The Financial Reporting Council (FRC) recently produced a Thematic Review of the International Financial Reporting Standard – IFRS 9.
FRS 9 was introduced on 1 January 2018 and the review looks at how this has been rolled out across a number of organisations and sectors across industry.
This blog considers the effects of the introduction of this new standard and how Collections operation changes can help offset the impact on financial reporting.
What is IFRS 9?
IFRS 9 is the accounting standard that has revamped the provision for credit losses. It replaced the old IAS 39 standard, where losses were recorded once a loss was incurred, with one that accounted for historic, current and future losses. Additionally, organisations now need to include consideration of changes in economic conditions. It has been quite a wide-ranging change.
What impact is it having?
The review in general is quite extensive. It talks through reporting requirements, transitional disclosures and how companies have treated economic scenarios. Some of the smaller banks are called out for improvement.
However, there were a couple of surprising areas and observations hidden within the text.
- Credit loss provisions have increased substantially, especially for banks. The illustrative example showed a 75% increase in year over year provision for impaired loans.
- Clearly not much is given away in terms of how probability of default and increased credit risk is being calculated by each bank; although we know independently this has been a significant area of activity over the last year. The review does appear to reflect this hard work with a relatively smooth rollout.
- Some of the staging reporting is interesting to compare across companies. This could be useful in providing insight for internal reporting, especially if the mix and change between Stage 1 and Stage 2 is resulting in volatility in credit loss provisions.
- Alternative economic scenarios are an interesting aspect of IFRS 9. In particular, with reference to trigger events, such as a hard Brexit, these could become particularly important. It is important Collections teams are also ready to react operationally to these scenarios
How to respond in collections?
IFRS 9 has clearly had a significant impact within financial reporting, especially within the banking sector.
A primary response to this within any collections team is to ensure the operation and process is well run, make contact early, and have plans that can help resolve customer issues. Reviewing your current strategies is also certainly recommended.
Updating the criteria for pre-arrears cases, using AI with extended data to identify customers early can all help in preventing customers move to Stage 2. This is also worth review, potentially releasing funds from the balance sheet and reducing expected future credit losses.
Arum is a leading provider of expertise in Collections and Recoveries, including strategy, technology and implementation. We work across industry to help clients improve their processes. If you think we could help, please contact us.