Bank NPLs (17) - IFRS and Accounting Standards

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Impairments Overview: IFRS 9 and Its Impact

 

Understanding IFRS9 and its Implications for Banks -The Accountants Point of View

 

IFRS9 came into effect in Nigeria's Financial Services Sector on 1 January 2018. The new Accounting Standard assesses impairments of financial assets on an expected credit loss basis as opposed to the incurred credit loss basis that was applied under the previous IAS 39 rules. A few other twists are pointed out in the extracts from the Ernst and Young ("EY") guidance manual below:

 

The Ernst and Young generally accepted accounting principles ("GAAP") Manual for IFRS9 Adoption 2017

 

EY GAAP Manual 2017 (Chapter 54) - 8.2 Adoption of IFRS 9: disclosure requirements8.2 Adoption of IFRS 9: disclosure requirements

 

When IFRS 9 is first applied, the following information should be disclosed, in a table unless another format is more appropriate, for each class of financial assets and financial:

  • Liabilities at the date of initial application: [IFRS 7.42I]

The original measurement category and carrying amount determined in accordance with IAS 39; the new measurement category and carrying amount determined in accordance with IFRS 9; and

  • The amount of any financial assets and financial liabilities that were previously designated as measured at fair value through profit or loss but are no longer so designated, distinguishing between those that are required to be reclassified and those which an entity elects to reclassify.

 

In addition, qualitative information should be disclosed to provide an understanding of:

[IFRS 7.42J] how the classification requirements in IFRS 9 were applied to those financial assets whose classification has changed as a result of applying IFRS 9; and the reasons for any designation or de-designation of financial assets or financial liabilities as measured at fair value through profit or loss.

The following additional disclosures should also be provided on the application of IFRS 9: [IFRS 7.44S, IFRS 9.7.2.13]:

  • At the date of initial application of IFRS 9, changes in the classifications of financial assets and financial liabilities, showing separately: [IFRS 7.42L] changes in the carrying amounts on the basis of their measurement categories in accordance with IAS 39 (i.e. not resulting from a change in measurement attribute on transition to IFRS 9); and
  • The changes in the carrying amounts arising from a change in measurement attribute on transition to IFRS 9; and
  • In the reporting period in which IFRS 9 is initially applied, for financial assets and financial liabilities that have been reclassified so that they are measured at amortised cost and, in the case of financial assets, that have been reclassified out of fair value through profit or loss so that they are measured at fair value through other comprehensive income, as a result of the transition to IFRS 9: [IFRS 7.42M]
  • The fair value of the financial assets or financial liabilities at the end of the reporting period; and
  • The fair value gain or loss that would have been recognised in profit or loss or other comprehensive income during the reporting period if the financial assets or financial liabilities had not been reclassified;
  • For financial assets and financial liabilities that have been reclassified out of fair value through profit or loss as a result of the transition to IFRS 9: [IFRS 7.42N]
  • The effective interest rate determined on the date of initial application; and
  • The interest income or expense recognised.
  • If an entity treats the fair value of a financial asset or a financial liability as its amortised cost at the date of initial application (see Chapter 47 at 10.2.7.B), these disclosures should be made for each reporting period following reclassification until derecognition. [IFRS 7.42N].

 

These disclosures, together with other information in the financial statements, must permit reconciliation as at the date of initial application between: [IFRS 7.42O]

  • The measurement categories presented in accordance with IAS 39 and IFRS 9; and
  • The class of financial instrument.

 

Information should be disclosed that permits the reconciliation as at the date of initial application of the ending impairment allowances in accordance with IAS 39 and the provisions in accordance with IAS 37 - Provisions, Contingent Liabilities and Contingent Assets - to the opening loss allowances determined in accordance with IFRS 9. For financial assets, this disclosure should be provided by the related financial assets' measurement categories in accordance with IAS 39 and IFRS 9 and show separately the effect of the changes in the measurement category on the loss allowance at that date.  [IFRS 7.42P].

