Dubai: Ahead of the introduction of International Financial Reporting Standards 9 (IFRS 9), a game-changer for banks across the world, UAE lenders need to prepare themselves to change the processes of reporting credit impairments, according industry experts.

The new regulation strongly affects the way credit losses are recognised in the balance sheet and profit and loss (P&L) statement. While impairments are currently based on “incurred losses”, IFRS 9 introduces an approach based on future expectations, namely expected losses (EL).

The main impact on banks is the need to recognise expected losses for all financial products, and at individual and grouped-asset levels. Banks will have to update their calculation at each reporting date to reflect changes in the credit quality of their assets. This will significantly increase the number and frequency of impairment quantifications that must be undertaken and the amount of data that must be processed for such purpose.

“IFRS 9 is a change that will significantly impact banks across the globe, as well as here in the UAE. In fact, the biggest accounting development for banks today is likely to be IFRS 9, as it will significantly impact balance sheets, accounting systems and processes,” said Yousuf Hassan, Partner, Risk Consulting at KPMG.

The new standard on risk recognition revises guidance on the classification of financial assets, and supplements the new hedge accounting principles published in 2013.

Guidance on impairment — that is, provisions for loan losses — are significantly different from current practice.

IFRS 9 will require recognition of losses by provisions to cover both already-incurred losses and some future expected losses.

If a bank provides a home loan, any number of events could result in a non-performing loan, such as the customer losing his job or suffering a serious injury.

“Under the current incurred credit loss model, the bank provides for a loan loss when such an event occurs. However, under the expected credit loss model, the bank is expected to anticipate that such an event could occur and therefore provide for losses earlier than previously,” said Hassan.

Adopting the new principles will require a lot of time, effort and money. The new standard requires banks to provide for expected credit losses over the lifetime of the loan on the date the loan is first recognised, based on the level of default expected over the next 12 months.

Where credit risk is assumed to significantly increase, loan-loss provisioning must be recognised based on the level of defaults expected over the expected life of the loan. This should lead to higher provisions, more complexity and deeper risk management involvement.

IFRS 9 is going to be a genuine paradigm shift for banks, not just in the UAE but worldwide. This is not an issue that affects only the finance or risk functions. The ripple effect of IFRS 9 will be felt across the organisation. Higher provisioning will force banks to review their capital requirements. Product mixes and business models will also need to be evaluated.

With a significant surge in provisions and its impact on profit and loss account expected, it will also be a big challenge for banks to plan ahead. Banks will need to factor this into their capital planning.

“We see only limited possibilities to cushion profit and loss from the worsening asset quality, given the implementation of IFRS 9 by 2019, which forces the bank to provision on expected losses, rather than incurred losses,” Jaap Meijer, head of Research at Arqaam Capital .

On the operational side, systems, processes and other infrastructure will need to change.

“Although the standard is applicable to accounting periods beginning on or after January 1, 2018, the changes are so pervasive and far reaching that, institutions should start acting now to comply with their requirements. Many, if not most, banks will require all of the time left to prepare for the expected credit loss requirements,” said Hassan.

Source: gulfnews.com/business/sectors/banking/ifrs-9-to-redefine-risk-recognition-and-absorption-by-banks-1.1832343

Among the sectors identified as significantly affected by VAT are construction, real estate and export industries

The implementation of 5 percent value-added tax (VAT) in the UAE and Saudi Arabia has not impacted deal flow in the GCC, even as many companies found themselves unprepared, according to experts speaking at the Institute of Chartered Accountants in England and Wales (ICAEW) corporate finance faculty roundtable in Dubai.

According to the panellists, despite the fact that the flows of deals was not impacted there remain uncertainties regarding the items subject to the tax, as well as a “sentiment of denial” across businesses that affected their ability to be ready on time. Now, however, businesses are embracing VAT.

“We are living in a very exciting period,” said Michael Armstrong, FCA and ICAEW regional director for the Middle East, Africa and South Asia (MEASA). “There is no doubt that VAT implementation will improve business conditions and create more stable economies over the long run.”

The panel noted that many businesses do not have access to consultants with VAT experience, which means that smaller businesses with no access to tax advice are struggling with the compliance processes.

The panellists added that while some businesses experienced a negative consumer reaction to the implementation of VAT, it is likely to only be a short-term effect that is negated by the positive long-term economic impact of VAT.

Among the sectors that the panellists identified as significantly affected by VAT are the construction, real estate and export industries. They noted that because of the long tenure of construction projects, businesses with existing contracts hadn’t factored in VAT when planning and found it difficult to pass the cost of the tax onto their customers.

Many panellists applauded the UAE government’s efforts to provide guidance to make the tax’s implementation process as simple as possible for stakeholders.

“As a young legislative body, it’s tough for the UAE tax authority to address all concerns raised by businesses,” Armstrong added. It has been a hasty incorporation process, but as time unfolds, VAT will create a more transparent, credible and internationally accepted economy.

“Time will tell whether this increased transparency will make the UAE more or less competitive,” he added.

Good news for the UAE: No value-added tax (VAT) increases for upcoming 5 years.

UAE Minister of State for Financial Affairs Obaid Al Tayer said at the Arab Fiscal Forum the government has no plans to raise the rate of VAT or excise tax in the near future.

He was answering to a January note by S&P Global Ratings which believed some GCC countries may double the rate of VAT to 10% to raise government revenues, by between 1.7% to 2% of GDP.

Not so good news: The framework for corporate tax is under study, as per Al- Tayer.

Corporate tax is already applied on certain sectors but will now be expanded to include all UAE businesses.

We’ll get to that.

But what impact has the 5% VAT had or will have on the country?

No Impact: study

In a study, the Alliance Business Centers Network (ABCN) saidUAE businesses will be least affected by the imposition of VAT because it is one of the lowest rates in the world.

“Also the government will also be pumping back tax funds into the development projects which, in turn, will boost a number of industries in the country including investments in artificial intelligence, ICT and other traditional investment sectors,” says a new study.

Among Arab countries, the study showed that Tunisia imposes the highest VAT at 18%, Algeria 17%, Egypt 14% and Lebanon at 11%.

The ABCN report said Expo 2020 plans and projects will not be affected, evidenced by 2018 federal and local budgets showing government spending on development is increasing.

Some impact: JLL

Property consultancy Jones Lang Lassalle (JLL) said VAT in the UAE may impact parts of the real estate market in 2018, in particular the retail and office segments.

“Softer conditions and about 2% added to consumer prices will force landlords to take on additional costs, so if anything it’s going to be a negative, but not a big negative,” Craig Plumb, head of research at JLL Mena (Middle East and North Africa), told media last week.

While commercial buildings are subject to a 5% VAT, residential buildings are largely excluded.

Plumb said JLL witnessed an increase in real estate deal making in December 2017 before the tax came into effect.

“I think a lot of it was people bringing forward transactions to avoid the VAT, and January has been definitely a quieter month because of that,” he said.

Source: https://ameinfo.com/money/banking-finance/uae-vat-corporate-tax/