisions for risk related to the activities of banks, should be recognized in costs, i.e. expensed in Profit and Loss Account. From the accounting result point of view the difference between the IFRS9 and the Polish Accounting Standards has a presentation character: IFRS 9 reduces revenue and the Polish Accounting Standards increase costs.

Taking into account the above, the bank argues that for the purpose of RI calculation institutions applying IFRS9 would be favored over institutions applying the Polish Accounting Standards if the latter would have to include the interest income on loan gross amount before the deduction of provisions for interest from impaired loans.