Hoogervorst says IFRS9 will lead to fundamental change

Hoogervorst says IFRS9 will lead to fundamental change

Some critics believe IFRS 9 lacks teeth and banks should be forced to recognise lifetime losses on day loans are extended

IASB chairman Hans Hoogervorst has praised IFRS 9 for its ability to provide investors with better insight on loan loss risks.

Hoogervorst was speaking at the third annual event for financial services institutions, organised jointly by the IFRS Foundation and the ICAEW. This year’s conference is focussed specifically on the practical implementation of the impairment element of the financial instruments Standard, IFRS 9. The Standard was finalised in 2014 and becomes effective in 2018.

The IASB chief said: “The impairment element of IFRS 9 will result in fundamental change to current practice. It should help investors get a better picture of the risks banks face with regard to potential losses on loans extended to customers.”

The new standard requires banks to recognise 12 months’ expected losses on loans that perform as anticipated and full lifetime losses on loans that have experienced a significant increase in credit risk.

But some critics believe IFRS 9 lacks teeth and that banks should be forced to recognise lifetime losses on the day loans are extended.

And in a recent survey, almost  (47%) of chief risk and finance officers at some of Europe’s largest financial institutions are not on course to meet the 2018 IFRS 9 deadline, a new survey reveals.

Commissioned by financial services consultancy Parker Fitzgerald, and conducted in conjunction with the Centre for Finance Professionals (CFP), the results show that over a quarter of those who risk missing the deadline, anticipate a ‘significant’ delay in their compliance with the new accounting rules.

Hoogervorst said such a model does not reflect the economics and could distort the actual performance of a bank. He suggested it could increase the barriers for new banks wishing to enter the market and could have a negative effect on long-term lending in economic downturns.

He added that robust capital requirements are “the best way to make the banking system safe and that transparent accounting can be of great help”.

The IFRS 9 standard was finalised in July 2014 and will come into force on 1 January 2018, to replace the International Accounting Standard 39, to simplify standard accounting rules and address impairment calculation issues arising during the global financial crisis.

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