Fool-proofing the IFRS 9
Unified standards and effective implementation of integrated reporting is crucial for long-term success in the GCC, asserts Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia.
Due to the continuous financial market fluctuations, and as a broad response to the financial crisis, the International Accounting Standards Board (IASB) has replaced IAS 39 with the International Financial Reporting Standard (IFRS) 9. Additionally, the American Institute of Certified Public Accountants (AICPA) and the Chartered Institute of Management Accountants (CIMA) advocated a new corporate reporting initiative, integrated reporting (IR), which is championed by the International Integrated Reporting Council (IIRC) and endorsed by International Federation of Accountants (IFAC).
While IR is not mandatory, IFRS 9 is and will come into effect from 1 January 2018. The race to regulatory compliance of the latter reporting should be nearing the finishing line. But how ready are the region’s banks and financial institutions?
The new standard brings together three phases of the IASB’s project which include classification and measurement, impairment and general hedge accounting. It will change the way in which banks and other financial institutions account for loan losses on their balance sheets, imposing a longer, more forward-thinking view.
IFRS 9, which developed as a result of attempting to reduce the complexity of accounting standards for financial instruments, and to strengthen accounting recognition of loan-loss provisions by incorporating a broader range of credit information, will provide a more accurate and timely presentation of financial institution reporting.
However, when it comes to implementing IFRS 9, some countries in the GCC, including the UAE, may face challenges due to organisational culture, regulation, transparency and fraud, according to a report titled ‘The globalisation of Accounting Standards: The Case of the UAE’. In order to overcome such cultural issues, the UAE will have to adopt suitable regulatory systems relating to secrecy and fraud.
IFRS 9 readiness in the GCC
According to Deloitte’s Fourth Global IFRS Banking Survey that compiled the information of 91 banks and financial institutions, almost half of the banks surveyed do not think they have enough technical resources to deliver their IFRS 9 project and almost a quarter of these do not think that there will be sufficient skills available in the market to cover shortfalls.
In the Middle East region, some of the challenges facing regional financial organisations when it comes to IFRS 9 implementation include accounting related matters, creation of IT solutions to comply with the new rules, alignment of stakeholders and a lack of risk management expertise.
Banks and financial institutions should not wait for regulators to make suggestions about their reporting practises. Instead, they need to take a judgement call, forecast macroeconomic factors and run their own risk scenarios.
When it comes to businesses, they should put together a plan that involves a consistent capital planning and impairment analysis that would lead to an effective implementation of IFRS 9. Organisations in the GCC must ensure they understand stakeholder priorities, qualitative and quantitative data generation and credibility.
Integrated reporting—a catalyst to improve business reporting
Integrated reporting (IR) has the potential to act as a catalyst for major improvements in business reporting. The Integrated Reporting Framework by IIRC, brings together material information about an organisation’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates. It provides a clear, concise representation of how an organisation demonstrates sustainability and creates value.
Effective integrated reporting requires integrated thinking and decision making based on an information set that is much broader, more interconnected and more forward-looking than traditional financial analysis. The IIRC’s vision is a long-term one and its ambition is not only for a new model of corporate reporting around the world, but for the adoption of ‘integrated thinking’ by businesses everywhere. While this transformation will require time, GCC businesses and organisations should start building the principles of integrated reporting into their existing annual reporting.
Globalisation, technological development and rapid population growth are causing fundamental change to the business world. Traditional financial reporting has not kept pace with the seismic shift in macro-economic value experienced over the last 30 years. Now is the time for GCC businesses and financial institutions to adopt the new revolutionary reporting frameworks which will support in creating a more stable and sustainable economies.