The introduction of IFRS reporting in 2015 for Colombian banks is an improvement in financial disclosure, says Fitch Ratings. A majority of IFRS rules became effective for all Colombian financial institutions on Jan. 1, 2015 and introduced material changes in the treatment of goodwill and consolidation. Colombia did not adopt IFRS on loan loss reserves, which Fitch believes is a conservative deviation from full adoption.

The most important differences between IFRS and Colombian GAAP are related to goodwill and loan loss reserves. IFRS does not require that goodwill be amortized; instead, an impairment analysis must be performed and provisions must be taken if the value of the investments that generated the goodwill is deemed impaired. Unless these investments are severely impaired, this is likely to have a moderately positive impact on banks’ bottom lines. Fitch consistently deducts goodwill for the calculation of Fitch Core Capital, therefore, no changes are expected when calculating capital ratios.

Regulators decided to maintain their current expected loss-based provision rules rather than introducing IFRS’ occurred loss framework. The latter would have allowed banks to weaken loan loss reserves, which have been a key strength of banks in Colombia. This deviation is in line with what other regulators in the region have done and should help maintain banks’ healthy reserve cushion based on rules that are considered among the soundest in Latin America (30-days NPL of 3.11% and 1.45x coverage of impaired loans as of September 2014).

Fitch also sees IFRS’ consolidated, annualized financial statements as an enhancement given Colombian banks’ subsidiary structure. Some banks have sizable specialized subsidiaries for leasing or trust services, among others, and significant investments abroad (Bancolombia about 30% of its total assets, Banco de Bogota 35%, Banco Davivienda 21% and Banco GNB Sudameris 24% as of September 2014). This is an important improvement that helps cross-border comparisons and provides a thorough understanding of banks’ financial standing.

IFRS reporting also introduces some minor changes regarding the treatment of depreciation, capital reserves and the valuation of financial instruments in the portfolios. The adoption is another step toward closing Colombia’s regulatory and reporting gap with other countries.

IFRS implementation follows the new capital rules introduced in the last two years, which in Fitch’s opinion, was a positive step toward compliance with Basel III standards. In addition, Colombian regulators drafted detailed rules on the issuance and use of hybrids by Colombian financial institutions.

Fitch does not anticipate any impact on ratings from the adoption of any of the accounting standards.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.