Home owners hit by new accounting standards

ACCA (Association of Chartered Certified Accountants) today (28 July) warns that the new accounting standard (IFRS 9) may force banks to have larger bad debt provisions against long term loans such as mortgages and business loans.

The standard will also financially penalise banks for offering overdraft and credit lines even when they are unused by the customer.

This development presents obvious access to credit implications for those seeking longer term mortgage approval and for business in general. A number of shorter term loans, however, will not be affected and they will become more financially attractive to banks.

The new standard, IFRS 9 Financial instruments, will require a life time expected loan loss model to be used rather than the current standard which uses an ‘incurred but not reported’ (IBNR) loan loss model. While somewhat technical in application, the new standard may result in long-term loans requiring larger bad debt provisions compared to the previous accounting standard, loans of one year or less duration will require lower provisions. The standard also requires recognition of losses expected on credit limits offered to customers even when the credit limits are not used as at the year-end reporting date.

Glenn Collins, ACCA UK head of technical advisory said: “Business needs long term credit but banks will be under pressure to provide shorter term credit and lower credit limits. Even though the standard will not be applicable until 2018, loans taken out now will be affected by this change and are likely to be either more expensive or of a shorter duration.”

He concluded: “IFRS 9 in 2014 will not stop bad lending, but it will measure the financial effect of such lending better and require earlier bad debt provisioning. This should allow earlier intervention by the Regulator where necessary. It will however, encourage banks to cut consumer credit limits on overdrafts and credit cards, only granting approval for shorter term mortgages and business loans.”