The IFRS Roadmap in Vietnam was officially announced in Decision No.345/QD-BTC on 16 March 2020 by the Ministry of Finance (MoF), a year after introduction of the draft version. Against the mandate by the MoF and economic distress caused by COVID-19 outbreak, KPMG now view the application of IFRS to be more challenging than anticipated as banks in Vietnam plan forward to embrace IFRS 9.
IFRS 9 represents a new era of expected credit loss provisioning. The global financial crisis (GFC) of 2007-9 highlighted the systemic costs of delayed recognition of credit losses by banks and other lenders. These delays ultimately resulted in the recognition of credit losses that were widely regarded as “too little, too late”. Following the crisis, the G20 leaders, investors, regulatory bodies and prudential authorities called for action by accounting standard setters to improve loan-loss impairment standards and practices.
After intensive deliberations and consultations, the International Accounting Standards Board (IASB) ultimately responded to the G20’s call to action, and in Jul 2014 published IFRS 9 as the new standard for accounting for financial instruments. The most significant innovation is the introduction of the Expected Credit Loss (ECL) impairment model when recognizing loss allowances, which aims to promote earlier recognition of credit risk.
The new impairment approach now requires banks to recognize expected credit loss (ECL) and to update the amount of ECL recognized at each reporting date to reflect changes in the credit risk of financial assets. This new approach is forward-looking and eliminate the threshold for the recognition of credit losses, so that it is no longer necessary for a ‘trigger event’ to have occurred before credit losses are reported. Apart from historical and current information – for the first time – forecasted macroeconomic information such as GDP growth rate, unemployment %, and housing pricing index must be considered when generating a probability weighted.
Most stakeholders believe that IFRS 9 will have a significant impact on loan-loss allowance, earnings, and capital given that ECL will be measured using macroeconomic forecasts that are inherently uncertain. In addition, IFRS 9 introduces the concept of “Staging”. When a borrower experiences a material deterioration in credit quality (but continues to perform), and an associated financial asset transitions from “Stage 1” to “Stage 2”, loan-loss allowance increases from 12-month to lifetime expected loss.
Based on KPMG implementation experience on IFRS 9, commonly observed business impacts include:
Given the uncertainties associated with (first-time) implementation of the new and far more complex ECL impairment models. we recommend banks to plan now and prepare themselves for any negative impact to business models and stability of bank’s operation. A high-quality implementation plan should cover:
Based on observed implementation journey from successful adopters, the technology for IFRS 9 has had a variety of key impacts on the way that banks operate, in three main areas: data, computation and languages / modelling environment.
Most banks have had to upgrade their calculation environments; some may even have had to run different calculation environments in parallel. In addition, banks have had to carry out many stress tests, especially what-if scenarios to understand their ECL impairment model sensitivities.
Finally, as new ECL impairment models have become more demanding, there has been rapid growth in the use of new computing languages (such as Python and R) or an expansion in the use of traditional mathematical languages as MATLAB and SAS. To develop an effective, lasting technology solution, banks must repurpose their existing tools, extend their standardized features, make use of new flexible more open-source computing languages and develop a clear and well-articulated data strategy, which is essential if they want flexible, scalable models. Banks also need to take a holistic view of the credit lifecycle, and view these developments as part a deep sea-change in risk and finance, one that will affect the way they operate for decades to come