This article was first published in the February/March 2019 Africa edition of Accounting and Business magazine.

The new accounting standard for financial instruments, IFRS 9, has come into effect for accounting periods beginning January 2018, replacing IAS 39. The banking sector was always going to feel the greatest impact of this standard.

A number of banks have accounting years ending in December, and so the 2017 financials of some contained preliminary information about the impact of the impending transition (as required by IAS 1, Presentation of Financial Statements). These banks have since published their interim reports on the first six months of 2018. This article looks at this information for 11 major banks operating in a variety of countries.

The biggest effect of IFRS 9 is the increase in loan loss provisions from the new expected loss impairment model, as compared to IAS 39’s incurred loss model. The increases in the provisions are large and quite variable, from €3.2bn for Unicredit to €0.2bn for ABN-AMRO.

The exception is the Development Bank of Singapore (DBS), where the level of credit loss allowances actually fell on the application of IFRS 9. This seems very hard to explain, but presumably reflects the high level of general allowance DBS set aside. The IAS 39 incurred loss provisions were very variable, with the balances much higher at BNP and Unicredit than at the other banks.

For all banks, the increase in allowances compared to the carrying value of the customer receivables is less than 1% of the relevant assets. But the increase is proportionately greater at Barclays and Lloyds than at ABN-AMRO, BNP or RBS. This may reflect the history of the different banks and their different geographic exposures.

The IFRS 9 allowance level compared to the relevant asset balance is less than 2% at the majority, but up to 4% and 6% at BNP and Unicredit, respectively.

The banks draw attention to the complexities of the modelling required for IFRS 9’s impairment model and the considerable judgments that have had to be applied in using this standard.

When it comes to the income statement, none of the banks restated the 2017 numbers, so they are not properly comparable. On average, new impairments under IFRS 9 were reduced; however, three of the 11 showed increases. In most cases these were significantly different from the equivalent period in 2017 (based on IAS 39) and were very variable from bank to bank. But some of the banks have noted that increased volatility of profits is expected to result from the change and that it will take some time before IFRS 9 embeds into the system.

The classifications of assets under IFRS 9 have changed, but the key impact was switches between fair value and amortised cost. The net impacts are generally smaller than from the impairments, and in many cases were minimal. The majority showed a gain and increase in net assets, though there were cases of decreases (ABN and Lloyds).

The third area of change was in hedge accounting. This has affected the banks least. All 11 major banks have chosen the option to continue the IAS 39 model and not adopt that of the new standard.

The banks also demonstrate a number of ways and extent of presentation of the transition to IFRS 9. Most included the IAS 1 requirements in their 2017 accounts with a description of the nature of the changes and the effect on equity. Some, for example Standard and Maybank, only produced the full impact as part of their 2018 interim reporting. Others, such as Deutsche and Unicredit, produced extensive separate reports on the effect of the transition, reclassifications and the restatements of the 2017 balance sheet that result.

The key impact of IFRS 9 on banks (with one exception) has been a significant increase in the extent of their credit loss allowances, which will raise their resilience to adverse economic events. But this has not perhaps been the earthquake some were predicting. The new level of allowance relative to their assets remains significantly different between banks. As none restated the 2017 comparatives, any increased volatility in their performance measures cannot be judged for another year.

Richard Martin is ACCA’s head of corporate reporting.

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Impact of IFRS 9 on 11 major banks

Bank IAS 39 allowance balance (€bn) Increase in allowance (€bn) Increase (%) Customer loans and receivables (€bn) Increase (as % of 1%) IFRS allowance (as % of receivables)
ABN-AMRO 2.46 0.2 8.1 275 7 1.0
Barclays 5.34 2.5 47.3 416 60 1.9
BNP-Paribas 26.0 3.0 11.5 728 41 4.0
DBS 3.26 (0.1) (1.4) 202 (2) 1.6
Deutsche 4.2 0.8 19.0 402 20 1.2
HSBC 6.46 1.7 26.5 803 23 1.0
Lloyds 2.47 1.5 59.1 536 28 0.7
Maybank 1.7 0.4 24.9 99 42 2.1
Standard 1.28 0.3 26.3 70 56 2.7
RBS 4.26 0.7 15.8 398 17 1.3
Unicredit 23.8 3.2 13.4 449 71 6.0