Thesis director:

Mr. Fayçal DERBEL

Presented by:

Moez Fakhfakh

UNIVERSITE DE SFAX

FACULTE DES SCIENCES ECONOMIQUES ET DE GESTION

Thesis presented for the obtention of the NATIONAL DIPLOMA Of CHARTERED ACCOUNTANT

The compliance of Tunisian banks with IFRS rules regarding customer’s loans operations:

Innovative principles and necessary adaptation of local

accounting standards

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Thesis Issues

Thesis Interests 1

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Thesis Objectives

Thesis Plan

Presentation of business processess and accounting

policies for customer’s loans operations in Tunisian Banks

Compliance of Tunisian Banks with IFRS accounting

policies related to customer’s loans operations

Case study : Objectives and Conclusions7

Added value of the Thesis8

THESIS PRESENTATION PLAN

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1. In order to maximise its contribution to the financial sector

stability, the Tunisian banks should ensure:

The compliance with Basle II rules but also

The application of an recognized international accounting

standard (i. e IAS/IFRS) to reinforce the foreign investor’s

trust on bank’s financial reporting processess.

I- Thesis Interest

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2. The effects of IFRS on the accounting policies of customer’s

loans operations is an interesting issue for the followings

reasons:

The great impact of customer’s loans transactions on

Tunisian banks financial performances.

The significant changes observed during the last ten years

regarding the accounting and regulatory rules of such

financial instruments.

I -Thesis Interest

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3. The continuous amendment of accounting principles and

banking regulations is a challenging opportunity for the

chartered accountant to gain a sufficient knowledge of IFRS

rules. Such effort is required for the conducting of the following

audit engagements:

Audit of bank’s financial statements prepared according to

IFRS rules.

Assist the bank in the implementation of a new information

system compliant with IFRS principles.

I -Thesis Interest

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« What is the bank’s startegy that ensure compliance with IFRS

principles knowing that :

The Tunisian accounting principles are largely defined by

two different regulatory instances( i.e. the CBT’s accounting

policies and the Tunisian accounting system).

The bank’s financial reporting processess should be

harmonious with Basle II principles.

II- Thesis issues

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1. What are the gaps between the tunisian accounting methods

and IFRS principles regarding the customer’s loans ?

2. What are the effects of IFRS rules on credit information systems,

internal control process and accounting policies of Tunisian

banks?

3. What are the main guidelines that should be followed by

Tunisian banks to succeed in implementing a global banking

solution compliant with IFRS rules?

II- Thesis issues

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1. Carrying out a critical analysis of the Tunisian accounting principles.

2. Presenting in depth the IFRS principles.

3. Proposing guidelines for the application of IFRS rules regarding cutomer’s loans.

III-Thesis Objectives

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IV- Thesis Plan

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The customer’s loans process is governed by a specific

banking regulation that encompass CBT circulars, banking

laws, and international standards.

Therefore, the Tunisian banks must have a internal control

process that identify, evaluate and analyze the credit activity

risks.

1- Customer’s loans particularities

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The accounting principles mentioned in some CBT circulars

(mainly CBT circulars N° 91-24, N°93-08 and N° 2006-19)

The accounting policies of the Tunisian accounting system

(mainly banking accounting standards N°21 and N°25).

2- The customer’s loans accounting rules 2- The customer’s loans accounting rules

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The customer’s rating and therefore the loan provision

calculation based on the past due aging ignore the fair value

amount, which is equal to the total estimated cash-flow

discounted at the effective loan interest rate.

A- Customer’s loans assessement method

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  The information included in Tunisian banks financial

statements have the following deficiencies:

The assessment of nature and extent of credit risk are not well defined.

The risk concentration criteria as well as risks mitigation methods are not communicated.

The risk assessment methods are not regrouped by counterparts that have similar characteristics.

B- Poor Quality of Financial information

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The information included in bank’s financial statements are

provided only to explain figures and therefore is insufficient

compared to the requirements of pillar 3 of Basle II.

The Tunisian banks must publish sufficient, relevant and

usefull information regarding:

The nature, the volume and methods used for credit risk

management.

The adequacy of bank’s equity with the credit risk level.

