Expat Credit Be Capped Under New Accounting Rules

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Expats could find their borrowing and credit limits capped by new international accounting standards for banks, building societies and credit card providers.

The standards will force financial firms to make larger bad debt provisions against credit advanced to customers even if the borrowing is not used.

The result, say accountants, may be leave customers and businesses seeking long term finance out in the cold as lenders switch to offering short term finance to avoid holding more cash on their balance sheets.

IFRS 9 will affect overdraft and other credit offered by lenders, even if the cash is not drawn by the customers.

The Association of Chartered Certified Accountants (ACCA) fears this will push lenders into declining long term credit to borrowers and force them to market short term loans instead.

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Exposing financial problems

The accounting standard changes the alters the way banks report credit arrangements on their accounts so mortgages, business loans and other long term debts are transparent to regulators.

Glenn Collins, ACCA UK head of technical advisory said:  “The standard does not take effect until 2018, but will impact long term loans taken out between now and then as they will need to be included in the bad debt provision on lender accounts at that time.

“The likely result is customers will either have to pay more for credit or accept a shorter term to repay the loan.”

Collins explains the measure is not aimed at tightening up lending rules.

“Banks will have to put aside capital to counter bad debts, and if customers have unused credit, it’s possible that this could be withdrawn to reduce the balance sheet liability,” he said.

Accounting standards are regularly changed, often in response to financial problems.

Around 14 years ago, the standard for reporting defined benefit pension deficits was changed, resulting in a shift to defined contribution pensions for workplace schemes.

Tool for regulators

Another change in 2004 halted giving share options to senior executives, says ACCA, and a requirement for companies to explain working conditions in factories supplying their goods improved workplace conditions in India.

In effect, international accounting standards are a tool for regulators to make companies disclose otherwise hidden information that might affect their financial stability on their public accounts.

IFRS9 may make life even harder for cash-starved businesses seeking credit lines from banks.

Businesses may plan credit and spending needs years in advance and make financial arrangements that may not be used for some time in the future.

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