ASSESSING THE IMPACT OF THE IFRS 9 ACCOUNTING STANDARD
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.