IFRS 9 EXPLAINED IN CONTEXT
For debt instrument to be classified as an amortise cost the following must be applicable:
- It must be held within a business module whose objective is to hold assets in order to collect contractual cash flows up to maturity.
- The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principle amount outstanding.
As a result, IFRS 9 categorises financial assets into two categories amortised cost and fair value.
IFRS 9 was first implemented on the 1st of January 2018 in place of the IAS 39. IFRS 9 is a forward-looking credit loss module whereas the IAS39 only included Past and Present conditions in determining the impairment value. The first major challenge of IFRS 9 is the Covid-19 Pandemic as most banks had to make significant adjustments to provisions to account for credit losses.
In the South African market, the most affected industries are Airlines, Hospitality, Alcohol and Tobacco, due to strict government regulations to reduce the infection rate of Covid-19. Institutes with exposure to these industries will show a result of increased provisions, not only accounting for current conditions but also for future conditions.
The accumulated result will have a direct negative impact on the asset quality of financial institutions and the underwriting of insurers. Due to the increase in provisions made it will have a direct impact on the bank’s capital levels. We can see the impact on the banking sector through the financial reporting of ABSA bank as shares fell from R145 in February 2020 to R63.30 on the 30th of March 2020. ABSA bank also stated in their Interim Unaudited Financial Statements for 2020, that credit impairments where 4 times higher at R14.7 billion resulting in a 2.77% credit loss ratio from 0.79%.
With this trajectory the banking industry will experience more difficulty recovering from this pandemic due to the nature and extend of IFRS 9.
This article was written internally by Affiniax Partners South Africa (Pty) Ltd and should be read in conjunction with summary report of the specific topic (If available).