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Company profits to be impacted as impairment losses are expected to rise

Last Updated Dec 2017

Johannesburg, 07 December 2017 - The new financial instruments standard (IFRS 9 – Financial Instruments) is coming into effect from 1 January 2018, which means companies will be required to consider whether their profits are likely to be significantly impacted by this new standard.

“The new requirements will, amongst others, affect companies which sell goods to customers on credit, render services on credit or grant cash advances to customers including financial institutions, furniture retailers and construction companies,” says Bongeka Nodada, SAICA’s Project Director: Financial Reporting. 

“IFRS 9 introduces a fundamental change, meaning companies will have to reflect the impairment losses on financial assets - for example, trade debtors and home loans - much earlier than under the current financial instruments standard. The impairment losses will also be recognised over the life of the financial asset. This change will therefore introduce some volatility to the company’s financial performance. Under the current financial instruments standard, which will be replaced by IFRS 9, companies are required to recognise impairment losses when a credit event has occurred, for example, at the point in time when the customer defaults. 

A general rule in IFRS 9 is that where the credit risk of a financial asset has not changed significantly from the date it was initially recorded on the company’s financial statements, a company measures the loss allowance at an amount equal to 12-month expected credit losses. Lifetime expected credit losses are recognised where the credit risk of a financial asset has changed significantly. A company takes into consideration a number of factors in assessing whether the credit risk of a financial asset has increased significantly and these include a customer’s credit rating, economic conditions under which a customer operates, unemployment rates and changes to the regulatory environment.

IFRS 9 is expected to impact a company’s reported profits, the balance sheet, headline earnings, key leverage ratios, debt covenants, budgets, information technology systems, tax and more.

Companies will also be required to review their financial asset classification as this is likely to change under IFRS 9. A change to the classification is likely to impact how a financial asset is measured. Classification is determined on the basis of the company’s business model and cash flow characteristics of the financial asset.

These new financial instruments requirements are applicable to companies which are required to prepare financial statements in terms of International Financial Reporting Standards (IFRS) including companies listed on the Johannesburg Stock Exchange and those required in terms of the Companies Act 71 of 2008 or any other legislation to comply with IFRS and others who have opted to apply IFRS.

IFRS 9 is effective for annual reporting periods commencing from 1 January 2018. Companies should also consider what disclosures to provide in the financial statements prior to 2018 in respect of this standard which is not yet effective as per the requirements in IFRS (IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors),” concludes Nodada.  

More information on IFRS 9 can be obtained here.  

About SAICA

The South African Institute of Chartered Accountants (SAICA), South Africa’s pre-eminent accountancy body, is widely recognised as one of the world’s leading accounting institutes. The Institute provides a wide range of support services to more than 42 000 members and associates who are chartered accountants [CAs(SA)], as well as AGAs(SA) and ATs(SA), who hold positions as CEOs, MDs, board directors, business owners, chief financial officers, auditors and leaders in every sphere of commerce and industry, and who play a significant role in the nation’s highly dynamic business sector and economic development.

 

SAICA Media Contact:

Kulani Chauke
Communication Coordinator: Corporate
SAICA Brand Division
011 479 0698
kulanic@saica.co.za

 
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