Companies, and banks in particular, need to start preparing now for the impact of a new financial reporting standard
Are youa banker and involved in key decision making or financial reporting? Then you must be aware that in July 2014 the International Accounting Standards Board (IASB) issued the final version of IFRS 9 Financial Instruments, which replaces IAS 39. This new standard has an effective date of 1 January 2018, with an early adoption permitted.
With less than three years to the effective date of this new standard, management teams need to assess its impact on their companies – and the impact will definitely be significant for banks. Banks need to closely examine the effect of IFRS 9 not only on their financial statements but also on their capital adequacy, IT systems, people, taxes, processes and product design among others. The new standard also requires retrospective application on classification and measurement if certain conditions are met, irrespective of the entity’s business model in prior periods. Consequently, management teams must prepare ahead in order to comply.
IFRS 9 introduces a new model of classifying financial assets, which is driven by cashflow characteristics and the business model in which an asset is held. It also introduces a single impairment model that will apply to all financial instruments, which is a departure from the previous accounting requirements. Classification determines how financial assets and liabilities are accounted for in the financial statements. In addition, IFRS 9 introduces a new expected-loss impairment model that will require more timely recognition of expected credit losses. The new standard requires entities to account for expected credit losses when financial instruments are first recognised and to timely recognise full lifetime expected losses. This is likely to increase the levels of impairment for banks.
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