ICAEW has published a briefing on the new accounting standard, IFRS 9, which is to be implemented on 1 January 2018. The new rules will mean banks must show their expected losses earlier than in the past.
Zsuzsanna Schiff, Manager, Auditing and Reporting, said:
One of the major outcomes of the financial crisis was a fundamental review of how banks account for loan losses. The model used prior to the crisis was heavily criticised for providing ‘too little too late’, and ultimately allowing a credit bubble to develop and an over-optimistic assessment of bank’s reported profits.
IFRS 9 is a more forward-looking approach. It will mean banks will be forced to estimate credit losses from the date the loan is taken out, and over the course of its lifetime. However, this model is complex and means that banks must look into the future and estimate the impact of possible economic events – and it is just that, an estimate.
The element of forecasting could potentially lead to unpredictable results, as estimates are highly subjective. This will also make comparisons between banks difficult, which analysts may find problematic. Providing enough information on year-on-year changes, assumptions and projections will be vital to allow users to compare banks
The application of IFRS 9 will substantially increase the amount banks set aside for bad loans, and will also make their results more unpredictable as economic predictions are made. The key challenges banks will face include difficulties predicting the future, complexities of calculations, and defining ‘significant’ changes in credit risk.
The full briefing can be found here: http://www.icaew.com/en/technical/financial-services/inspiring-confidence-in-financial-services