New accounting standards weighs on banks performance

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    From the latest half year results currently being reported, earnings across banking institutions are showing the dampening effects of IFRS 9 which was adopted at the beginning of the year.

    International Financial Reporting Standard 9 (IFRS 9) which was introduced in January 2018, replaced International Accounting Standard 39 (IAS 39), an accounting standard which gives accounting guidance on how treat financial instruments such as loans,money market investments among others. .

    In brief, IFRS 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. IFRS 9 standards require banks to recognise impairment sooner and estimate lifetime expected losses against a wider spectrum of assets.

    When IFRS 9 was introduced analysts argued that it will significantly impact banks provisions and financial statements, with impairment and profitability calculations affected most.

    Nedbank Zimbabwe which was the first among 3 banks to have released interim results so far reported that loss allowances as at January 1, 2018 under IRFS 9 was  $8.5 million, which compares to a December allowance of $5.1 million, a 65 percent growth.

    “For assets in the scope of IRFS 9 impairment model, impairment losses are generally expected to increase and become more volatile,” reads the bank’s statement.

    “The bank (Nedbank) has determined that the application of IRFS 9’s impairment requirements as at January 1, 2018 results in additional impairment allowances.”

    Under IRFS 9, loss allowances are measured on either of the following bases, a two-month expected credit loss (ECLs) and a lifetime ECLs.

    CABS reported a total impairment charge (ECL) through profit or loss of $6.89 million, a 138 percent jump from $2.89 million recorded in the same period last year.

    For ZB Financial Holdings, loss allowances under IAS 39 as at December 31, 2017 was recorded at $7.6 million, jumping 76 percent to $13.4 million as at January 1, 2018 under IRFS 9. It is likely that more banks will report results showing a similar behaviour impairement which is as a result of IFRS 9 adoption.

    However, it should be noted that the introduction of IRFS 9 offers profound benefits to the operations of financial institutions.

    IFRS 9 aligns the measurement of financial assets with banks business model, contractual cash flow characteristics of instruments, and future economic scenarios.

    – Equity Axis News

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