Qatar banks gear up for game changing accounting standard

With the new financial reporting standard (IFRS9) is set to come into force from January 2018, banks in Qatar are busy making fundamental changes to their accounting model. The implementation of new standards means the banks will need to take into account the impact of the possible future events when calculating their capital provisions.
The IFRS 9 will bring in a new era in the banking sector across the region, in terms of the way they do businesses. Currently, banks are required to set aside provisions only when they incur losses. IFRS 9 will require banks to earmark provisions in advance, based on their loss expectations. Starting January, banks will need to make a forward-looking approach to provisioning. Essentially, the new IFRS will restructure banks’ existing lending portfolio.
“The new accounting standard is going to be a game changer in the industry. This is the single biggest change in last nine years. For the last nine years, we have been seeing this in making. Qatar Banks had been asked by QCB (Qatar Central bank) to submit their reports in September. QCB is now assessing the banks reports. The central bank is expected to go back to the banks in December before finalising the guidance”, Omar Mahmood, Partner, Head of Financial Services for Middle East and South Asia, KPMG told The Peninsula, in an interview yesterday.
The new accounting system will make banks’ disclosures more transparent, which will help get better understanding of cash flows, how portfolios are being split and how they are moving. The implementation of IFRS9 will bring in additional meaningful disclosures, he said. The new regulation will alter the way credit losses are recognised in the profit and loss statement. While impairments are currently based on ‘incurred losses’, IFRS 9 introduces an approach based on future expectations, i.e. expected losses (EL).
The new system demands banks to centralise data from numerous sources, coordinate and manage a wide variety of models, evaluate changes in credit risk, and calculate expected credit losses and provisions accordingly. Banks also need to prepare and export data required by external accounting systems, Omar said.
The three key differences from the existing accounting model (IFRS39), in terms of ‘impairment’, is that the ‘incurred loss model‘will be replaced by ‘expected loss model’. The impairment trigger is no longer required before impairment allowance is recognized and impairment does not apply to equity investments.
IFRS 9 is a response to the events of the 2007-2008 financial crisis.
The accounting standards that was in use in the pre-crisis years failed to highlight the losses that firms would face because they were based on analysis of past events. This led firms to underestimate the capital provisions they required.