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Jakarta Post

Bracing for full impact of IFRS 9

Compliance with new accounting standards

Matthias Coessens (The Jakarta Post)
Singapore
Tue, June 14, 2016

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Bracing for full impact of IFRS 9

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ompliance with new accounting standards. Most bankers don’t want to deal with such dry issues. They would rather strategize how to develop new markets.

And in Indonesia, Southeast Asia’s largest economy, that’s enough to chew on. But with International Financial Reporting Standard 9 (IFRS 9), it is an issue they cannot run away from.

On May 25, 2016, Indonesia agreed to achieve full convergence with the IFRS standards. The Trustees of the IFRS Foundation, the Indonesia Financial Services Authority (OJK) and the Institute of Indonesia Chartered Accountants (IAI) agreed to full convergence, reaffirming Indonesia’s commitment to the G20-endorsed goal of a single set of global accounting standards.

They also highlighted the importance of IFRS standards in achieving the ASEAN Economic Community Blueprint 2025 by increasing ASEAN’s attraction to investors through the creation of an open, transparent and predictable investment regime.

With this headline announcement, a topic that would usually put bankers to sleep made them wide awake. In fact, IFRS 9 and its implications were on everyone’s minds at a financial, risk and compliance conference in Jakarta I spoke at in end-May 2016.

Bankers wanted to know just what this new standard is and most importantly — How’s it going to impact their bank? In a word: the bottom line.

In an Asia-Pacific survey Wolters Kluwer just did in May 2016 with 700 participants, many of them estimate that with IFRS 9, they will have to increase provisions substantially, and on average, by up to 40 percent.
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Finance managers will have to move from an incurred loss model ... to an expected credit loss model.

The new rules under IFRS 9, promulgated by the International Accounting Standards Board (IASB), will bring change to three main areas — classification and measurement of financial instruments, hedge accounting, where rules here will be more in line with general risk management practices, and impairment. The latter is where the main challenge lies and where the bottom line will be ultimately affected.

Why is this so? With new impairment rules, finance managers will have to move from an incurred loss model where provisions were only recognized when there were problems with a contract (i.e. losses) — to an expected credit loss model, where all contracts will have provisions from initial recognition.

This new model has to take into account a number of forward-looking scenarios, which have to be developed by various departments working in tandem.

To manage this, banks will need to bring together finance, risk and even IT departments and increase communication and collaboration between them as there will be extensive disclosure requirements.

Banks also need to revisit their current systems to see if these are fit for purpose and set up proper disclosure frameworks.

Banks should be doing a data gap assessment at this moment and look to implement systems so ‘parallel runs’ can be performed.

A “parallel run” is where IFRS 9 provisions are run alongside usually IAS 39 (the old accounting standard) rules and is recommended in order to assess the likely impact on the balance sheet and fine-tune credit loss models before actual rollout.

Because IFRS 9 changes to classification rules and such impairment provisioning will substantially impact financial institutions’ income statements, regular and timely communication on its implementation is essential to ensure boards, markets, shareholders and other stakeholders are not surprised by the post-IFRS 9 numbers.

How much time do Indonesian banks have?

Bank Indonesia (BI) targets Jan. 1, 2019 for implementation. That’s just about two and a half years away but the need to do parallel runs to facilitate a smooth transition crimps the amount of time banks actually have. From our discussions with Indonesian banks, we see that they are allocating bigger budgets for IFRS9 implementation as deadlines loom, especially within the Tier II and Tier III segment.

For these banks, the introduction of expected credit losses provisioning has the biggest impact, as they are not able to rely on the Basel Internal Ratings-Based (IRB) credit models as basis for the expected credit loss models, and thus may not have appropriate systems and in-house expertise available.

If it’s any consolation, a recent Wolters Kluwer survey of Asia-Pacific financial institutions found that 66 percent of respondents had not even begun the IFRS 9 implementation process.

IFRS 9 is indeed a major milestone that was developed to lower global financial risk in the aftermath of the 2008 global financial crisis. With the right preparations, banks can certainly achieve compliance and even benefit from the greater insight into their business.
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The writer is vice-president, finance and performance for Asia Pacific at information services provider Wolters Kluwer, Singapore. The views expressed are his own.

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