AS­SESS­ING THE IM­PACT OF THE IFRS 9 AC­COUNT­ING STAN­DARD

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Changes in ac­count­ing stan­dards seem to be the talk of the town, es­pe­cially those for fi­nan­cial in­stru­ments un­der IFRS 9, which is be­ing in­tro­duced many years after the broader IAS 39 took ef­fect. The committee in charge of the stan­dards in­tro­duced IFRS 9 to address con­cerns aris­ing from the im­ple­men­ta­tion of IAS 39. It will take ef­fect on Jan 1, 2018 in the in­ter­na­tional mar­ket and one year later in Thai­land.

From Jan 1, 2019 all listed com­pa­nies and pub­lic in­ter­est en­ti­ties in Thai­land will need to ap­ply the new ac­count­ing stan­dard called TFRS 9, Fi­nan­cial In­stru­ments. It clar­i­fies the clas­si­fi­ca­tion and mea­sure­ment of fi­nan­cial in­stru­ments such as loans and re­ceiv­ables, as well as in­vest­ments. As well, a new im­pair­ment model will re­sult in the ear­lier recog­ni­tion of pro­vi­sions for loan losses, in­clud­ing “day one” pro­vi­sion­ing for im­pair­ment in some cases.

The changes will have a po­ten­tially sig­nif­i­cant im­pact on an or­gan­i­sa­tion car­ry­ing fi­nan­cial as­sets. Banks in gen­eral will bear greater im­pact. Management of banks with fi­nan­cial in­stru­ments that have a low credit risk from the date of ini­tial recog­ni­tion or at the re­port­ing date (good loans, gov­ern­ment bonds, or state en­ter­prise bonds) must de­ter­mine ex­pected credit losses from any de­fault events ex­pected within the 12 months from the re­port­ing date.

If there is a sig­nif­i­cant in­crease in credit risk since the ini­tial recog­ni­tion date, the life­time ex­pected credit loss, which is the pos­si­ble de­fault event spread over the ex­pected life of the fi­nan­cial in­stru­ment, needs to be taken into con­sid­er­a­tion when management de­ter­mines suf­fi­cient im­pair­ment losses.

There are fi­nan­cial, busi­ness and op­er­a­tional im­pacts from the ap­pli­ca­tion of this stan­dard. There is high po­ten­tial for an in­crease, rather than a de­crease, in loan-loss pro­vi­sions, and net in­come will be re­duced, since pro­vi­sions need to be set aside from ini­tial recog­ni­tion of loans granted.

Be­cause of the high pos­si­bil­ity of day one pro­vi­sion­ing, the cost of grant­ing new loans needs to be taken into ac­count as part of pric­ing strat­egy. If the lender doesn’t in­crease the in­ter­est rate charged to the cus­tomer, the net in­ter­est mar­gin will def­i­nitely be di­min­ished. Loan bal­ances that later on have a sig­nif­i­cant in­crease in credit risk will need higher pro­vi­sions.

Deal­ing with this risk will re­quire in­vest­ment in more so­phis­ti­cated IT soft­ware. The system should be able to com­pare the credit risk of each loan be­tween two points in time (ini­tial recog­ni­tion ver­sus fi­nan­cial pe­riod). The pro­vi­sion should be set up based on this pre­dic­tive in­for­ma­tion.

Data management also will be­come cru­cial. To quan­tify the ap­pro­pri­ate amount of pro­vi­sions and to pre­pare suf­fi­cient dis­clo­sures, fi­nan­cial in­sti­tu­tions need to as­sess the avail­abil­ity of qual­ity data. This is be­cause the same data will be used in dif­fer­ent ways to re­spond to the re­quire­ments of dif­fer­ent stake­hold­ers. One set of data will be utilised to pre­pare not only proper ac­count­ing so­lu­tions but also suf­fi­cient in­for­ma­tion to sup­port tax com­pu­ta­tion and to re­spond to cus­tomers’ var­i­ous queries in­clud­ing state­ments.

As well, banks will need an op­ti­mum so­lu­tion for cor­po­rate in­come tax and spe­cific busi­ness tax pay­ment. Cur­rent in­ter­pre­ta­tions hold that pro­vi­sions based on Bank of Thai­land re­quire­ments can be used as tax-de­ductible ex­penses. Un­der IFRS 9, pro­vi­sions com­pli­ant with the stan­dard must not de­vi­ate from central bank re­quire­ments and as such, the same amount will be a tax-de­ductible ex­pense ac­cepted by the Rev­enue Depart­ment.

The changes will also af­fect pro­cesses and pro­ce­dures, so good gov­er­nance is needed. Ex­ec­u­tives need to de­cide on ac­count­ing poli­cies and also how the in­sti­tu­tion can prac­ti­cally im­ple­ment the pro­vi­sions. The on­go­ing process of re­port­ing and mon­i­tor­ing fi­nan­cial per­for­mance and pro­vi­sions also needs to be con­sid­ered, and the way management re­views the fi­nan­cial im­pact and mon­i­tors sig­nif­i­cant in­creases in credit risk should be ad­dressed.

Com­ply­ing with IFRS 9 is a long jour­ney, and both management and ac­count­ing staff need to be ready to hit the ground run­ning smoothly. Management un­der­stand­ing of IFRS 9 re­quire­ments is an es­sen­tial pre­req­ui­site for the busi­ness model de­sign of core prod­ucts. Ac­count­ing treat­ments un­der IFRS 9 will re­flect and mir­ror these busi­ness mod­els.

Once management buys in, cas­cad­ing the ac­cep­tance of IFRS 9 to mid­dle management and staff will be much eas­ier. Ul­ti­mately, de­ci­sions on the busi­ness model will af­fect fi­nan­cial per­for­mance, so col­lab­o­ra­tion be­tween dif­fer­ent de­part­ments such as ac­count­ing and risk is es­sen­tial.

In summary, im­ple­ment­ing IFRS 9 will not be easy as it will in­volve all stake­hold­ers from the out­set of strate­gic think­ing about the busi­ness model, to the search for op­er­a­tionally vi­able so­lu­tions, es­pe­cially tech­nol­ogy sup­port and doc­u­men­ta­tion. Un­der­stand­ing the stan­dard and plan­ning to work to­gether through­out the in­sti­tu­tion, with or with­out con­sul­tants, is es­sen­tial to en­sur­ing your or­gan­i­sa­tion will be ready for Jan 1, 2019.

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