KPMG Warns On Impact Of New Accounting Standards On Hong Kong Banks

by Mary Swire, for LawAndTax-News.com, Hong Kong

08 July 2004

In a statement released late last month, accounting firm KPMG warned that two new accounting standards set to come into force in Hong Kong in January 2005 are likely to have the most far-reaching effect on the banking industry of any accounting developments in recent history.

At more than 320 pages with an additional 214 pages of implementation guidance, Hong Kong Accounting Standards 32 and 39 are detailed and prescriptive in nature, and KPMG revealed that many in the banking sector fear increased volatility, conflicts with existing regulatory requirements, large additional costs, and increased pressure on resources will result from their implementation.

The new accounting standards will require banks to estimate loan provisions based on future cash flows rather than the current guidelines issued by the Hong Kong Monetary Authority, and review the basis for general provisioning.

Most banks hold a general provision of around 1% of total advances, as required by the Hong Kong Monetary Authority. The new standard will require this to be based on an analysis of historical loss experience and may lead to a significant write back of general provisions.

The standards are the Hong Kong Society of Accountants' final step in achieving full convergence with International Financial Reporting Standards. In achieving full compliance Hong Kong banks will be more comparable with their international peers, facilitating easier access to cross border capital markets.

Speaking with regard to the forthcoming implementation of IAS 32 and 39, the partner in charge of KPMG's Financial Services operation in Hong Kong, Steve Roder announced that:

"It is essential that the banks allocate sufficient resources now if they are to meet the new requirements. Implementing HKAS 39 and 32 will involve most areas of the business and will be very complex. A detailed assessment of the requirements and the major areas of non-compliance should be the starting point. From there a detailed project plan can be prepared. The key to success will be strong project management and sufficient management attention to the detail."

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