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IFRS 9: Why it matters now

Following his webinar with Credit today, Damian Riley, director of business intelligence at HML, talks about upcoming changes to impairment.

Damian Riley
director of business intelligence, HML

IFRS 9 – have you heard of it? If you are a debt provider you may have done. Nevertheless, many businesses, particularly smaller ones, may be unaware – and this isn’t helped by the seemingly distant implementation date of January 2018.

So what is IFRS 9? It is a new accounting standard that replaces the current IAS 39. Under the current system, mortgage lenders and other debt providers are required to calculate an expected loss value for accounts that are impaired – and for those accounts only.

However, this will all change under IFRS 9. Once this kicks in at the start of 2018, debt providers will need to reassess the probability of their customers defaulting on their loans, and what the expected losses would be for all of their exposures, even those that are currently performing. In addition, this will need to be carried out during each reporting period.

2018 is a long way off – so why is this important now? Well, the task at hand is by no means small. In order for a lender to have comprehensive enough information to base their assessments on, a history of measured risk is needed.

The benchmark for this will be when the loan assets were placed on to the lender’s balance sheet. Large firms, particularly the advisory companies, have noted that this retrospective exercise could take as long as three years to complete, so firms that haven’t commenced this task need to start this as soon as possible.

It’s not just the provisioning calculation task at hand that debt providers need to keep in mind when planning for the implementation of IFRS9.

More than half of banks surveyed by Deloitte believed that impairment charges could climb by as much as 50 per cent as a result of the new accounting standard. While taking on extra costs is no mean feat for any firm, at HML we believe this could particularly impact upon the mortgage market, one which is getting back on its feet after the economic crash.

HML’s chief executive officer Andrew Jones recently spoke to Credit Today about the expectation that around £150bn of mortgage portfolio trades are expected to come to market in the UK within the next five to seven years. If lenders don’t prepare for IFRS9 and have the right models in place, they may end up forecasting higher potential expected losses.

Subsequently, lending appetite could be restricted, something which may set the market back at a time when business volumes are strong.

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HML, in association with Deloitte, covered the transition to IFRS 9 in a Credit Today webinar on September 3. During the broadcast, the presenters examined modelling and data challenges posed by the implementation, as well as looking at the wider business implications, and examining the effects on different asset classes.

The webinar “IFRS 9: moving the credit industry towards account-level provisioning” is archived for viewing in its entirety here, while the slides from the presentation can be viewed here.

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Posted on 16th September 2015 by Fred Crawley

 

 

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