Beyond banks, the new financial benchmark means detailed adjustments that will collectively alter how sectors interact, writes Nuntawun Polkuamdee
International Financial Reporting Standard 9 (IFRS 9) will have an impact on banks' provisions and financial statements and could jeopardize macroeconomic growth momentum, as the rise in bank provisions might make it harder for small and medium-sized enterprises (SMEs) to obtain loans.
IFRS 9, expected to replace International Accounting Standard 39 at the start of next year, was announced by the International Accounting Standards Board in response to the 2008 global financial crisis.
In July 2014, the board finalized the impairment methodology for financial assets and commitments. The mandatory effective date for implementation is Jan 1, 2018, with many countries already adopting the practice, especially in Europe.
Thai financial institutions are expected to increase provisions significantly, which could affect operating results and act as a headwind against the recovering economy, said Jakkrit Parapuntakul, president of the Federation of Accounting Professions (FAP).
As the domestic financial sector needs more time to adjust to the stringent regulations, Thailand is likely to adopt IFRS 9 on Jan 1, 2019.
PROFOUND CHANGES
IFRS 9 introduces changes across three areas with profound implications for financial institutions. These include the classification and measurement of financial assets; the introduction of a new expected loss impairment framework; and the overhaul of hedge accounting models to better align with risk management activities.
Jakkrit said Thailand's accounting industry is preparing for the impact from IFRS 9. Apart from banks, other businesses poised to be shaken by the new accounting standard include leasing, non-bank and listed companies.
The FAP has surmised five key points for banks and other businesses preparing for IFRS 9.
First and foremost, businesses will have to arrange financial instruments to reflect business operations and strategies. The approach is aimed at equipping management executives with proper financial statements in order to facilitate investment decisions.
Second, the fair value method is used to assess a company's real value and amortize costs by using real interest rate calculations to reflect cash flow valuation throughout a lifetime contract.
Third, IFRS 9 will use a calculation of loss allowance as an evaluation basis for a company's future payment ability. This information is considered an assessment of reasonable loss over time, aiming to help investors foresee clearer risks occurring in financial institutions on possible future losses derived from delays in debt repayment.
Fourth, IFRS 9 practices will compel banks to be more cautious in providing loans based on banks' financial status and borrowers' credit risk and keep a lid on non-performing loans in an economic cycle.
Lastly, IFRS 9 contains clear items on accounting risk protection and corporate risk management.
"The most significant impact of IFRS 9 will be on impairments, as the new standard will be reduced to three stages from the current six stages endorsed by the Bank of Thailand," Jakkrit said. "Banks might consider making term loans shorter than in the past to control loan credit risk."
SMEs will likely have more difficulty obtaining bank loans because of new limitations on credit risk exposure.
Related organizations have to find a solution for SMEs to seek other funding sources, Jakkrit added.
UNDERLYING IMPACTS
Banks will face greater difficulty when doing business, yet they cannot rely heavily on corporate loans and their slimmer margins.
According to a survey conducted abroad, the impact of IFRS 9 could cause medium-sized and small banks to consolidate or liquidate, while banks could set up subsidiaries to buy and manage bad loans, said FAP assistant secretary-general Chaiyuth Angsuwithaya.
Another survey noted that 20-25% of the provision increase stems from IFRS 9 adoption in European banks, but there is no information available for Thai banks yet, Chaiyuth said.
Looming over all this, blockchain and robotics are disrupting traditional banking services and are poised to chip away at banks' net profit in the coming years.
Jakkrit said major banks are ready to adopt IFRS 9 after beefing up provisions over the last few years.
Still, the IFRS 9 impact is unpredictable and smaller banks remain unclear about their adoption readiness.
"We can adopt IFRS 9 next year without any problem, as we have 6-7 months to prepare and most accounting members have been practicing over the past three years," Jakkrit said. "But the impact on bank provisions and SMEs is a key issue that should be considered."
Financial regulators have to evaluate the economic impact and send their assessments to the FAP, he said.
Some countries such as Indonesia have postponed adopting IFRS 9 until 2022 because businesses and financial institutions are not prepared. On the other hand, Japan has applied IFRS 9 but has yet to implement all items.
PREPARATION KEY
S&P Global Ratings has said it does not expect widespread changes to banks' issuer credit ratings as they increase credit-loss provisions in line with the new accounting standard.
Banks reporting under the IFRS are required to apply a more forward-looking approach to provisions for credit losses under IFRS 9.
"The higher credit-loss provisions will be reflected immediately in our capital measures fully for 2018, but we don't expect widespread changes to our ratings on initial adoption, given that it is a change in reporting, not a change in underlying economic activity," Osman Sattar, an S&P Global Ratings credit analyst, said in a report titled "The Adoption of IFRS 9 and Bank Ratings".
In the view of Christopher Saunders, a banking partner at KPMG Thailand, IFRS 9 will take time, effort and money for banks.
"A further issue for banks and investors in banks will be the impact on regulatory capital ratios," Saunders said. "Banks will need to be prepared to respond to questions from analysts and regulators, so factoring this into capital planning activities is key."
Nick Bellamy, head of KPMG Financial Services in Thailand, said insurers must plan for new standards dealing with financial instruments and insurance contracts over the next few years.
"The overall effect cannot be assessed until the insurance standard is finalized over the next 12 months," Bellamy said. "But a significant change in financial reporting for most insurers should be expected."
Piyapong Sangpattarachai, executive director for financial risk management at KPMG Thailand, said other companies should not assume that the impact of the classification, measurement and impairment requirements of the new accounting standard will be small.
Furthermore, many Thai companies do not adhere to fair value accounting or hedging principles in relation to derivatives used in hedging activities, so the adoption of IFRS 9 could introduce significant earnings volatility and accounting complexity, Piyapong said.
(c) 2018. The Post Publishing Public Company Limited. All Rights Reserved.
Document BKPOST0020180503ee530005z