The IASB issued a new accounting standard on July 24 2014 called IFRS 9 which is targeted at financial instruments' valuation and risk assessment. IFRS 9 is to replace the existing standard known as International Accounting Standard (IAS) 39. IFRS 9, in essence specifies how an institution should classify and measure financial assets and liabilities. This new standard has a mandatory effective date of January 1 2018.
One key change that IFRS 9 introduces is the concept of Expected Credit Loss (ECL) provisioning which is to replace the incurred loss approach. The devil here certainly lies in the details as far as the quantification and measurement of Expected Credit Loss rates in the face of a lack of reliable loss data in most developing countries, particularly in the African markets.
Like many of the new regulations recently proposed, such as liquidity ratios in Basel III, the motivation for IFRS 9, in part, traces its roots to the recent global financial crisis of 2007-2009. Authorities observed delayed recognition of credit losses in banks and other lenders, where accounting standards at the time prevented banks and lenders from appropriate provisioning for credit losses causing excessive lending not aligned to emerging risks and thereby exacerbating the financial crisis.
While it is still somewhat challenging to forecast an emerging credit environment, it is both theoretically appealing and practically plausible to aligned credit risk management to market risk management techniques widely used in capital markets and is akin to moving from book value accounting to fair value accounting and thereby synchronising valuation philosophies on both sides of the balance sheet.
-Dr Blessing Mudavanhu
Dura Capital
