By Ahtasam Ahmad & Ariba Shahid
T
he SBP has issued final instructions on IFRS-9 for “ensuring smooth and consistent implementation of the Standard in the banking industry, with revised implementation time-
lines”. “For banks having asset size of PKR 500 billion or above, as per their Annual Financial Statements, as of December 31, 2021, and for all the Development Finance Intuitions (DFIs), SBP has set the revised implementation date as January 1, 2023,” said the circular. The SBP added that for all other banks and Microfinance Banks (MFBs), SBP has revised the implementation date of IFRS 9 to January 1, 2024. Implementing the aforementioned accounting standard would negatively affect the profitability of financial institutions due to an upward revision in loan default provisioning. Subsequently, the equity reserves on the balance sheet would also be impacted bringing down the balance sheet footing. Earlier, for the implementation of IFRS-
BANKING
9 by banks, SBP had set a deadline of January 1, 2022, which has now been revised at the request of banks that are facing challenges in the implementation of the new standard. The SBP says it has been consulting with the banking industry since early 2018 for the adoption of IFRS 9 in Pakistan. As per a senior banking source, IAS 39 was never fully implemented as the SBP already had a straightforward method to allocate provisions. Some local banks with international operations and foreign banks operating in Pakistan were fully compliant. Laziness on part of the banks is primarily why banks did not implement IAS 39 or IFRS yet. The source believes that this change in the accounting standards could leave roughly Rupees 40-50 billion impact on banks, although this is a very rough estimate.
What is IFRS9 and what does it mean?
I
FRS 9 replaces IAS 39, in laying out recognition and measurement criteria of financial instruments. Financial Instruments can be cat-
egorized into two broad categories; Financial Assets and Financial Liabilities. The financial assets consist of primarily two instruments, Equity-based or Debt-based e.g. Shares of a company and an investment bond. Financial liabilities on the other hand is an obligations that would be settled through payment of a financial asset. If a company owes its creditors money, basically, that’s a financial liability. The global regulators and accounting standards board were of the opinion that IAS 39 was inconsistent with the way entities manage their businesses and risks, and deferred the recognition of credit losses on loans and receivables until too late in the credit cycle. Following the global financial crisis, addressing this became a priority. IFRS 9 is a Global Standard issued by the International Accounting Standards Board (IASB). The Standard lays out the accounting treatment of classification, measurement of financial instruments, and impairment of financial assets. IFRS describes it as a standard that “requires an entity to recognize a financial asset or a financial liability in its statement of financial position when it becomes a party to the contractual provisions of the instrument.
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