The amount of reserves that is provisioned by the financial institution to cover the potential loss on the loan. Monetary type is represented as a naturally positive integer number of cents/pence.

FRS 102 “The Financial Reporting Standard Applicable in the UK and Republic of Ireland” (Provisions and Contingencies):

“A provision is recognised only when a past event has created a present obligation at the reporting date, an outflow of economic benefits is probable and the amount of the obligation can be estimated reliably. An obligation arises when an entity has no realistic alternative to settle the obligation and can be a contractual, legal or constructive obligation. This excludes obligations that will arise from future actions, even if they are contractual, no matter how likely they are to occur.”

“Provisions are measured at the best estimate of the amount required to settle the obligation at the reporting date and should take into account the time value of money if it is material.”

FCA: Forbearance and Impairment Provisions – ‘Mortgages’: Good Practice:

All potential impairment indicators are identified, reported and monitored at all customer contact points across the firm.

All potential impairment indicators, forbearance provided, volumes of live accounts and their associated loss risks are monitored, fully reported through management and board committee structures, and incorporated into all decision-making processes of the firm where loss risk is evaluated or used (eg provisions, capital, credit decisions, product pricing, strategy and forecasting, and planning). This assessment considers the forbearance actions taken and the type and level of customer difficulty.

This reporting and loss risk assessment is segmented by type of potential impairment indicator, whether impairment exists and the severity of customer impairment, type of forbearance provided, time since last potential impairment indicator and key loss characteristics eg LTV. Additionally, further segmentation is considered where a difference in the performance or loss risks is evident. For example:

  • re-defaulters;
  • multiple forbearance applied;
  • duration of potential financial stress period or severity;
  • period since account recovery or last potential impairment indicator;
  • non-sustainable account;
  • use of limits activity, accounts at risk of moving into a non-sustainable position due to activity;
  • another account held by the customer shows potential impairment; and
  • loans past maturity.

The performance and loss risks of a customer where a potential impairment indicator has taken place are considered within the whole up-to-date book only from the point when the loss risks and performance of this mortgage can be shown to be the same as the whole.

The firm’s reporting, provisions and capital assessment are undertaken in full awareness of the contract shortfall of customers and thus the level of severity where financial stress exists or a potential impairment indicator has taken place.