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Study highlights significant variations in HKFRS 9 reporting practices

One year on since the HKFRS 9 standard on financial instruments came into force in Hong Kong and two years since the First Time Application (FTA), trends and insights into impacts of the standard are beginning to evolve.

As a reminder, the standard introduced numerous changes with regard to the classification, impairment recognition and the performance of hedge accounting. As such, financial disclosures have been significantly amended both for first time adoption and for ongoing reporting.

In order to assess the impact of changes introduced under the new standard, Mazars conducted a benchmark study  (Hong Kong Banks’ HKFRS 9 Benchmark Study) which also gave an opportunity to assess the quality of disclosures and to better understand the risk management practice of banks incorporated in Hong Kong. Initial findings suggest there are significant variations in reporting practices among banks.

According to the study, out of the 22 banks analysed, 15 banks reported a negative change in value of total financial assets on first time application. In terms of credit exposure, banks reported a high quality of financial assets as of December 2018, 96% of the exposures being classified as “stage 1” impairment.

However, while some financial disclosures are very comprehensive, others did not fully address financial disclosure requirements. Notably, several banks are silent in reporting the use of rebuttable “30 days past due” presumption, the application of “low credit risk simplified approach,” or the number of scenarios applied for the impairment computation.

In addition, a wide diversity in the definition of “default” and its relationship with the stage 3 impairment classification was noted. Only 12 banks mentioned the linkage between the HKMA loan classification system and the different stages of impairment under HKFRS 9.

With regard to hedge accounting, macro-hedging has been excluded from HKFRS 9 and will be subject to a separate standard. Pending the finalisation of the macro-hedging standard, the Hong Kong Institute of Certified Public Accountants (“HKICPA”) offers different options to deal with the accounting for micro hedging, either by applying partially of fully HKFRS 9 or continuing to apply HKAS 39.

It’s clear form the study that Implementing the standard for the first time was a complex exercise and variations in implementation and impact are to be expected at this stage of the journey. However, as the journey continues, banks will need to continue to refine their risk and finance processes in the coming years. Such an approach will not only ensure full compliance with the standard, but reduce the cost in the preparation of their financial statements.

Pierre Latrobe

Director - Financial Services

Pierre is a Director within Mazars’ dedicated Hong Kong Financial Services team. He joined Mazars Hong Kong in 2017 after having spent 10 years at Mazars France and Mazars United Kingdom in the Financial Services practice. His experience includes numerous projects in relation to risk management, asset-quality review, stress tests, financial due diligences, expert in the context of arbitration, audit and IFRS advisory across Europe and Asia. Pierre is also an expert in accounting for financial instruments under French GAAP and IFRS, including IFRS 9 implementation. He has a recognised track record of working with retail banks, corporate and investment banks, private equity entities, Central Banks and National Regulators.

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