Industry Insight
Two new ‘big-bang’ global changes are coming to the UAE in 2018. First, is the implementation of Basel III regulatory norms, which will drastically alter the way banks do business. But, a second and a more momentous change, is in the offing from January 2018 — the IFRS 9 accounting standard.
The International Accounting Standards Board (IASB) issued the final version of IFRS 9-Financial Instruments which is all set to replace the older IAS 39. In the UAE, IFRS Standards are required both by the UAE Commercial Companies Law No 2 of 2015 and by the listing rules of Nasdaq Dubai, Dubai Financial Services Authority, Dubai Financial Market PJSC, and the Abu Dhabi Securities Exchange.
The new accounting standards will have farreaching consequences for the entire banking sector, and has forced several banks to prepare for expected credit loss requirements whilst acting to comply to all of its requirements.
Altering the system
The current system, IAS 39, which will be replaced by IFRS9, is a critical accounting standard, prescribing rules for recognising and measuring financial assets, financial liabilities, derivatives and some other non-financial contracts.
After the 2007-08 crisis, which heavily impacted the world, global leaders signaled a need for a move into a more forward looking accounting standard that would enable banks to identify credit losses in advance. That need became more urgent – and thus the IASB decided to replace IAS 39 in its entirety. The new accounting standard, IFRS9, essentially is a move by regulators to avoid repetition of events in the last financial crisis. It will mean that the management of banks can now make more informed judgements than was allowed earlier. could lose his job, or have a serious ailment. This meant that banks would have to immediately react and provide for the loan loss. It also meant that no credit loss was being recognised until the actual credit event took place. However, with the new IFRS9 model, banks will have to anticipate and provide for such losses far in advance.
The impact of IFRS9
As a result, banks will have immediately higher loan loss provisions once the new standard comes into effect. This is thus expected to impact banks’ profits, and in turn capital adequacy ratios, as banks may need additional capital to provide a finance, and will have to factor this into their decision making. The writer is senior trainer at Emirates Institute for Banking and Financial Studies. Views expressed are his own and do not reflect the newspaper’s policy.