How much is IFRS9 really changing the collections landscape?

24 May 2017

By James Connolly, Head of Debt and Utilities, Callcredit Information Group

James Connolly (1)Before we get into the detail, it is important to understand I’m not a qualified accountant. My area of expertise is the data, software and insights that facilitate customer interactions and collections strategies and by my very nature I am a practical person. In my day-to-day work I look for real tangible solutions to changes in legislation and reporting requirements and hopefully I’ll achieve this in the article below.

Time and time again, my colleagues and I are asked about what the real impact of IFRS9 is in the collections space. For those of you not familiar with this particular financial reporting standard, it comes into force at the beginning of 2018 and arguably, fundamentally changes the way many businesses will have to record credit losses (and potential credit losses).

One of the features of IFRS9 is that it will require banks and other lending institutions to recognise impairments differently. Whereas under the current regime recognised losses from a default are based on expected losses over the next 12 months, under the new standard if there is a significant increase in credit risk, the allowance is measured as the present value of all credit losses projected for the instrument (e.g. a loan or a credit card balance) over its full lifetime. This can turn a potentially modest accounting loss into a much larger one, in effect pulling forward when and how it is recorded.

“So what?” I hear you say, “…it won’t change the way we try to help customers who are in financial difficulty. It won’t influence my contact strategy or workflows, it’s just a technical accounting rule.” WRONG! If you haven’t already, you may well soon be getting a tap on the shoulder from your FD or CFO. The new rules mean they have to report potentially much bigger losses in a given period as well as tie up capital they could be utilising more effectively elsewhere (i.e. in new lending).

Read the full article on Credit Connect