Sources inform "Globes" that the Bank of Israel intends to oblige the banks to adopt US accounting rules in their financial statements. The banks will adopt US GAAP rules gradually, and in some cases the rules will be adapted to the Israeli market. Banking system sources say that the US standards are more stringent than IFRS (International Financial Reporting Standards), and allow less freedom of action in calculating and valuing various items.
The transition will be gradual, with the first item to which American standards will be applied likely to be liabilities to employees. The Bank of Israel's original inclination was to adopt standard IAS 19 of the IFRS, but in the end it was decided to adopt the US standard.
In practice, there are no dramatic differences between the two standards; the differences are in the finer details. The main effect will be on Bank Leumi (TASE: LUMI). Bank Leumi has a very high liability to employees, because of its commitment to pay generation A employees unfunded pensions. It is estimated that implementation of the standard will reduce the bank's shareholders' equity by a large amount, which could be as much as NIS 2 billion. Other banks with exposure to the transition to the new standard are Israel Discount Bank (TASE: DSCT) and First International Bank of Israel (TASE: FTIN), but in lower amounts.
Adoption of the standard will probably take place in 2015, but as early as 2014, and possibly in their next financial statements, the banks will have to publish an estimate of the effect of adoption of the standard. Although adoption of the standard will affect the banks' shareholders' equity in accounting terms, the blow to capital adequacy will not be so severe. The reason for that is that the banks will be able to spread the effect of the transition to the standard on their capital adequacy ratios over five years. This is important, as a reduction in capital adequacy restricts the banks' ability to grant credit.
The Bank of Israel's decision to adopt US standards comes four years after it was decided that the banks would adopt IFRS for matters unconnected to their core businesses. The banks' financial statements are currently a mixture when it comes to reporting standards: core activity is reported on the basis of US standards; non-core activity is reported according to IFRS; and in any event there are matters which there are adjustments with an Israeli twist. Banking system sources say that the combination of standards makes comparison between Israeli and other banks difficult.
The reason that different standards were imposed on the banks was the expectation that US standards and IFRS would ultimately coalesce, but this has still not happened, and there does not appear to be progress in this direction. It was therefore decided that all rules would revert to the US standard.
"Switching to US standards is the right way forward, and will assist in comparing figues of Israeli banks with those of US banks. It is however important that the Bank of Israel should not make too many local adjustments, and should conform as closely as possible to the American rules," a bankingsource said.
Published by Globes [online], Israel business news - www.globes-online.com - on December 15, 2013
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