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Deloitte : 55 percent of financial institutions believe that IFRS 9 will increase capital requirements for the banking industry


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4 April 2012 – According to Deloitte, the latest changes to International Financial Reporting Standards (IFRS), adapted and used in over 100 nations across the world including most countries in the Middle East, will change the financial reporting landscape in an extensive way.  To assist clients and interested parties, Deloitte launched a series of IFRS seminars across the region, with the April Deloitte IFRS seminar being held in Dubai on April 4, 2012.

The Deloitte IFRS seminar will focus on complex areas in financial reporting and topics which have been subject to significant changes as a result of new IFRS standards including consolidations, fair value measurements, joint arrangements, financial instruments and others. The Deloitte seminar also addresses the forthcoming changes in IFRS financial reporting standards related to revenue recognition and leases.

“The International Accounting Standards Board (IASB) has issued several new Standards (IFRSs and Exposure Drafts) on some highly contentious accounting issues. This changing accounting landscape represents one of the biggest medium term challenges for banks,” said Abbas Ali Mirza, Deloitte audit partner in the United Arab Emirates. “Preparing for the implementation of the new IFRSs is the start of what is expected to be a large scale change program, that will definitely impact the Middle Eastern region,” he added.

In a recent survey by Deloitte, entitled ‘Global IFRS Banking Survey – Q1 2012: A changing landscape’, 56 key financial institutions around the globe were approached, to understand the implications of the changing IFRS regulations; 59 percent of which were based in the Europe, Middle East and Africa (EMEA) region. The survey sought to assess the attitudes towards the changing IFRS regulations, of which is the introduction of IFRS 9 to replace IAS 39.

Nearly 70 percent of respondents believe that impairment deliberations (or assets being marked down) will have the greatest impact on their business model and financial statements.  In addition, the majority of respondents believe that an impairment model based on deterioration of credit risk will be operationally feasible. As such, the three bucket model, designed to aid financial institutions make responsible provisions and decide how to impair assets, will most likely be implemented.

The three bucket model stipulates the division of assets by ranking, with the healthy assets placed in bucket one, assets with some level of impairment in bucket two and ‘bad’ assets into the third bucket. Assets can alternate between buckets in light of macro and micro-economic triggers.

The Deloitte survey also finds that 55 percent of respondents believe that IFRS 9 will increase capital requirements for the banking industry. Half of the respondents expect the new rules to affect pricing with an even greater proportion predicting an increase in capital requirements.

“The growing complexities in financial transactions and of financial reporting make it essential for the users of financial statements to be fully aware of various areas related to financial reporting standards” said Akbar Ahmed, audit partner at Deloitte Middle East. “It is of equal importance that preparers of financial statements are fully aware of the latest developments, not only to be able to adapt their financial statements in accordance with IFRS standards but also to be able to advise management and directors as to allowable alternatives under the standards, future developments therein and the relevant effect on the related company’s financial position and operating results.”

In light of this, the Deloitte survey finds that despite the consistently high level of concern towards the accounting changes by the respondents’ boards, nearly 80 percent of participants believe that there is room for improvement in the level of involvement of the board or audit committee level, regarding the upcoming accounting changes. 

To date, IFRS 9 remains a work in progress, with many parts being revisited and developed further. Following the two year deferral of IFRS 9, banks and other entities required to apply IFRS, will need to utilize IFRS 9 by 2015.

A series of IFRS seminars will be hosted by Deloitte in other countries of the Middle East in the coming months, to address these ongoing changes.

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