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Albanian approach to adaption to IFRS for loan loss provisions Indrit Banka Bank of Albania October 2014 1 CONTENT • Albanian banking system context • Current legal & regulatory framework on financial reporting • Key differences between IFRS and regulatory reporting • Current regulatory provision approach • Our approach on IFRS approximation 2 Albanian Banking System Context • Banks and other financial institutions supervised by BoA: – – – – 16 banks 21 non-bank financial institutions 2 unions of SLA-s (121 SLA-s) 333 foreign-exchange bureaus • Two tier banking system created in 1992: – Banking system’s capital structure dominated by foreign capital: • 92% of paid-in capital of the banking system is of foreign origin, out of which • 74% of EU origin – No state owned banks – Two banks with predominantly local capital • Key indicators (as of June 2014) • • • • • • Banking system assets to GDP: 89.6% Outstanding loans to GDP: 40.5% Non-performing loans ratio: 24.1% Loan loss provisions to non-performing loans: 66.9% Restructured loans to outstanding loans: 12.5% Loans under foreclosure to outstanding loans: 19.2% 3 Current legal & regulatory framework on financial reporting • The law “On accounting” required IFRS reporting from 2008. This was applied to banks, other financial institutions and other big companies. • Reporting of banks to the central bank is based on a “local reporting methodology” – based mostly on 1998 IFRS. • The local reporting methodology is continuously updated aiming approximation to best supervisory standards and to the latest IFRS version. 4 Key differences between IFRS and regulatory reporting 1. Loan provisions - This is considered the main factor influencing in quantitative terms the difference between standards. - In some cases the provisions as per local methodology may be double to impairments created as per IFRS Other less relevant items contributing in the difference are: 2. Accounting treatment for “available for sale assets” 3. Accounting treatment for “shareholder’s capital” 4. Accrued interest for NPL-s 5. Fees and commissions 5 Current regulatory provision approach • The current methodology requires categorization of loans in 5 classes/categories • Each class is referred a provisioning rate • Categorization is based on certain criteria: - Days past due - Financial position - Collateralization - Restructuring status 6 Our approach on IFRS approximation • The approach: Gradual implementation of IFRS in the local reporting methodology • The rationale: Keeping the regulatory/local treatment for items that present relevant gaps between standards. No Items Moving to IFRS treatment 1 Loan provisions 2 Treatment of available for sale assets X 3 Treatment of shareholder’s capital X 4 Accrued interests for NPL-s X 5 Fees and commissions X Keeping local treatment X 7 …Our approach on IFRS approximation • BoA will keep its local treatment for provisions. However, we aim to reduce the gap by developing the regulatory provision with IFRS requirements in terms of: - collateral recognition - better combination of excepted & incurred loss methodologies 8 Thank you! 9