C- Non compliance with Basel II principles

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The application of IFRS standards should be considered as a

wide entreprise project .

Besides the accounting issues, compliance with IFRS requires

the improvement of the companies' information systems

quality.

First part conclusion:

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With reference to IFRS rules, customer’s loans are recorded

initially at fair value plus transaction costs that are directly

attributable to the acquisition or issue of the financial asset.

The incorporation of these incremental costs permits to

determine the initial effective interest rate.

A- 1 : Initial loan evaluation   

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According to IFRS rules, the loans are valued at their amortized cost ,which equal to :

The amount at which this financial asset is measured at

initial recognition .

plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount

Minus repayments.

Minus any reduction (directly or through the use of an allowance account) for impairment or uncollectibility.

A- 2 : Loans evaluation

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An entity first assesses whether objective evidence of

impairment exists individually for financial assets that are

individually significant, and individually or collectively for

financial assets that are not individually significant .

If an entity determines that no objective evidence of

impairment exists for an individually assessed financial asset,

it includes the asset in a group of financial assets with similar

credit risk characteristics and collectively assesses them for

impairment.

A- 3 : Impairment and uncollectibility of financial assets

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A financial asset or a group of financial assets is impaired and impairment losses are incurred if and only if :

There is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’).

That loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate;

A- 3 : Impairment and uncollectibility of financial assets

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An commun methodlogy of credit risks assessment in order :

To ensure coherence between Basle II and IFRS defintions and rules.

The determination of collective assessment of impairment as required by IFRS based on the criteria defined within the framework of Basle II.

The production of the information required by IFRS regarding the credit risk management based on the methodologies, data and tools developed within the framework of Basle II.

B- Links between IFRS et Basle II

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Given the great volume of data processing, the application of

IFRS principles for customer’s loan operations requires to

implement a global banking solution .

In order to guarantee the success of such project, the banks

should cleary identify all the needed steps.

C-Startegy of compliance with IFRS principles

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A. GAP analysis activities and preliminary impacts measurement of such project on bank’s organization and process.

B. Defining the project planning.

C. Implementing the global banking solution.

D. Follow-up of the project performance.

2- Appproach for applying IFRS rules to credit operations

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A implementation of a new customer’s loans application.

Upgrading the internal control system.

A- GAP analysis and preliminary effects on the bank’s organization

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Be compliant with IFRS principles.

Satisfy the specific requirements of the accounting and credits

departments of the bank.

B- Defining the project planning

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Migration of all existing data into the new information system.

The definition of all accounting parameters.

Satisfying all specific tasks required by accounting and credit

departments.

C- Implentation project phase

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The capacity of the information system to produce financial

statements prepared in conformity of several accounting

principles (IFRS,local accounting system,….).

Ensuring continous training sessions.

Ensuring that the new information system is capable to

follow the bank strategy changement.

D- The follow-up of the project performance.

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Collecting and analyzing interviewees opinion on tunisan

accounting principles regarding the customer’s loan

operations.

Identifying the advantages of IFRS rules.

Defining the keys success factors for conducting projects of

implementing a new global banking solution compliant with

IFRS principles.

 VII- Questionnaire Goals

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The improvement of the financial information quality requires

an update of the tunisian accounting methods.

The IFRS rules should be adpated to the specific context of the

Tunisian banks. The adoption of IFRS Full version should be

restricted for the preparation of head office reporting (if it is

required by the law in force of the mother company).

Compliance with IFRS principles should be considered as a

global project that have effects on employee’s attitude,

department’s organization and company’s procedures.

 VII- Questionnaire conclusions:

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A relevant analysis of the credit process to decise which

approach should be choosen for the global banking

implementation process.

A precise and concise defintion of budgeted time, materials

and human resources.

 Questionnaire conclusions:

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1. Summarizing the tunisian accounting practices in force

regarding customer’s loans operations.

2. Identifying the weakness of these practices compared to the

advantages of IFRS rules.

 VIII- Theorical Added Value of the thesis

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Assisting banks in implementing global banking solutions compliant with IFRS rules.

Financial audit of the financial statements prepared according IFRS principles.

 Added value for the chartered accountants profession