IFRS 9 causes HSBC’s net assets to drop £1.2bn

The impact of IFRS 9 Financial Instruments, effective 1 January 2018, is starting to show as banks begin to publish their 2018 annual reports, with HSBC, Barclays and RBS all being affected by the new standard

 IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement and is effective for periods beginning on or after 1 January 2018 with early adoption permitted. The new standard includes requirements for recognition and measurement, impairment, derecognition and general hedge accounting.

Under IFRS 9, the recognition and measurement of expected credit losses differs from the approach under IAS 39. The change in expected credit losses relating to financial assets under IFRS 9 is recorded in the income statement under ‘change in expected credit losses and other credit impairment charges’.

HSBC adopted IFRS 9 on 1 January 2018, except for the provisions relating to the presentation of gains and losses on financial liabilities designated at fair value, which were adopted from 1 January 2017. The adoption of IFRS 9 reduced the bank’s net assets at 1 January 2018 by $1.6bn (£1bn).

This decrease in net assets arose from:

• a decrease of $2.2bn from additional impairment allowances;
• a decrease of $0.9bn from our associates reducing their net assets;
• an increase of $1.1bn from the remeasurement of financial assets and liabilities because of classification changes, mainly from revoking fair value accounting designations for certain long-dated issued debt instruments; and
• an increase in net deferred tax assets of $0.4bn.

IFRS 9 has also meant that there has been a reclassification of certain items within the balance sheet. ‘Net gains on the disposal of equity securities’ and ‘impairment of available-for-sale equity securities’ are no longer reported within ‘gains less losses from financial investments’. These are now reported within ‘net income/(expense) from financial instruments measured at fair value through profit or loss’.

The financial statement line item ‘changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss’ was added under IFRS 9 and HSBC recording revenue of $0.7bn under this line item in 2018.

Barclays

When Barclays issued its Q3 2017 results, it said: ‘Barclays’ estimated IFRS 9 impact, based on the portfolio as at 30 September 2017, is a decrease in shareholders’ equity of approximately £2bn post tax. This estimated reduction in shareholders’ equity equates to a decrease in tangible net asset value of 10 to 12 pence per share.’

By the end of 2018, the implementation of IFRS 9 resulted in a net increase in CET1 capital as the initial decrease in shareholders’ equity of £2.2bn on implementation was offset by the transitional relief of £1.3bn and the removal of regulatory deduction for the excess of expected loss over impairment.

In its annual report for 2018, the year of IFRS 9 adoption, the bank revealed that financial assets at fair value through the income statement increase £40.6bn to hit £144.7bn due to the impact of IFRS 9, with adjustments under IFRS 9 transitional arrangements being £1.3bn at 31 December 2018.

The report states ‘tangible net asset value per share was 262p (December 2017: 276p) as 21.9p of earnings per share, excluding litigation and conduct, was more than offset by the implementation of IFRS 9, impact of litigation and conduct charges, the redemption of Preference Shares and AT1 securities, as well as dividend payments’.

RBS plc

The transition to IFRS 9 reduced RBS’s total equity by £1.4m to £84.8m as at 1 January 2018.

RBS implemented IFRS 9 with effect from 1 January 2018 with no restatement of comparatives other than the day one impact on implementation reflected in opening equity. Cash flows and cash losses are unchanged by the change in impairment framework from IAS 39 to IFRS 9.

Changes in accounting treatment under IFRS 9 significantly raised the non-traded market risk profile, which was partially mitigated through additional hedging. This impacted the long-dated loans based on fair value in RBS plc (LOBOs), which drive the risk in this entity.

New elements include:

• move from incurred loss model to expected loss model, including all performing assets having 12-month expected credit loss on origination;
• determination of significant increase in credit risk – this moves a subset of assets from a 12-month expected credit loss (Stage 1) to lifetime expected credit loss (Stage 2) when credit risk has significantly increased since origination;
• change in scope of impaired assets (Stage 3); and
• incorporation of forward-looking information, including multiple economic scenarios (MES).

IFRS 9 introduced additional complexity into the determination of credit impairment provisioning requirements. However, the building blocks that deliver an expected credit loss calculation already existed in the RBS Group. At RBS, existing Basel models were used as a starting point in the construction of IFRS 9 models, which also incorporate term extension and forward looking information.