Financial reporting brief

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Financial Reporting Brief

August 2015

Our featured article for August is 'IFRS 9 – Moving Forward' with Brendan Sheridan commenting on developments in relation to IFRS 9 – the new Financial Instruments Standard.

IFRS 9 - Moving forward

A year ago the International Accounting Standards Board (IASB) published the final version of IFRS 9 ‘Financial Instruments’ bringing together the classification and measurement, impairment and hedge accounting phases of the IASB’s project to replace IAS39. IFRS 9 is effective for periods beginning on or after 1 January 2018, subject to EU endorsement.

The publication of IFRS 9 and its plan for implementation represent a major milestone in the development of a substantially improved international financial reporting framework.

Following publication of IFRS 9, the IASB established a discussion forum, the IFRS Transition Resource Group (ITG), to provide support for stakeholders on implementation issues arising from the new impairment requirements of IFRS 9. The ITG held its first meeting in recent months.

More recently the European Financial Reporting Advisory Group (EFRAG) has published a draft recommendation proposing IFRS 9 for European endorsement without further delay.

The Deloitte Global Financial Services Industry Group has just published its fifth Global IFRS Banking Survey which collates the views of 59 major banks to keep stakeholders informed of how the industry is responding to accounting and regulatory change.

It is clear that financial instruments reporting and accounting is a dynamic area where time and resources are needed to gain understanding and familiarity with new requirements and developments as they take place.

It should also be borne in mind that the new Irish financial reporting framework, notably FRS 102, introduces financial instruments accounting for many Irish entities for the first time in 2015. Those adopting FRS 102, and financial instruments accounting, may be able to avail of IFRS 9 accounting earlier than IFRS adopters.

IFRS 9-EU Endorsement
The EU Accounting Regime requires that IFRSs be adopted individually for use in the European Union, a process commonly referred to as ‘endorsement’. EFRAG delivers its advice to the EU Commission on whether the Standards meet the criteria of endorsement which are primarily that a Standard:

  • is not contrary to the true and fair principle
  • is conducive to the European public good
  • meets the requisite standards in relation to understandability, relevance, reliability and comparability

EFRAG has concluded that IFRS 9 meets the criteria of endorsement, and has issued a draft endorsement advice letter. EFRAG has sought comments on all aspects of its analyses supporting its preliminary conclusions. EFRAG emphasises that it has reached its preliminary conclusions relying on limited quantitative assessments, particularly on the impact of the new impairment model. This may not be available on a broad basis before 2017.

EFRAG also wishes to gain more insight into the impact on financial reporting by insurance businesses of adopting IFRS 9 before the effective date of the future standard on insurance contracts. EFRAG is proposing to recommend to the EU Commission to ask the IASB to globally open an action to defer the effective date of IFRS 9 for insurance businesses and align it with the effective date of the future insurance contracts standard.

The position for insurance businesses is subject to conflicting views. The European Securities and Markets Authority (ESMA) is of the view that in light of significant uncertainty about the timing of the finalisation of the new standard on insurance contracts, there should be no delay in the application of IFRS 9 to the insurance industry. ESMA believes that the deferral of IFRS 9 for insurance companies would be inconsistent with the generic nature of IFRSs which apply across all industries. On the other hand, the Federation of European Accountants (FEE) agrees with deferring the effective date of application of IFRS 9 for insurers, stressing the importance of having an international solution and avoiding a European ‘carve-out’.

The IASB has very recently proposed an amendment to IFRS 4 ‘Insurance Contracts’ to address the consequences of different effective dates of IFRS 9 and the new insurance contracts standard which is expected to be published in 2016. This will be discussed at the September IASB meeting.

Impairment Requirements
The first meeting of the ITG shared views on a number of potential issues in relation to the IFRS 9 requirements for impairment of financial instruments. The purpose of the ITG does not include the issuing of any guidance with the IASB to determine what actions will be taken, if any, on each issue addressed.

The topics that were addressed at the first ITG meeting include:

  • Forecasts of future economic conditions
  • Loan commitments- scope
  • Expected credit losses- measurement date
  • Assessment of significant increase in audit risk for guaranteed debt instruments
  • The maximum period to consider when measuring expected credit losses
  • Revolving credit facilities
  • Measurement of expected credit losses in respect of a modified financial asset

The Deloitte Global publication IFRS in Focus summarises the topics discussed. The next meeting is planned for September and will discuss additional issues that meet the ITG criteria.

Fifth Global Survey
The Deloitte survey findings provide a number of significant insights into how banks are approaching the implementation of the anticipated IFRS 9 (or equivalent FASB) requirements in their organisations.

Key findings of the survey include:

  • 75% of banks surveyed expect accounts of banks to be more useful for regulators under new rules
  • Key implementation challenges include
    - Clarity around acceptable interpretation of the new rules
    - Internal coordination between finance, credit, risk and IT functions
    - Availability of data
  • Total anticipated implementation budgets have doubled since the previous survey
  • 60% of banks think they do not have enough resources to deliver their IFRS 9 project with further doubt that there will be sufficient skills available in the market to cover any shortfall
  • Most global banks estimate new IFRS 9 rules will result in loan loss provisions increasing by up to 50% across asset classes.
  • 85% of banks surveyed anticipate their expected credit loss provisions to exceed those calculated under Basel rules, mostly driven by the provision of lifetime expected losses.

The leading Banks are recognising the challenges of transition to and implementation of IFRS 9 and the impact it is likely to have on their reported financial results and state of affairs.

Conclusion
IFRS 9 is expected by the majority to ultimately be a substantial improvement over IAS 39. The period of transition and implementation will be challenging for all involved, particularly those engaged in the financial services industry.

To some, 2018 may still seem a long time away but all should take heed of the 60% of the respondents to the Deloitte survey who consider they do not have the resources to deliver their IFRS 9 project by 2018, and that there will be difficulty with the adequacy of external resources to provide the support necessary.

Time and resources must be committed to ensuring preparedness and avoiding unwanted surprises.

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