IFRS 9 in a nutshell: how it affects your ability to borrow from the Banks
Affecting accounting periods starting from 1 January 2018, the intention of the powers that be was the Banks would report loan losses sooner rather than later, thereby halting the trend seen in the economic crisis a decade ago when significant losses were recorded in the downturn.
What impact will the new standard have for businesses trying to borrow?
The main thrust of IFRS 9 is to move away from the model of the past, whereby Banks recognised a provision against a loan once the loss had been incurred to an EXPECTED loss model where Banks need to look at the credit risk attached to the loan.
There are now 3 main stages of risk to assess:
Stage 1 – no significant increase in credit risk, so the Bank makes a 12 month expected loss provision.
Stage 2 – a significant increase in credit risk, with the provision against the loan increasing to the expected loss over the life of the loan.
Stage 3 – once the loan is actually impaired, a full provision is needed.
IFRS 9 is all about timing.
Practically speaking, the problem for the Banks lies in deciding if there is a significant increase in credit risk attached to a loan and when to move a loan from stage 1 to stage 2. Considering the range of Banks now operating in our environment, from the established operators to those who are new to the game, will all Banks assess the risk in equal measure?
The standard also now requires Banks to predict the range of future events that might have an impact on their losses, putting more weight on their economic projections and tying these to the loan book. This in turn will affect how they assess clients.
If economic conditions deteriorate and we once again find ourselves in choppy waters, how volatile will the Banks’ number become?
If you would like to discuss any aspect of this blog or require any advice, please contact the team here at Forward Financials.