4 Aug 2014 02:28pm

IFRS 9 - a milestone in the world of financial reporting

The recently announced rules from the international accounting standards board (IASB) are the last piece of the jigsaw in the introduction of IFRS 9 (with the IASB macro-hedging project in still in the pipeline). This long awaited standard will change the way in which banks and other financial institutions account for loan losses on their balance sheets, imposing a longer, more forward-thinking view

Preparing for IFRSIFRS 9 introduces changes to the classification, measurement and impairment assessment requirements for financial instruments as well as new requirements for hedge accounting. It hasn’t been so long that financial institutions won’t remember IAS 39 and its role in the financial crisis which led to the five year development of the new rules. So how will IFRS 9 differ?

The key changes to financial reporting in the new standard are:

• A forward looking impairment assessment model for financial assets, which will encourage mitigating risk by recording expected losses as well as losses incurred;

• Simpler and clearer classification, recognition and measurement rules, which will help in more transparent and consistent financial reporting by banks and other credit institutions;

• Hedge accounting will be linked to the entity’s risk management framework, which will help financial institutions by aligning the hedging strategies used with financial reporting to ensure a more meaningful disclosure to the users of financial statements. With the elimination of the effectiveness threshold of 80-125%, there is more scope for financial institutions to utilise hedge accounting;

• Changes in own credit risk are to be recognised in other comprehensive income, which will reduce volatility in the profit or loss account.

These key changes reflect improvements on the previous standard because they significantly address the criticism levelled at IAS 39.

IFRS 9 was borne out of the financial crisis and intended to paint a more accurate picture of accounts. Despite these good intentions, it is yet another regulatory cost as banks and financial institutions scramble to update systems and processes to comply with broader regulatory changes.

Although this will impact everyone, the changes will be more keenly felt by those with international operations, as there remains a divergence with the US rules to be finalised later in the year.

The implementation of IFRS 9 will be complex, and the key to ensuring compliance is to start preparing now to instigate the required change. Financial institutions should be looking at business objectives documentation to ensure the classification of financial assets can stand up to an audit, and be assessing the impact on equity to assess the implications on debt covenants and regulatory capital.

There will also be significant IT and resourcing investment needed to comply with the new rules, as well as granular level data requirements and the additional costs of integrating accounting, IT and risk functions in order to be able to accurately monitor and report losses.

Finally, financial institutions should be engaging with analysts and the investor community to notify them of the changes and how to read the new loan loss provisions, interpreting the financial health of the financial institution.

IFRS 9 is a comprehensive response to the financial crisis and is intended to provide a more accurate and timely presentation of financial institution reporting, particularly in relation to loan losses. However, it will be a significant cost at a time when other regulatory burdens are already putting pressure on banks and financial institutions. One thing is for sure: IFRS 9 will lead financial institutions in to a new world of long term forecasting.

Dan Taylor, BDO financial services audit partner


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