Karachi, Starting January 1, 2024, Pakistani banks will begin reporting under the new International Financial Reporting Standard (IFRS) 9, a major shift from the current IAS 39 standards that govern financial instruments. This change, anticipated with the onset of the first quarter results for 2024, marks a significant transition in how banks will account for credit losses, impacting their financial statements and overall credit risk management.
According to JS Global, IFRS 9, which was globally introduced in 2018, provides a more forward-looking approach than its predecessor, incorporating the Expected Credit Loss (ECL) model to anticipate future credit losses rather than reacting to incurred losses. This new model uses a three-stage process based on the credit risk profile of financial assets, drastically altering how banks set aside provisions for potential losses. For assets showing a significant increase in credit risk, banks must now recognize full lifetime expected losses, a move that could affect their profit or loss statements.
The standard also revises the classification and measurement of financial assets, simplifying the previous categories into three new ones: Amortized Cost, Fair Value through Other Comprehensive Income (FVOCI), and Fair Value through Profit or Loss (FVTPL). This restructuring aims to align the accounting treatment more closely with the banks' business models and how they manage financial instruments.
The application of IFRS 9 in Pakistan was delayed by several factors, including the COVID-19 pandemic and global economic volatility, allowing banks additional time to prepare for the comprehensive changes required under the new reporting standard.
Banks are expected to face challenges with the varying impacts of the transition depending on their existing loan portfolios and investment practices. For instance, initial adjustments may lead to a spike in provisioning, affecting banks' capital and requiring strategic management to maintain compliance with capital adequacy requirements.
The implementation of IFRS 9 is a critical step towards enhancing the transparency and consistency of financial reporting in Pakistan's banking sector, providing stakeholders with a clearer picture of banks' financial health and risk exposure.