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ICPAK Preparing implementation guidelines for the standard

By CPA Cliff Nyandoro

The International Financial Reporting Standard (IFRS) 9 which replaces International Accounting Standard (IAS) 39 is expected to come into force on 1st January 2018. The new standard is currently creating ripples and great anxiety across the globe, owing to the radical provisions which it prescribes in respect to accounting for financial instruments.

Kenya has not been left behind in that rush to beat the January 2018 implementation date which has been set by the global standard setter, the International Accounting Standards Board (IASB), one of the standard setting bodies under the International Federation of Accountants (IFAC). ICPAK is a member of IFAC which comprises a total membership of 175 professional accounting bodies drawn from across the globe.

The anxiety in the markets is understandable because the introduction of new requirements for the accounting for the expected credit losses in IFRS 9 will bring a significant change to the financial reporting of banks and other institutions which deal with financial instruments. The new accounting regulation will affect many stakeholders among them investors, regulators, analysts, auditors and many other users of financial statements.

Owing to the significance of banks and other financial institutions in the global, regional and domestic capital markets and in the wider economy, effective implementation of the new standard NOVEMBER – DECEMBER 2017 11 Financial Reporting and Assurance has the capacity to cause immense benefits to many players within the diverse segments of the economy. On the flipside is the humongous risk associated with the flippant and unprofessional implementation of the standard based on approaches which are not compliant, or properly aligned with the purpose for which the standard is intended. Chief among these risks is the prospect of the negative impact on the confidence placed on the financial results of financial institutions due to poor implementation and adoption of the standard.

As we approach this momentous milestone of the IFRS 9 implementation deadline, it is significant that entities that report under the IFRS framework must apply IFRS 9 in their 2018 financial statements. To achieve this, it will be necessary for the various institutions such as banks and other firms in the financial services sector to complete certain projects which will engage the skills of finance, risk and IT experts. These projects will call for strong oversight initiatives in terms of governance, internal controls as well as reliable data in order to give all the stakeholders confidence in the resulting financial information.

In order to produce financial statements that will inspire the expected confidence in the various stakeholders, there is need to consider the different aspects below in the implementation of IFRS 9.

The first key consideration will be the effect on significant accounting policies for different organizations which will be applying the standard. Such consideration will entail addressing aspects of what can be considered loan modification for retail or corporate banks, what could be considered a lifetime of a credit card, how to handle sovereign credit risk among other accounting aspects which need to be taken into consideration in light of the new requirements of IFRS 9.

Another key area for thought will be in respect to impairment and the associated credit loss models. Impairment, for the benefit of non-finance readers, is a measure of risk attributable to the cash flows that an entity may fail to realize in the event of a default. This is generally a factor of the customer’s probability of default over a specified time horizon, the expected exposure at default and the loss given default for the cash flows not recovered. Exposure at default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, and expected draw-downs on committed facilities.

The loss give default mentioned above

The anxiety in the markets is understandable because the introduction of new requirements for the accounting for the expected credit losses in IFRS 9 will bring a significant change to the financial reporting of banks and other institutions which deal with financial instruments.

is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows and those that the lender would expect to receive, including those due from any collateral. This is usually expressed as a percentage of the exposure at default.

It is important to be clear on the concepts highlighted above as these form the key elements of impairment. While IFRS may sound too complex and intimidating, the fundamental change from the previous standard lies in the recognition of credit risks losses. Credit risk in this case is the risk that the borrower will default on their contractual obligation to repay a loan. Traditionally, a lender offering credit products has always recognized a loan’s risk at the point of default.

Under IFRS 9, banks will be expected to provide for eventualities that are likely to happen in the future. The standard requires that these institutions recognize this risk at the beginning and during the entire loan’s credit life cycle.

In order to achieve the foregoing, proper understanding of the borrower’s credit profile, industry, current and expected macroeconomic environment will be important determinants of how to score measure and price risk.

The other critical consideration besides significant accounting policies and impairment aspects is to do with disclosures in financial statements. It will be important to ensure that entities provide sufficient information to users of the financial statements in the nature of both quantitative and qualitative disclosures. This will be useful to all stakeholders for purposes of making the right investment decisions and also carrying out regulatory roles by those charged with responsibilities of regulation in different sectors of the economy.

Finally, it would be naïve to assume that all will be smooth even as the Kenyan market readies itself for the implementation of the new standard. A number of challenges are expected to arise due to the peculiar nature of the new accounting regulation, chief among them being the use of sophisticated models to calculate credit loss provisions. This is besides the increased need for source data on credit risk tracking both at individual customer and macro levels.

However, to ease the burden of the various players in the economy that will be affected by the standard, the Institute of Certified Public Accountants of Kenya (ICPAK) is finalizing IFRS 9 implementation guidelines which will help the market to seamlessly move from the application of IAS 39 to the new standard.

The Institute is working with various industry players among them the regulators, the auditors, preparers of financial statements, representatives from the academic sector and other stakeholders to drive a uniform and consistent interpretation and application of the new IFRS 9 standard to the Kenyan situation.


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