One of the lessons of the financial crisis was that banks needed to pay greater attention to their provisions for losses, and how they report their financial position. Perceived deficiencies in accounting for financial instruments were thought to have contributed to the magnitude of the crisis.

And so a project was set in motion to create a new International Financial Reporting Standard (IFRS) on loan loss provisioning — the IFRS 9. This came into force on January 1, 2018.

The new standard will have an effect on banks in the UAE and the rest of the world where IFRS is the accounting standard used. The race to regulatory compliance of the new reporting should be nearing the finishing line. But many GCC banks and financial institutions are not ready yet and must speed up their efforts or risk non-compliance.

The IFRS 9 is a game changer for all organisations in the market. It introduces changes to the classification, measurement and impairment assessment requirements for financial instruments as well as new requirements for hedge accounting. It will change the way in which banks and other financial institutions account for loan losses on their balance-sheets, imposing a longer, more forward-thinking view.

It is a comprehensive response to the financial crisis and is intended to provide a more appropriate and timely presentation of financial institution reporting, particularly in relation to loan losses. But the implementation process is complex and the key to ensuring compliance is preparation in order to instigate the required change.

Many organisations will be affected by the new standard and this could mean they will have to re-build their information systems and processes, which cannot be done overnight. The biggest challenge facing regional financial organisations is most likely to be data collection.

Other challenges include accounting related matters, creation of IT solutions to comply with the new rules, alignment of stakeholders, and a lack of risk management expertise.

In emerging markets, such as the Middle East, these challenges are often greater than in others with more established systems in place. Reliable macroeconomic data can be less readily available than elsewhere. Where this information is generated by financial institutions themselves, extra care has to be taken to ensure its rigour.

According to Deloitte’s fourth Global IFRS 9 survey, which compiled the information of 91 banks and financial institutions, almost half of the banks surveyed do not think they have enough technical resources to deliver their IFRS 9 project. And almost a quarter of these do not think there will be sufficient skills available in the market to cover shortfalls.

No one should wait for regulators to make suggestions about their reporting practices. Organisations should be proactive in their interpretation and implementation of IFRS 9. They should take a judgement call, forecast macroeconomic factors and run their own risk scenarios.

They must also ensure that their solutions are sufficiently dynamic to be able to respond to changes in the environment on an ongoing basis.

In order to prepare, businesses should be putting together a plan that involves a consistent capital planning and impairment analysis that would lead to an effective implementation of IFRS 9. It will also be critical to ensure they understand stakeholder priorities, qualitative and quantitative data generation and credibility.

Finally, it is also important to consider macroeconomic factors in determining provisioning levels. This requirement might be difficult and complicated for multinational organisations operating in different jurisdictions.

While preparation for IFRS 9 requires time and money, it will bring financial institutions into a new world of long term forecasting. Research shows that IFRS adoption should lower accounting costs, increase market efficiency and reduce the cost of raising capital — a tremendous benefit for the UAE, which is diversifying economically, especially into financial services.

The writer is the ICAEW Director for the Middle East, Africa and South Asia.