The countdown is now on for the implementation of the new global accounting standard: International Financial Reporting Standard 9 (IFRS9), which must be implemented and fully compliant by January 2018.
The IFRS9 addresses how to recognise and account for credit losses (impairment) and will require serious thought, cooperation and investment from the industry, not only to meet the new requirements, but also to reach the end goals it has been designed to achieve.
The new standard is a distinct departure from the current International Accounting Standard 39 (IAS39): Financial Instruments: Recognition and Measurement, in that it focuses on accounting for expected credit losses as opposed to incurred losses.
There have of course been a number of criticisms levied at the current standard, namely:
1. It was slow to respond to recognition of credit losses, specifically only recognising lifetime expected credit losses on exposures where there was objective evidence of impairment and an additional allowance (incurred but not reported) for exposures expected to become impaired imminently.
2. That it was too reliant on backward-looking information, particularly delinquency data and historical loss rates.
3. That it only considered drawn loans, not commitments to lend. As a result, many credit card and current account providers were not recognising sufficient loss allowances.
4. That the information provided to users of financial statements is not transparent enough to be useful.
5. It was too complicated to implement and maintain as there were multiple approaches depending on the asset.
The move to change this was escalated as a result of the financial crisis of 2007/2008, and the fall out we have seen in terms of banks having to be bailed out by public money and failures of countries, (Greece, for example), to repay their debt.
There have been numerous debates in the industry and across various publications about how far the new standard goes in addressing these criticisms. One area in particular that has come into focus more recently is whether IFRS9 does give a true and fair view of banks’ financial positions.
In an article published in the Financial Times on 1 September 2015, following a report conducted by Barclays Bank on the impact across the industry, there was reference to an opinion of George Bompas QC, published by the Local Authority Pension Fund Forum, claiming that the new regime would still not give a “true and fair” view of the banks’ financial position.
Therefore, the burning question is will IFRS9 deliver on truth and fairness? This depends on how consistently and robustly the changes are implemented across the industry.
The standard itself gives makes clear (35B), that it expects IFRS7 disclosures under IFRS9 to enable users of financial statements to understand the effect of credit risk on the amount, timing and uncertainty of future cash flows. To enable this, banks must disclose the following information:
(a) Information about an entity’s credit risk management practices and how they relate to the recognition and measurement of expected credit losses, including the methods, assumptions and information used to measure expected credit losses.