Dear,
The Financial System, and in fact the whole economy, is in a process of Systemic Transformation, from a model based in Volume to a model based in Efficient Management of Capital.
Today's economy is pulled by two forces, limited growth (due to natural resources scarcity, markets saturation, pollution, etc.) and historically high global debt ($233 Trillion, around 300% of the Gross World Product). As limited growth also limits Capital generation and global debt consumes Capital, the logical conclusion is Capital has become scarcer than ever.
Capital is the most important resource of the Financial System, which is also the most critical element of a Capitalist System (it’s the responsible of transferring and allocating capital and liquidity).
Capital scarcity makes the Financial System unstable, as we have seen since the 2008 Financial Crisis, and transfers this instability to the whole economy and society.
If Capital is scarce and it is the most important resource in a Capitalist System, the logical conclusion is managing it efficiently; and this is the driver of the paradigm change, from a model based in Volume to a model based in Efficient Management of Capital.
Regulators are very aware of this new environment of Capital scarcity and the necessity of the paradigm change, and their logical proposal has been a new regulatory framework, focused in making visible the Capital consumption.
The Financial System has two main sources of regulation:
- Solvency from the Basel Committee on Banking Supervision of the Bank for International Settlements https://www.bis.org/bcbs/
- Accounting from the International Accounting Standards Board https://www.ifrs.org/groups/international-accounting-standards-board
The Basel Committee has increased significantly the Capital requirements in the last decade (Basel III, Basel IV, etc.), and the transparency in Capital consumption calculation (Principles for effective risk data aggregation and risk reporting) https://www.bis.org/publ/bcbs239.pdf
The International Accounting Standards Board has also brought significant changes in making Capital Consumption visible.
For instance, IFRS 9 – Financial Instruments, has modified the calculation of the Losses for deterioration of Financial Instruments, from the Incurred Losses to the Expected Losses principle In practical terms, the change produces an early recognition of the deterioration Losses and the consequent Capital consumption.
More interesting is the example of IFRS 15 - Revenue from Contracts with Customers, which modifies the process for Revenue Recognition, including a Contract Asset and a Contract Liability in the Accounting Postings.
The contract liability represents the company obligation to deliver goods or services to the customer for which the entity has received consideration (cash or non-cash) from the customer.
It’s also possible that the goods or services are delivered to the customer before the Revenue Recognition, and the correspondent value is represented by a Contract Asset.
The example of IFRS 16 – Leasing, is also very interesting. With IAS 17, the Lessees did not have to recognized the cost of Capital of a Leasing Contract, which was considered off-balance and only recognized at the time of receiving the Invoice. With IFRS 16, the Lesses have to recognized an Asset (Right of Use) and a Liability at the time of the contract activation.
Finally IFRS 17 – Insurance contracts, which increases the transparency requirements, including the recognition of profit over the period that services are provided under the contract, and the consequent Contract Asset and Liability positions.
All the above Accounting Principals have in common that the contract is represented, since the moment of its activation with an Asset and a Liability Position, influencing the Capital Position of the entity.
- The Asset Position represents a Risk Exposure which consumes Capital.
- The Liability Position reduces the ratio Capital/Debt of the entity.
As you can see, Capital requirements and Capital management are at the center of the regulators concerns. Anyway, this is logical as they know that Capital is scarce and they also know it is the main resource in a Capitalist System.
Once again, the logical conclusion is that Capital Optimization has become the main priority.
Looking forward to read your opinions.
K. Regards,
Ferran.
www.capitency.com
Join the SAP Banking Group at: https://www.linkedin.com/groups/92860
Visit my SAP Banking Blog at: http://sapbank.blogspot.com/
Let's connect on Twitter: @FerranFrancesGi
Ferran.frances@capitency.com
The Financial System, and in fact the whole economy, is in a process of Systemic Transformation, from a model based in Volume to a model based in Efficient Management of Capital.
Today's economy is pulled by two forces, limited growth (due to natural resources scarcity, markets saturation, pollution, etc.) and historically high global debt ($233 Trillion, around 300% of the Gross World Product). As limited growth also limits Capital generation and global debt consumes Capital, the logical conclusion is Capital has become scarcer than ever.
Capital is the most important resource of the Financial System, which is also the most critical element of a Capitalist System (it’s the responsible of transferring and allocating capital and liquidity).
Capital scarcity makes the Financial System unstable, as we have seen since the 2008 Financial Crisis, and transfers this instability to the whole economy and society.
If Capital is scarce and it is the most important resource in a Capitalist System, the logical conclusion is managing it efficiently; and this is the driver of the paradigm change, from a model based in Volume to a model based in Efficient Management of Capital.
Regulators are very aware of this new environment of Capital scarcity and the necessity of the paradigm change, and their logical proposal has been a new regulatory framework, focused in making visible the Capital consumption.
The Financial System has two main sources of regulation:
- Solvency from the Basel Committee on Banking Supervision of the Bank for International Settlements https://www.bis.org/bcbs/
- Accounting from the International Accounting Standards Board https://www.ifrs.org/groups/international-accounting-standards-board
The Basel Committee has increased significantly the Capital requirements in the last decade (Basel III, Basel IV, etc.), and the transparency in Capital consumption calculation (Principles for effective risk data aggregation and risk reporting) https://www.bis.org/publ/bcbs239.pdf
The International Accounting Standards Board has also brought significant changes in making Capital Consumption visible.
For instance, IFRS 9 – Financial Instruments, has modified the calculation of the Losses for deterioration of Financial Instruments, from the Incurred Losses to the Expected Losses principle In practical terms, the change produces an early recognition of the deterioration Losses and the consequent Capital consumption.
More interesting is the example of IFRS 15 - Revenue from Contracts with Customers, which modifies the process for Revenue Recognition, including a Contract Asset and a Contract Liability in the Accounting Postings.
The contract liability represents the company obligation to deliver goods or services to the customer for which the entity has received consideration (cash or non-cash) from the customer.
It’s also possible that the goods or services are delivered to the customer before the Revenue Recognition, and the correspondent value is represented by a Contract Asset.
The example of IFRS 16 – Leasing, is also very interesting. With IAS 17, the Lessees did not have to recognized the cost of Capital of a Leasing Contract, which was considered off-balance and only recognized at the time of receiving the Invoice. With IFRS 16, the Lesses have to recognized an Asset (Right of Use) and a Liability at the time of the contract activation.
Finally IFRS 17 – Insurance contracts, which increases the transparency requirements, including the recognition of profit over the period that services are provided under the contract, and the consequent Contract Asset and Liability positions.
All the above Accounting Principals have in common that the contract is represented, since the moment of its activation with an Asset and a Liability Position, influencing the Capital Position of the entity.
- The Asset Position represents a Risk Exposure which consumes Capital.
- The Liability Position reduces the ratio Capital/Debt of the entity.
As you can see, Capital requirements and Capital management are at the center of the regulators concerns. Anyway, this is logical as they know that Capital is scarce and they also know it is the main resource in a Capitalist System.
Once again, the logical conclusion is that Capital Optimization has become the main priority.
Looking forward to read your opinions.
K. Regards,
Ferran.
www.capitency.com
Join the SAP Banking Group at: https://www.linkedin.com/groups/92860
Visit my SAP Banking Blog at: http://sapbank.blogspot.com/
Let's connect on Twitter: @FerranFrancesGi
Ferran.frances@capitency.com
