Financial Reporting Brief October 2017


Financial Reporting Brief 

October 2017

Our featured article for October is 'IFRS 9 – Some Reactions to Implementation' with implementation of IFRS 9 only three months away, Brendan Sheridan reflects on some of the many reports which have been published by various authoritative bodies on the topic.

IFRS 9 – Some Reactions to Implementation

Lest we forget - we are in the period of the tenth anniversary of the beginning of the global financial crisis. The collective memory will clearly recall the trauma of overheating economies, deluging of financial markets with new money and access to finance, inability to repay borrowing, all of which led to traumatic instability with widespread collapse of economies and financial systems.

It was indeed a traumatic time for the world in general, and one which we must guard against a recurrence of in any form with extreme diligence.

Did financial reporting standards have a role to play in contributing to, or at least not protecting against, the global financial crisis?

A gluttony of criticism arose at the time primarily focused on accounting for financial instruments, including the requirement to fair value them and the inadequacies of the process for recognition of impairment losses.

The response of the International Accounting Standards Board at the time was to establish the Financial Crisis Advisory Group to review the adequacies or otherwise of financial reporting standards and engender discussions with particular regard to financial instruments, fair value and consolidations including special purpose entities.

Since then, there has been a plethora of new standards, including those on financial instruments, fair value and consolidations. While the standards on fair value and consolidations have been in place for a number of years, the implementation of the standard on financial instruments, IFRS 9, is very much to the forefront being scheduled for implementation for accounting periods beginning on or after 1 January 2018. The development process took some five years from the publication of the first exposure draft on classification and measurement in July 2009 to the publication of a final standard in July 2014, subject to some work still to be completed on macro hedging. Some three and a half years have been extended to those involved with implementation to be prepared.

Will IFRS 9 address the issues that cause so much concern under IAS 39, and were seen by many as at least not being helpful during the global financial crisis?

IFRS 9 - Assist Financial Stability

The report of the European Systemic Risk Board published in July – 'Financial Stability Implications of IFRS 9' provides a useful perspective on whether the core issues are being addressed by IFRS 9. It recognises the change in recognition of impairment losses from an incurred loss approach to an expected credit loss approach (ECL) as being the most important change to be introduced by IFRS 9. 

The report includes an analysis of the cyclical implications of the ECL approach. A more timely and focused-looking recognition of credit losses addresses the criticism of the “too little, too late” provisioning resulting from the incurred loss approach. By expediting loss recognition, IFRS 9 may improve financial stability. If the downturn or its implications can be identified sufficiently early on, procyclicality may be reduced and the credit contraction in a downturn may be less severe. Early loss recognition should also reduce market concerns regarding capital adequacy. The ECL approach also implies reacting to new and forward looking information as it is received, so impairment allowances may increase suddenly and significantly if economic conditions deteriorate. As a result, IFRS 9 could have certain procyclical effects derived from such cyclical sensitivity.

The report also reflects on a long debate on the use of historical cost or fair value for the measurement of financial assets and the suitability of the methods for different bank assets. The report concludes that the classification of financial assets will, in principle, be clearer and sounder than under IAS 39. The report identifies certain areas in which there are significant changes relative to IAS 39 and which, for specific banks or periods of time, could entail relevant differences.

Impact on Long-Term Decisions

The High-Level Expert Group (HLEG) on Sustainable Finance, established by the European Commission has published its first report  ‘Financing a Sustainable European Economy’ setting out concrete steps to create a financial system that supports sustainable investments. Special significance is placed on the integration of information. The report comments that there are two overarching considerations – first, the need to integrate sustainability more effectively into accounting standards and, second, the need to ensure that accounting standards do not present an obstacle to sustainability and long-term investment. The report states that HLEG will explore evidence on the financing of sustainability focused projects. This is with a view to ensuring there will be no undue consequences from the adoption of IFRS 9 for the financing of such projects.

The European Financial Reporting Advisory Group (EFRAG) is collecting evidence from European constituents on information about the significance of their existing investments in equities and the possible effects of IFRS 9. There are some concerns regarding the prohibition of recycling from other comprehensive income to the income statement, with the main one being that the prohibition may limit the relevance of information on performance since profit or loss is the main indicator of performance. This may be of particular significance to long-term investors, and could affect decisions on long-term investing.

Addressing the Audit Question

With significant changes being brought about by the introduction of IFRS 9, the Global Public Policy Committee of the six major accounting firms has issued a paper titled 'The auditors response to the risks of material misstatement posed by estimates of the expected credit losses under IFRS 9'. 

The report is addressed primarily to the audit committees of systemically important banks, although much of its content will be relevant to other banks and financial institutions.  The report give particular focus to: -

  • The policies, procedures, internal controls, systems and models in place or to be put in place for implementation of IFRS 9;
  • The complexity of estimating expected losses;
  • The higher number of inputs and assumptions, which are subject to judgement; 
  • Increased estimation uncertainty; and
  • The potential magnitude of the ECL estimate for systemically-important banks.

Impact – Qualitative and Quantitative

The European Banking Authority has published a report ‘Results of the Second EBA Assessment of IFRS 9’. The report is based on a review of a sample of approximately 50 institutions across the European Union. Some of the main observations are: -

  • The estimated increase in provisions compared with current levels of provisions under IAS 39 is 13% on average and may be up to 18% for 75% of respondents;
  • An increase in volatility in profit or loss caused by IFRS 9 impairment requirements is expected by 72% of those surveyed;
  • The EBA is concerned that some banks are not sufficiently advanced in the implementation of IFRS 9, with smaller banks lagging behind in their preparations compared with larger banks in the sample;
  • The EBA is concerned that key elements of the governance structure have not been sufficiently involved which may lead to insufficient commitment of resources to implementation of IFRS 9;
  • Data, availability of historical data and the assessment of “significant increase in credit risk” are the most significant challenges for banks in implementing the standard and it is important that banks apply a sound and consistent methodology and governance process when implementing the standard.

The EBA report emphasises the need for comprehensive disclosure when IFRS 9 is implemented. Banks should be able to understand the behaviour of IFRS 9 numbers (and the differences compared with IAS 39) and provide useful information to internal and external stakeholders.

The EBA published guidelines in May 2017 on 'credit risk management practices and accounting for expected credit losses'.


It is essential that all the relevant stakeholders – such as banks, competent authorities and auditors – ensure an ongoing and timely dialogue in relation to the initial application of IFRS 9.

With three months to go to implementation of IFRS 9, entities need to be sure that their preparations are complete in good time and that there will be no surprises for stakeholders. 

What's New? Monthly Reporting Pack – October 2017

Irish/UK GAAP & Related Developments

IFRS & Related Developments

Legal & Regulatory Developments


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