Business

IFRS 9 ’ll make it difficult for banks to hide toxic assets – Expert

Published

8 years ago

April 2, 2018

Leading accountant and Principal Partner, ROAC Chartered Accountants, Mr. Olugbenga Akinyemi, has said that the current accounting regime of the International Financial Reporting Standard 9 (IFRS 9), will make it difficult for banks to hide toxic assets in their books.

Going down memory lane, the tax advisory expert recalled that “The CBN through circulars dated 20th December 2016 and 6th September 2017 issued guidance to banks and discount houses on the implementation of the IFRS 9”.

“The first circular featured supervisory expectations, clarification of regulatory expectation in implementation and information to be provided by banks on their IFRS 9 implementation projects. The second circular was issued to communicate the shift in date in the parallel run of the IAS 39 and the IFRS 9 system requirements to enable banks conclude the deployment of their newly developed ECL Models and implementation of the IFRS 9 accounting policies for classification and measurement as well as impairment calculations.

According to him, “The IFRS 9-Financial Instruments seeks to replace the IAS 39 (Financial Instruments: recognition and measurement). This standard has been issued since July 2014 but becomes effective for mandatory adoption by banks and other entities from 1st January 2018. The IFRS 9 introduces a fundamental shift in how loan losses are treated, with the effect that they will be recognised earlier than under the previous IAS 39 approach to the treatment of credit impairments”.

He said “Banks will be required to incorporate forward looking assessments in their estimates of credit losses using the Expected Credit Loss models rather than Incurred Loss models. There is also a new classification approach for financial instruments as well as changes to hedge accounting. The nature of this standard also means that the accounting processes and systems of banks are subject to drastic changes or complete overhaul as it introduces a futuristic approach to financial instruments measurement. In addition to the requirement for improved analysis of the quality of borrowers, the new approach will involve macro-economic factors which require a lot of subjectivity.

While noting that “These changes will require banks to develop capacity and attract new skills to the industry,” Akinremi averred that “The adoption of this standard is expected to impact many items on any bank’s balance sheet irrespective of size. However, banks that possess strengthened internal processes and systems before now may not be impacted significantly. It is expected that provisioning will increase generally, more so, for performing loans that have deteriorated in credit quality. Increase in provision would affect capital and could potentially impact covenants in external financing agreements”.