Phillimon Mhlanga
HARARE – Zimbabwe’s banking industry has adopted a new version of the International Financial Reporting Standard 9 (IFRS 9), issued by the International Accounting Standards Board (IASB) for its half year results.
The new rules requires all financial institutions to estimate future credit losses, a move which is likely to significantly impact on banks and other financial institutions.
The new rules under IFRS 9, which replaces the International Accounting Standard 39 (IAS 39) that has been the primary accounting standard that deals with impairments of financial instruments, changes to financial instruments accounting for banks comes into effect in January next year. The adoption will result in a significant but anticipated decline in capital in order to accommodate increased credit provisions for financial instruments.
Zimbabwe has chosen to apply the new standards earlier.
Lewis Hussein, the chairman of the Zimbabwe Accounting Practices Board of the Public Accountants and Auditors Board (PAAB), told Business Times yesterday that the new rules had already been applied in the half years results of listed and regulated companies to be published soon.
“Zimbabwe has implemented IFRS 9 on its effective date,” Hussein told The Business Times.
“This followed the hard work that the accounting profession in the country put in over the past few years in preparation for the implementation.
“The Zimbabwe Accounting Practices Board has worked with local registered accountants and other financial sector regulators in preparing for IFRS 9 implementation,” Hussein added.
Hussein said PAAB worked with the International Accounting Board as Zimbabwe’s accounting profession prepared for IFRS 9 implementation.
“We invited the International Accounting Standards Board and its board member Daryl Scott and staff have come on two occasions to participate in workshops and round tables as we prepared for IFRS 9 implementation,” Hussein said adding: “The RBZ has also played a critical role in ensuring banks that they regulate are prepared for IFRS 9. They have been working with various banks in assessing the impact of IFRS 9 on capital positions.”
Early this year, the Reserve Bank of Zimbabwe (RBZ) embarked on a process to assess banks’ adherence to new accounting rules as it moved to plug financial institutions’ shortfalls in meeting requirements of the standard.
Banks were ordered to submit compliant reports on the implementation of the new rules based on the financial results for the year ended December 31 2017, to assess their preparedness.
The accounting profession regulator said it was looking forward to half year results.
“We have an advanced financial market that requires that we keep abreast of international accounting developments. We are looking forward to IFRS numbers being reported in the half year numbers that will be published by listed and regulated companies soon,” Hussein said.
While Zimbabwe has adopted the new accounting rules, other countries are deferring the IFRS 9 implementation.
These countries include Thailand which this week deferred the implementation of IFRS 9 by a year to 2020, due to unpreparedness. India has also deferred the implementation of the new rules.
Commenting on those deferring the adoption of the new accounting rules, Hussein said: “IFRS 9 adoption and implementation is not an overnight affair as a lot of preparatory work goes into its effective implementation.
“Countries that have chosen to defer adoption would clearly still be working on ensuring they are well prepared for effective implementation,” Hussein said.
The RBZ also prescribed how banks should account for non-performing loans and advances using the Basil 2 requirements and also the banking regulations such as statutory instrument 205 of 2000.
IFRS 9 will require banks to estimate the credit loss allowances, a situation which may be challenging and will involve a high degree of judgment. As a result, reported credit losses are expected to increase and become more volatile under the new credit loss model.
According to paragraph 59 of IAS 39, banks have been determining loan loss provisions through useful factors that are considered when testing for impairment performance of a financial instrument such as significant financial difficulty, breach of contract, decline in future expected cash flows by the borrower, among other things.
But now, banks will be required to make expected credit losses. This effectively means that Zimbabwe’s financial institutions have moved away from the traditional incurred loss model to an expected credit loss which, by any means, requires more judgment in considering information related not only to the past and present but also to the future economic conditions.
This measure of loan loss allowance will again demand use of data and information not previously used under IAS 39.
The challenge, however, will be around the accurateness and reliability of such data given that some will not have been used for accounting purposes but for credit risk management or regulatory reporting. The changes will affect how impairments are recognized and measured and these changes may impact business decisions.