 

In the reporting period that includes the date of initial application of IFRS 9, an entity is not required to disclose the line item amounts that would have been reported in accordance with the classification and measurement requirements (including the requirements related to amortised cost measurement of financial assets and impairment) of IFRS 9 for prior periods or IAS 39 for the current period: [IFRS 7.42Q]

If, at the date of initial application of IFRS 9, it is impracticable (as defined in IAS 8) to assess:

  • A modified time value of money element based on the facts and circumstances that existed at the initial recognition of a financial asset; or
  • Whether the fair value of a prepayment feature was insignificant based on the facts and circumstances that existed at the initial recognition of a financial asset, the contractual cash flow characteristics of that asset should be based on the facts and circumstances that existed at that time without taking into account the requirements related to the modification of the time value of money or the exception for prepayment features as appropriate. The carrying amount of the financial assets whose contractual cash flow characteristics have been assessed in this way should be disclosed, separately for each of the two situations above, at each reporting date until those financial assets are derecognised. [IFRS 7.42R, 42S].

 

These disclosures should be provided irrespective of whether comparatives are restated.

 

The EY manual notes that:

 

"Entities adopting IFRS 9 in 2015 and onwards are required to provide additional disclosures showing the changes, as at the date of initial application, in the classification of financial assets and financial liabilities upon transition from the classification and measurement requirements of IAS 39 to those of IFRS 9. These disclosures are required even if an entity chooses to restate the comparative figures for the effect of applying IFRS 9 (see Chapter 54 at 8).

 

In an introduction to its explanation of the nature of the new IFRS rules Price Waterhouse Coopers ("PWC") analysts note that:

 

Revenue isn't the only new IFRS to worry about for 2018-there is IFRS 9, Financial Instruments, to consider as well. Contrary to widespread belief, IFRS 9 affects more than just financial institutions. Any entity could have significant changes to its financial reporting as the result of this standard. That is certain to be the case for those with long-term loans, equity investments, or any non-vanilla financial assets. It might even be the case for those only holding short-term receivables. It all depends.

 

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The Possible Consequences of IFRS 9 Include:

  • More income statement volatility. IFRS 9 raises the risk that more assets will have to be measured at fair value with changes in fair value recognized in profit and loss as they arise.
  • Earlier recognition of impairment losses on receivables and loans, including trade receivables. Entities will have to start providing for possible future credit losses in the very first reporting period a loan goes on the books - even if it is highly likely that the asset will be fully collectible.
  • Significant new disclosure requirements-the more significantly impacted may need new systems and processes to collect the necessary data.


With careful planning, the changes that IFRS 9 introduces might provide an opportunity for balance sheet optimization, or enhanced efficiency of the reporting process and cost savings. Left too long, they could lead to unhelpful surprises. Either way, there is enough at stake that if companies have not begun assessing the implications of IFRS 9, now would be the time to start (admittedly 2018 would have been better).


Illustration 4: The New Treatment of Amortized Cost Under IFRS9

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 Example of How New Impairment Adjustments Affected a Nigerian Bank In 2018

As an example of how the new impairment calculations under IFRS9 affected financial service providers in 2018, FBN Holdings, in its FY 2018 Accounts Statement noted that, "The resultant impact of the transitional adjustment to IFRS 9 was charged directly to equity during the financial year resulting in a decline in our loans and advances to customers from N2.0tn in 2017 to N1.7tn in 2018 and a commensurate reduction in our shareholders' funds. In addition, due to amendments to the AMCON Act, our statement of financial position and income statement for the financial years ended 31 December 2016 and 2017 was restated".


In other words, with IFRS9 rules in play from FY 2018, local deposit money institutions have had to chop off part of their outstanding shareholder equity and reduce the size of their current loan books. But this, ultimately, should help them cleanup their statements of financial positions and optimize their operations for stronger and more reliable future earnings. Analysts are of the opinion that FBNH's hefty IFRS9 adjustment of N209.6bn for 2018, for example, should help the Group reassert its leadership position in the lending industry over the next three or so years. 

 

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Related Reports (PDF)

1.      Download the Full PDF Report - Debtors Africa, May 13, 2020

2.     Executive Summary PDF - Proshare, May 14, 2020

3.     AMCON and Financial Services Debt Burden in Nigeria - Aug 17, 2018



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