Dealing with Black Swans in Thailand from an IFRS 9 Perspective
Sikke HempeniusPublished: 7 May 20203 min read
Forget business as usual for the time being, black swans do surface occasionally and COVID-19 is one of them. When Thailand recently introduced the IFRS 9 standard it completely changed the way loan-loss provisions are calculated. Financial institutions went from an incurred loss model to an expected loss model based on macro-economic forecasts.
Three months into IFRS 9 and we need to go back to the drawing board to change the models that we are currently using. The sudden nature of this pandemic and the uncertainty of how long this might last could cause lending firms to be very pessimistic and drive the provisions sky high. As such it would not only eat into the capital buffers but also have a very negative impact on the lending availability which is the last thing we all need. This economic crisis is already pretty bad, let’s not make it worse.
With this in mind let us take a look at the recently published accounting rules from the Thai Federation of Accounting Professions which gives guidance to financial institutions that are helping creditors that are affected by the COVID-19 crisis but still have the capacity to continue their business and repay their debt in the future. This definition is some piece of work because it requires defining potentially new sub segments based on combinations of sector codes and specific counter party attributes like credit ratings, being part of a diversified holding, etc. The impact of government aid programs also needs to be considered.
For those specific sub segments, the following measures are applicable from 1 Jan 2020 until 31 Dec 2021 and will have an impact on the following topics:
Pre-emptive Loan Rescheduling
If an entity pre-emptively reschedules a loan and, based on analysis, believes the client can still repay the loan. The entity can consider such modified contracts at stage 1.
If a restructured creditor has repaid 3 consecutive repayments the contract can be assessed at stage 1.
If the contract still has an undrawn credit line, the provision can be based on only on the drawn amount.
The systems that are calculating those loan-loss provisions will have to be flexible enough to cater for those new sub segments and the associated new rules as mentioned in the topics above. Multiple what-if scenario’s and stress tests will provide guidance to the financial institutions as well as to their respective regulators. Guidance in balancing between how to safely go forward in these turbulent times and at the same time ensuring continuity in providing funds to the economy.
At ElysianNxt we are providing real time IFRS 9 solutions that enables our customers to run an unlimited number of scenario’s in a matter of minutes. Our solution has an intuitive user interface allowing the end users to configure, test and simulate these new accounting rules without being dependent on an already overly stretched IT department.
We are more than happy to help you tackling this big swan. For further information please visit www.elysiannxt.com