Banks around the world are battling to prepare themselves for the introduction of new accounting rules affecting provisions for potential future losses, with UK banks expecting to be particularly hard-hit.

A survey carried out by consultants EY and seen by Out-Law.com examining banks' readiness for the implementation of International Financial Reporting Standard (IFRS) 9 on 1 January 2018 showed that the expected increase in impairment provisions varied significantly across banks.

While the majority of respondents expected an increase in impairment provisions, which take account of a drop in the value of assets, of up to 15%, half of the six UK banks surveyed expected an increase of 25% or more. EY said French banks were expecting lower increases. Some German and Canadian banks were expecting a decrease in provisions, but others expected a rise of up to 25%.

UK banks also expect a greater impact from planning for multiple economic scenarios than their competitors overseas. EY said for example impairment on floating-rate mortgages, which are market standard in the UK, was expected to be more sensitive to macro-economic scenarios than impairment on fixed-rate mortgages, which are market standard in France.

EY said the volume of changes needed to banks' internal systems, organisation and governance ahead of the introduction of IFRS 9 "had been generally underestimated" and that it was now clear meeting requirements would require "more intensive oversight with increased stakeholder scrutiny". The survey also revealed that half of larger banks have an IFRS 9 implementation budget of over €60 million.

Banks had also delayed parallel runs of their processes, which calculate expected credit losses under IFRS 9 in parallel with current impairment calculations. EY said most banks had expected to start parallel runs in the first quarter of 2017 and a limited number had managed to start in the first half of the year. However the majority of banks had moved their planned parallel runs to the second half of 2017 and a limited number would not perform any parallel runs.

Most UK banks will perform monthly parallel runs, although EY said one UK bank was among those which expected to carry out less frequent parallel runs.

IFRS9 was issued by the London-based International Accounting Standards Board (IASB) and forms part of the body's response to the global financial crisis. Amongst its provisions, it will require firms to account for expected credit losses at the point that they first recognise financial instruments, and to recognise full lifetime expected losses at an earlier stage.

The new standard is designed to address concerns which emerged following the global financial crisis that banks were unable to account for losses until they were incurred, even when it was apparent to them that they were going to experience those losses. Under IFRS9, the 'impairment model' used by banks will change from 'incurred loss' to 'expected loss', requiring them to set aside sufficient capital to cover expected losses over the next 12 months. In addition, they will be required to record lifetime expected losses if credit risks increase significantly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances,