The Ministry of Finance has announced the draft of a scheme to apply international accounting standards to Vietnam, originating from the government’s direction for Vietnam to develop sustainably and build a healthy business environment.
In particular, for sustainable development, international financial accounting standards create a transparent environment to attract capital from investors, especially foreign investors.
In fact, most of the developed economies in the region have applied international reporting standards (IFRS) in whole or in part such as Japan, Korea, Singapore, Hong Kong and Malaysia, forming a transparent playground that attracts and encourages global investment flows.
However, in Vietnam, IFRS is still a relatively unfamiliar set of standards for businesses in general and banks in particular.
IFRS9 is one of the international financial reporting standards issued by the International Financial Reporting Committee IASB replacing the old standard IAS39 from 2014. It officially took effect from January 1, 2018.
Talking to BizLIVE reporter, Vietnam Technological and Commercial Joint-Stock Bank (Techcombank) expert (the first bank in Vietnam applying IFRS9) said that, for the banking system in general, this was the backbone standard, which had a significant influence on financial data because about 80 percent of banks’ balance sheets were formed by financial instruments.
“IFRS9 is considered to be the benchmark to bring accounting principles closer to business operations, starting from the classification and measurement of financial instruments.
Under the Vietnam Accounting Standards (VAS) system, the classification of financial instruments into groups available for sale, held to maturity, or kept for business completely depends on rigid regulations and subjective will of the business. Meanwhile, IFRS’s classification model is based two basic principles, aiming at the financial data, which should reflect the business model of the banks.
In addition, if the basis for recognising VAS’s financial instruments is the book value, IFRS aims to maximise the reflect on market values, helping to evaluate much more timely and accurately the efficiency and management of the bank’s business operations, “said Techcombank expert.
Moreover, IFRS9 is considered a bridging standard between financial accounting and risk management, when the provisioning method for financial assets has shifted from a loss-based model to Expected Credit Loss (ECL) model.
Specifically, in VAS, debt classification is carried out mainly on qualitative factors, based on the number of overdue days of customers when losses have actually arisen to classify customers into five debt groups. Since then, provisioning data has been calculated on the basis of applying the specified loss rates for each specific debt group.
Meanwhile, IFRS9 offers an expected credit loss model, which requires banks to divide debts into three phases, not just based on qualitative factors but also quantitative factors such as early warning signs and the possibility of increasing customer credit risk are reflected in the bank’s internal credit rating.
“Right from the time of disbursement, the banks have to determine the expected loss to customers within the next 12 months. When customers have signs of increased risk, they will be categorised into worse periods and the banks need to determine the expected loss for the entire life cycle of the loan.
The determination of provision does not follow defined rates like VAS but based on ECL model, in which banks need to build models to calculate the probability of customer default, the rate of loss when default and the value of the loan or investment at the time of default, which takes into account macroeconomic variables to measure future losses,” said the expert.
As above, it can be seen that the implementation of IFRS9 in banks is really a big challenge, with difficulties coming from resources, tools, data and models.
In particular, the quality and availability of data will be an important factor to successfully carry out IFRS9 risk models. Banks will need large amounts of historical data with a complete list of input information of the model.
Accordingly, they will have to invest largely in information technology systems, project preparation, implementation plan, recruitment and human resource training.
Especially, the banks’ reserve loss is expected to increase as it moves from the loss-generated model to the proposed credit loss model.
The report was published in late September 2018 by PWC, saying that provisioning of Malaysian banks has increased from 25 percent to 50 percent on the first day of applying IFRS 9. And this has a direct impact on retained earnings of banks.
It can be seen that if IFRS 9 is used, banks will face a lot of pressure and challenges. However, according to the experts’ assessment, to be able to develop sustainably, keep up with the region and the world, this is the inevitable way of the banks.
Since applying successfully IFRS9 will greatly support the completion of the credit risk management framework for banks, coming from assessing and measuring customer risk earlier, more accurately, thereby providing reasonable policies in determining prices, managing customers, making appropriate disbursement decisions, monitoring and recovering debts and minimising losses to banks.
In addition, the disclosure and transparency of financial data and risk management policies in accordance with international financial reporting standards will help Vietnamese banks raise their reputation and call for capital from domestic and international investors.
It is known that in Vietnam, with the draft being finalised, the Ministry of Finance proposes an IFRS application roadmap to start in 2022.
As for the banking system, according to Techcombank’s experts, the Basel II application roadmap, Circular 13 regulating the internal control system and soon IFRS9 will support remarkably the State Bank of Vietnam (SBV) in capturing and managing credit quality of the whole system, increasing long-term values for the economy in general.
