Under current proposals, all UK building societies will be required to apply IFRS 9 (or a UK equivalent with reduced disclosure requirements) within three years.

Although the topic of accounting change is moving up Board agendas, the cost and time commitment required to achieve successful conversion should not be underestimated. The impact of the changes on financial statements will be significant, with the largest effects being a move to expected loss impairment provisioning and revisions to, or the introduction of, hedge accounting – in addition to other changes impacting interest and fee recognition and financial instrument valuation. For societies with a 31 December year-end, financial information may need to be prepared on an IFRS 9 compliant basis as of 31 December 2013 as part of the conversion process. It is our belief that few, if any, are likely to be in a position to do so within the next 12 to 18 months.

The implications are not just limited to the finance function. Whilst societies will be required to consider the effect of the proposals on finance resourcing levels, management information requirements and systems interfaces, the ability to achieve a smooth transition may be impacted by a number of as yet issues. These may include unidentified data quality issues, potential shortfalls in credit risk modelling systems and/or ability and pressures surrounding the commercial sensitivity of elements of the IFRS 9 disclosure requirements. Where societies need to develop effective credit models from scratch, the resource and time commitment required is significant.

Deloitte's Third Global IFRS Banking Survey identified that, of those banks that made an initial assessment of the impact of IFRS 9, more than half expected provisions to increase by more than 20%, with many believing that provision amounts will materially increase as a result of the new standard. The consequences for the building society sector are likely to be more varied given the differences between the current IFRS and UK GAAP reporting frameworks, but in all cases, higher provisions and higher volatility are likely to arise, resulting in a potential reduction in capital. UK GAAP societies will also need to consider the effects of recognising derivative balances on balance sheets at fair value for the first time, especially where fair value liabilities exceed assets, potentially further reducing capital levels.

These factors suggest that the largest risk may be the management of stakeholder perception, especially if members are not clear on the causes of sudden movements in the financial position of a society that have not been driven by economic or trading matters.

This article was first published in Building society update: Maintaining the momentum on 8 May 2013.

Michael Goddard
Michael is a Director in the Midlands Financial Services team and focuses on the provision of external audit, internal audit and advisory services to organisations primarily within the retail financial services sector. Michael is currently focussed on assisting firms in understanding the impact of the impairment requirements of IFRS 9 and is currently assisting firms by rolling out Deloitte's IFRS 9 impairment modelling study, which aims to develop a high level assessment of the qualitative impact of the standard. Connect with Michael on Linkedin.

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