International Financial Reporting (IFRS 9) Financial Instruments were issued in 2014 as the International Accounting Standards Board’s replacement of IASB’ 39 Financial Instruments that embraces both recognition and measurement and expected to take effect in January 2018.
The new regulation is anchored on three major categories which have been reduced from four that were previously under IAS 39. The categories are Classification and Measurement of financial instruments, impairment of financial assets and hedge accounting.
Classification and measurement of financial instruments
The new regulation under IFRS 9 will require that financial institutions measure their financial assets at amortized cost (amortized cost is the accumulated portion of the recorded cost of a fixed asset that has been charged to expense through either depreciation or amortization). Depreciation is used to reduce the cost of tangible assets while amortization is used reduce the cost of intangible assets) or at fair value. This will have to be determined in either profit or loss or simply by being taken to other comprehensive income (OCI) without recycling.
Impairment
This is the expected outcome of financial institutions moving to an expected credit loss model. This regulation comes in three stages that should be followed by the financial institutions:
STAGE 1: As soon as a financial instrument is given out, there is an expected 12-month period of either credit loss or profit. This serves as a proxy for initial expectations of credit losses.
STAGE 2: This is the establishment and recognition of a full-time credit loss in either profit or loss when the credit risk increases significantly.
STAGE 3: This is the stage where the credit risk of a financial asset increases to the point that it is considered credit-impaired.
Hedging accounting
The main objective of this regulation is to represent, in the financial statements, the impact of an entity and its risk management activities that use financial instruments to manage outcomes and exposures that come from a particular risk that could affect the profitability of the institution. This is optional.
The IFRS 9 is set to become part and parcel of the Kenyan financial institution in January 2018 with it being compulsory for all financial institutions under Central Bank of Kenya (CBK). In a workshop organized by Barclays Bank of Kenya to discuss the implications of IFRS 9, the Institute of Certified Public Accounts of Kenya (ICPAK) announced that it was in the process of putting down guidelines for IFRS 9 to be used by banks and other financial institutions. The regulations will be available by the end of October this year.
According to financial analysts from Nairobi Security Exchange, the Kenya Bankers Association and the Barclays Bank of Kenya, the change of IFRS 9 that will come about are meant to improve governance in accounting for financial instruments with the affected sectors being the banks and insurance companies. The new regulation in accounting will now require banks to make provisions for lending through government debt.
On its onset, IFRS 9 will lead to the reduction in available capital, reduction in retained earnings, changes in income tax, external audit changes, pricing consideration for collections before 30-90 days past due and banks will now be forced to be more careful in managing risks.
What IFRS 9 means for the consumer
IFRS 9 is more challenging to the consumer than it is to financial institutions. Consumers who have a habit of defaulting loans will now be at risk of not accessing any other loan from any financial institution. Under this regulation, the consumer will have to pay the loan on time to avoid risking being locked out of accessing credit in future. What is more, the bank will have to use past loan records to project whether the customer can be able to pay the loan on time.
Under this regulation, if the customer is in default of one product, the bank has to provide an impairment across all loans to them. Mobile loans too will be hugely affected. This is because many people take and consume mobile loans but are very slow in paying back. Under this regulation, the mobile loan history will be used to determine whether the customer is high risk or low risk.
Featured image via www.kenyanwallstreet.com
