Long-awaited new international book-keeping standards have hit the global finance market. QASIM ISPAHANI reports on ripples in the Gulf.
Gulf banks and financial institutions are absorbing the newly published International Accounting Standards Board (IASB) standards on financial instruments that are expected to affect the way banks and financial institutions classify investments, loans and derivatives in their balance sheets.
"Some institutions in the Gulf are contemplating adopting the standard in their financials for the current year, even though the mandatory enforcement date is in 2013, because the standard provides greater benefit to entities mainly through reversal of mark to market losses on available for sale portfolios and reduction in complexity," a source in the sector told Gulf Business.
A senior official from a large multinational bank added that the revision has come as a response to criticism of the accounting rules in the wake of the global financial crisis. The fact that accounting for financial instruments was too complex for financial decision makers to understand made proactive response to the crisis difficult.
The accounting standards issue has been generating controversy worldwide since the financial market turmoil and recession brought them under the microscope. Politicians, bankers, and analysts have criticised the old model for requiring financial institutions to mark toxic assets to market, which they claimed caused debilitating book losses for those that held these assets in their books.
The IASB said in its 'Project Summary and Feedback Statement' that the need for issuing this standard arose as a result of communications from financial statements users that the requirements in IAS 39 were difficult to understand, apply and interpret. They have repeatedly urged IASB to develop a new standard for financial reporting of financial instruments that is principle-based and less complex.
Furthermore, the requirement to fair value certain non-trading financial assets as per the previous accounting rules meant that assets held for earning contractual yields began straining banks' balance sheets, owing to valuations sourced from highly stressed markets that did not reflect the purpose of holding them in the books. It was the declining fair values and recoverable amounts of these financial assets that added to the plight of banks and financial institutions that were already facing erosion of capital through impairment provisions and trading losses.
"The new standard enhances the ability of investors and other users of financial information to understand the accounting of financial assets and reduces complexity - an objective endorsed by the Group of 20 leaders and other stakeholders internationally. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the many different rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the many different impairment methods in IAS 39. Thus, IFRS 9 improves comparability and makes financial statements easier to understand for investors and other users," the IASB stated.
The new standard was published on November 12, 2009 and is expected to be adopted globally by banks, financial institutions and listed companies that prepare their financial statements based on IFRS. The standard is applicable to financial statements for the year 2013 onwards, but early adoption from 2009 year-end financials is permitted.
The new standard specifically will affect how impairment losses are recognised on financial assets.
The old standard followed the incurred loss approach which assumed that loans would be repaid until evidenced otherwise, following which the loss was recorded and the loan devalued. The new standard recognises losses earlier.
The IFRS, marks the completion of the first phase of IASB's project to replace the complex IAS 39. It deals with the classification and measurement of financial assets. The two succeeding phases will tackle impairment and hedge accounting.
© Gulf Business 2010
