National Bank of Serbia
 
Bank Supervision | Implementation of IFRS 9 in Banks

Implementation of IFRS 9 in Banks

According to the Law on Banks (RS Official Gazette, Nos 107/2005, 91/2010 and 14/2015), when preparing annual financial statements, banks in the Republic of Serbia are required to apply International Financial Reporting Standards (hereinafter: IFRS),  as of the as of the date which the competent authority has designated as the date of application of these standards. International Accounting Standards Board published that IFRS 9 – Financial Instruments shall be applied from 1 January 2018, at which time the International Accounting Standard 39 – Financial Instruments: Recognition and Measurement shall cease to apply. The significance of the commenced application of IFRS 9 stems from the changed method of classification, measurement and calculation of impairment of financial instruments and represents an important shift for banks in terms of recognition and disclosure of credit losses since it introduces the concept of expected credit losses, instead of the concept of incurred credit losses, which, inter alia, entails macroeconomic models in their estimates and calculations.   

In accordance with its strategic commitment to continuously improve the legal framework in line with the EU regulations, international standards and best practice in a manner which ensures the preservation and strengthening of the banking and financial systems' stability, and honouring the specific features of the domestic regulations and market, the NBS worked intensely in 2017 to identify the necessary amendments to the regulations so as to enable the application of IFRS 9 in banks since the day of the commencement of its application. In addition, bearing in mind the changes in banks' operations and financial reporting due to the beginning of application of the new standard, in 2017 the NBS monitored the process of banks' preparation for the onset of application of IFRS 9, in line with its jurisdiction. Questionnaires on banks' activities concerning the implementation of IFRS 9 were aimed at analysing the capacity, in terms of quality, of individual banks and the banking sector as a whole for the application of IFRS 9, the models that banks intend to use for the calculation of impairment in line with the new standard and the estimate of expected effects of the commenced application of IFRS 9 to the amount of impairment of financial instruments and bank's capital. The most important conclusions of the analyses suggest the expected reduction in the capital adequacy ratio by around 0.39 pp as a result of the IFRS 9 application, which does not affect the banking sector’s ability to absorb any potential loss, bearing in mind that capital adequacy remains significantly above the prescribed minimum even after the expected reduction (prescribed value is 8% and the average value at the end-September 2017 stood at 22.46%). The presentation IFRS 9 implementation project contains conclusions of the analyses. The presentation was held at the counselling Annual Account – The First Application of IFRS 9, in Palić in December 2017.

For the purpose of a transparent dialogue and timely involvement of all stakeholders and in order to ensure the necessary information on the implementation of IFRS 9 in practice, the monitoring of banks’ preparations for the application of IFRS 9 and identification of the needed regulatory amendments were carried out under the auspices of a working group established for that purpose. The group was composed of the representatives of banks, the Association of Serbian Banks and external auditors, in addition to the NBS staff.  After the public discussion, a set of regulations was adopted (published in the RS Official Gazette, No 101/2017 of 10 November 2017), enabling the application of IFRS 9 in banks as of 1 January 2018: 

  • Decision on Forms and Content of Items in Financial Statement Forms to Be Completed by Banks;
  • Decision Amending the Decision on the Chart of Accounts and Contents of Accounts in the Chart of Accounts for Banks;
  • Decision on the Collection, Processing and Submission of Data on the Balance and Structure of Accounts in the Chart of Accounts.
  • Decision Amending the Decision on Reporting Requirements for Banks,
  • Decision Amending the Decision оn the Classification of Bank Balance Sheet Assets and Off-balance Sheet Items.

A brief overview of the novelties in the regulatory framework for banks which are the result of the adoption of the above set of by-laws can be found in the presentation New by-laws aimed at implementation of IFRS 9. With a view to acquainting all stakeholders with NBS’s position on specific issues regarding the implementation of the new regulations, and in accordance with the established practice, the NBS published Answers to the most frequently asked questions regarding the first application of IFRS 9 . The implemented activities reflect the commitment of the NBS to encourage the prudent application of IFRS 9 in the domestic banking sector, to enable higher transparency of financial reporting by banks in terms of the method for measurement of balance sheet items and strengthen the confidence in the financial position of banks.  The NBS activities concerning the application of the new standard will continue, particularly bearing in mind that the first application and implementation of the new standard in the banking sector of the Republic of Serbia are carried out simultaneously with the same process in other countries applying IFRS as well as that issues and problems arising from their application in practice have not yet been identified in domestic and international practice. The NBS will closely analyse the overall effects registered in banks’ business books and continue to use the experience acquired in the process of monitoring the commenced application of IFRS 9 for further improvement of regulatory and supervisory framework and for enhancing the quality of financial reporting by banks. In this regard, in line with its mandate, the NBS will continue the dialogue with banks as a part of its regular supervisory activities and cooperate with external auditors in monitoring the application of IFRS 9 in banks.