IFRS 9 and its impact on the financial reporting of the local banking industry

Abstract

Purpose: The main objective of the study is to evaluate the expectations of the local banking industry as regards the proposed changes to financial instrument accounting. The global banking industry called for immediate changes following the crisis that swept through the financial markets resulting in huge regulatory challenges. Maltese banks are an essential part of the local economy and as such their prosperity is of great importance. The challenging changes to come about from the new standard are thus to be analysed in detail and understood in the context of the local banking industry. Design: Semi-structured interviews are carried out, along with email based interviews sent in order to obtain the opinions of local banking financial officers as to the effect of the change in standards on the local banking industry. The replies received are analysed and then compared to provide the full picture. Findings: The study concludes that the changes issued so far through IFRS 9 are mainly aimed at making it easier for banks to conduct their business, with reporting mainly being limited to just that, with the removal of the tainting provisions as well as the reduction in the classifications for financial assets. The proposed changes to the Impairment model, in theory, have been welcomed, yet many operational challenges are inherent in the proposal with deliberations ongoing to clear these up. These two phases of the replacement project have been found to be the most important to the local industry due to the majority of financial assets being held at amortised cost. Finally, Hedge Accounting has been criticised as the most challenging aspect of IAS 39 due to the complexity of the requirements. Conclusions: IFRS 9 is a step in the right direction due to the local banking industry holding most assets at amortised cost. This will result in the proposed Impairment model having a large change especially as regards operations, due to the move from incurred to expected losses, as well as the impact of increasing provisions due to this. Value: This study is original as it is the first to analyse the effects of the new standard on the local banking industry.