IFRS: the race is on... The last lap!
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4 Ianuarie 2012 |
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KPMG ROMÂNIA S.R.L. |
Adresa
DN 1 Bucureşti Ploieşti, Nr. 69-71
013685 Bucureşti, Sector 1
Telefon
+40-21-201.22.22
Fax
+40-21-201.22.11
Website
www.kpmg.md
www.kpmg.ro
Foreword
Almost at the finish line… where the future begins
Global trends
The recession and financial turmoil of recent years has exacerbated the growth differential between emerging and developed economies, with banking sectors in emerging markets continuing to grow while those in certain developed economies have stalled or even contracted. In Germany, Spain, Switzerland and the Netherlands, for instance, the banking sector shrank between the end of 2007 and the end of 2010, as did the total size of the E.U. banking sector. By contrast, Chinese banking assets almost doubled over the same three-year period, while Brazil’s sector expanded by almost 80 percent.
European leading banks’ profits up in 2010 but risk from sovereign debt crisis may turn the tables. The leading 15 European banks made collective profits of €85 billion in 2010, double the amount recorded in 2009 and up from losses of €25 billion in 2008. They look well-placed for recovery in normal conditions – but sovereign debt concerns may mean that difficult times are looming again. European banks’ exposure to sovereign debt is a major challenge, particularly in the context of the eurozone crisis with Italy now under scrutiny and even France giving cause for concern.
European Union bailout plans have forced troubled countries to implement severe austerity measures that have produced recessionary spirals, decreasing the chances that they will be able to meet skyrocketing obligations. On 27 October 2011, Europe’s leaders announced a “comprehensive set of additional measuresreflecting Europe’s strong determination to do whatever is required to overcome the present difficulties.” The three pillars of the bail-out package (50% haircut on Greek debt, € 114.7 billion recapitalization of Europe’s banks, EFSF - € 1 trillion war chest) will come with new challenges in relation to the accounting treatment of theGreek sovereign haircut, regulatory implications, capital raising options (i.e. external capital, hybrid conversion, state aid, other internal measures – retained profits, scrip dividends, balance sheet deleveraging, and accelerated portfolio run-offs). These measures aim to prevent contagion from the sovereign debt crisis in peripheral EU member states affecting the wider EU economy and in particular the banking environment, investment and capital markets, as well as government debt sustainability.
Challenges for the Romanian Financial Sector
The Romanian financial sector is not only affected by the challenges faced by the European financial system and in particular, European banks’ exposure to sovereign debt, but also has to deal with the changes in the local regulatory framework, brought by the IFRS conversion project with implementation date 1 January 2012. Also, as mentioned further in this publication, a new Civil Code entered force in October 2011.
Big changes are always difficult, but the current context makes the convergence process all the more important. Time has been and still is the first challenge – there are only few weeks until 1 January 2012 and, although the transition period started in 2009, many aspects such as the new chart of accounts, the prudential regulations and the tax aspects of IFRS implementation have only recently been solved or are still in the development process. Solving these issues has generated extensive discussions between the three main players involved – credit institutions and theRomanian Association of Banks (ARB), the National Bank of Romania (NBR) and the Ministry of Public Finance (MFP). Furthermore, the difficult economic situation, reflected by the concentration of resources in monitoring credit portfolios and by theneed to reduce expenditure, makes it more difficult to find a balance between cost and the reliability of the solutions implemented by banks.
The IFRS convergence project has required a significant effort from banks as a whole, in order to analyze and report the new information in accordance with the required standards. During the implementation stage, IT systems proved to bea significant factor together with the appropriate knowledge about new reporting requirements. Thinking in terms of efficiency, there is no place for temporary solutions. Experience proves that many “temporary” solutions set up at the moment of the conversion to IFRS remain in force for many years, even after the conversion process ends, even though this may require a large amount of work, and a detailed analysis proves their inefficiency in terms of cost.
Although the global economic crisis highlighted vulnerabilities and affected the financial services industry, the Romanian banking sector has managed to maintain a capital-adequacy ratio of approximately 13.5% (September 2011). Still, the ongoing sovereign debt crisis in the Eurozone would affect alsoRomanian banks capital and liquidity needs and their management of Risk Weighted Assets (RWA). Additionally they will have to reduce the mismatch on the funding gap, meaning they will have to raise more deposits. Competition to raise deposits has picked up, with many Romanian banks offering high interest rates for EUR deposits and also higher than inflation rates on RON deposits. The latest announcement by the Austrian National Bank requiring Austrian banks to reduce their Loan to Deposit ratios to 110% could drive the price even higher.
However, as well as international developments, the short-term outlook for the Romanian financial system depends on a restoration of confidence in the domestic economy, of economic growth which seems to be positive in 2011, and developmentsrelated to the widespread uncertainty over the European economy. Several key figures for Romanian financial institutions are shown below:
