IFRS 9 may pose operational challenge for APAC banks -The Total Investment & Insurance Solutions

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5 October 2016

Moving over to International Financial Reporting Standard (IFRS) 9 or its local equivalent that requires providing for expected credit losses may create operational challenges across many Asia-Pacific (APAC) banking systems, said credit rating agency Fitch Ratings. The Total Investment & Insurance Solutions

According Fitch, IFRS 9 is one of the more significant accounting changes that banks are facing, and will be implemented in 2018 for most major APAC market. The Total Investment & Insurance Solutions

In India, for example, it is possible that the local equivalent of IFRS 9 could be delayed, Fitch said.

This is due to challenges faced by the banking system in meeting the capital required by end-March 2019 relating to the Basel III standards -- currently estimated at around $90 billion.

"Banking systems that have been characterized by under-reporting of impaired assets also look vulnerable to the potential rise in provisioning," Fitch said. The Total Investment & Insurance Solutions

The IFRS 9 requires banks to switch to recognising and providing for expected credit losses (ECL) on financial assets, rather than the current practice of providing only when losses are incurred.

IFRS 9 will also change the way that banks account for a wide range of financial assets.

Fitch expects the adoption of the new standard to lead to greater provisioning and earlier recognition of credit losses, which will have an impact on banks' financial statements and regulatory capital.

Moving to an expected-loss approach will require significant process changes, including greater integration of credit risk management and internal accounting systems. Banks will also need more data on how portfolios perform though the credit cycle, and will need to build complex models of expected losses.

The transition is likely to be more operationally manageable in sophisticated banking systems where there is better access to robust data.The Total Investment & Insurance Solutions