IFRS9, that replaces IAS39, combines the principles of classification and measurement, impairment and hedge accounting phases of the International Accounting Standards Board (IASB). The IASB is the independent, private-sector body that develops and approves International Financial Reporting Standards (IFRSs). IFRS 9 is effective for reporting periods starting on or after 1 January 2018.
IFRS9 reciprocates to the various critiques that IAS39 is too complex, not consistent with the method entities manage their businesses and risks and defers the recognition of credit losses on loans and receivables.
IFRS9 introduces new standard based on the concept that financial assets should be classified and measured at fair value, with changes in fair value recognised in profit and loss as they arise (“FVPL”).
In terms of provisioning, the amendment pertains to the movement form an “incurred loss” to a forward-looking “Expected Credit Loss” (ECL) model. The ECL model will accelerate the recognition of losses by requiring provisions to cover for future expected losses.
Like all other banks, AfrAsia Bank will be reporting under the new impairment model for the first time on the 30th June 2018.
The IFRS 9 Day 1 increase in provisions is likely to affect the CET1 ratios of Standardised banks more than those banks applying an Internal Ratings-Based Approach.
Provisions under ECL models will likely be higher than 12–month Basel expected losses, with IFRS 9 impairment provisions based on 12-month ECLs for Stage 1 and lifetime ECLs for Stages 2 and 3. Implicitly, return on equity and capital impact will be significant to Banks, affecting in turn the pricing of products.