An international round table was held in Kyiv to discuss problems and the possibility of implementing the international financial reporting standard IFRS 9 Financial Instruments (hereinafter – IFRS 9).

The event was organized by the National Bank of Ukraine supported by Canada-IMF Technical Assistance Project NBU Institutional Capacity Building. Eight central banks from Central and Eastern Europe took part in the round table: Albania, Armenia, Bulgaria, Belarus, Macedonia, Moldova, Georgia, Croatia, and Ukraine.

When opening the round table, Roman Borysenko, the NBU Deputy Governor, said that to ensure successful implementation of IFRS 9, the NBU closely cooperates with the international community and is open for both learning from foreign colleagues and experts of international institutions, and sharing its own experience.

“In Ukraine, implementation of IFRS 9 started as early as 1997. At that point in time, Ukrainian banks and the NBU began to implement the main IFRS principles: accrual of income and expenses, business continuity, the prevalence of economic substance over the legal form in the reporting, etc.” mentioned Mr Borysenko. “However, time flies and IFRS get improved. Now, the banking community faces another challenge: to shift to IFRS 9 starting 1 January 2018. Introduction of IFRS 9 by all financial market players is the basis for economic development and favorable investment climate in Ukraine, an instrument for efficient supervision over the financial market and development of the country’s information infrastructure. We are sure that the shift to the new standard will happen in line with the schedule“.

Bohdan Lukasevych, Chief Accountant, Director of Accounting Department at the NBU, shared the NBU’s experience of IFRS implementation. He noted that the shift to IFRS 9 – the new model for assessing credit losses, both incurred and expected – had been invoked by the financial crisis and required consolidated and systemic work from the public regulatory authorities and financial institutions. “The entire financial sector submitting high-quality, accessible, and reliable financial reporting will allow the society to assess the economy. I am convinced that the joint work in this direction will benefit our country and increase financial stability of the banking system,” said Mr Lukasevych.

“Implementation of IFRS 9 will influence a number of bank performance indicators – the new financial asset classification and the new credit risk assessment principles will impact the balance sheet, namely: asset value and equity; a probable substantial growth in provisions; change in profit indicators volatility and the basic performance indicators; a one-time adjustment of retained earnings as of the implementation date (1 January 2018). Taking into account the fact that now all classifications and assessment models base on the institution’s purpose, asset and risk management practices – successful realization of the project requires many divisions of the bank, including the key ones, to be engaged and work as a team, which the NBU has demonstrated by its own example,” said Liudmyla Snihurska, Deputy Director of Accounting Department at the NBU, during the discussion of the practice and challenges of IFRS 9 implementation.

The round table participants got interested in: classification and assessment of financial assets, especially defining business models and SPPI-testing (analysis if contractual cash flows include solely payments of principal and interest); expected credit loss models, particularly under financial assets included into international reserves and financial assets in the domestic currency; profit distribution in line with IFRS 9; formats of data disclosure in financial reporting for central banks according to the new requirements and other issues of establishing the central bank’s accounting policy related to the transition to IFRS 9 and its application.

The most heated discussions concerned the peculiarities of central banks to define and apply the accounting category of “at fair value through other comprehensive income” with regard to debt-based financial assets included into international reserves.

On the one hand, as mentioned by Oleksii Lupin, Head of Division at Open Market Operations Department of the NBU, accounting in this category is the most complicated: it requires simultaneous application of a range of complex methods to assess credit, interest, and market risk, as well as gains on the financial asset, entails a lot of upgrades to IT systems, and may cause a risk of artificial improvement in the financial results by means of purchasing securities with a high nominal rate despite a negative trend of the market yield curve.

On the other hand, Oleh Strynzha, Director of Financial Controlling Department at the NBU, noted that, given the current financial market conditions, accounting of financial assets under the category of “at fair value through other comprehensive income” would reduce volatility of financial results markedly as compared with financial results presented when the same financial assets are classified under category “at fair value through profit or loss”, as then the financial results would not include the frequent fair value fluctuations driven by market factors.

In this context, it becomes crucial to make correct and well-grounded analysis of the aim and model for managing the respective assets to be the basis for the classification. Rudy Wytenburg, expert at the International Monetary Fund, reminded that the business model had to be identified based on the actual operations and adopted strategy, but not based on the management’s wish to create a certain performance picture in financial statements. The round table participants shared their thoughts about aspects central banks must consider when analyzing their business models.

A lot of attention was paid to models of assessing expected credit losses.

The presentations showed that the participating central banks planned to apply similar assessment models for expected credit losses from reserve assets based on probability-of-default assessment models using open market data.

The participants have also agreed that debt financial instruments issued by a state or its central bank in domestic currency are instruments deemed to be without credit risk, and thus, there is no need for provisioning.

With regard to financial assets such as loans provided for domestic banks, central banks in different countries are set to apply credit loss measuring models that differ in sophistication and content, which, in turn, is attributed to significant differences in the treatment and types of lending products, the economic situation, the banking system liquidity level, the historical background and previous years’ performance, as well as the forecast for economic development.  

Active debate on the topic was held by representatives of the NBU Risk Management Department Olha Hvozdieva and Nadiia Meshenko.

As a key aspect of IFRS 9 implementation by central banks the need has been underscored to analyze laws that govern the activity of a central bank and its relations with the state with the view of determining expediency in revising the laws as new types and items of income and expenses have been emerging. It is also important to keep a dialogue with main stakeholders, including state agencies, with the aim of discerning a possible impact and developing (if necessary) measures to mitigate it. 

Summing up the results of the round table discussions, Vira Rychakivska, the member of the NBU Council and chairperson of the Council’s Audit Committee, said: “The implementation of the IFRS 9 at the NBU has given momentum to clear identification and description of objectives and business models. Central banks should demonstrate a due consideration, reasonability and prudence in their approach to developing new models to assess credit loss under the assets they possess, taking into account specific features of these assets and a special role that central banks come to play in the country’s economy in the future. It is also important for central banks to keep in mind that their activity has a direct impact on state financesˮ.

For reference

The IFRS implementation at the NBU:

• 1996 – 1998 - the development of methodological and technical framework in the area of the IFRS at the NBU;
• 2003 – 2004 - improvement of the NBU regulations for further implementation of the IFRS requirements (in particular, measurement of financial assets at fair value at their initial recognition; the use of the effective interest rate method in accounting);
• 2012 – 2016 - maintenance and preparation of the financial statements by the NBU in full compliance with the IFRS requirements, having made transition to IFRS 9 (in terms of the classification of financial assets) ahead of schedule.
• 2017 – 2018 – apart from  IFRS 9, the NBU is also working on the implementation of other international standards – IFRS 15 Revenue from Contracts with Customers ˮ and IFRS 16 Leasesˮ.   

This category is applied in case the objective of the model for managing a debt-based financial asset group is attained by both receiving cash flows from the issuer/debtor, and sale of the asset, while contractual cash flows envisage solely payments of principal and interest. Accounting under this category requires interest income and losses to be recognized as expected credit losses in the financial results, which impacts the profit and thus the portion of the profit transferred by the central bank to the State Budget. Along with this, rest of the changes in fair value caused by other market factors are recognized in the other comprehensive income and are accumulated (with both positive and negative effect) in the bank’s equity until the day when the financial asset is taken off the books, when they are also reflected in the financial results.