IFRS 9 Implementation
Time to get ready
IFRS 9 introduces a new methodology for financial instruments classification and the incurred loss impairment model is replaced with a more forward looking expected loss model. This is all in addition to the major new requirements on hedge accounting.
On 24 July 2014, the International Accounting Standards Board (IASB) issued the final version of IFRS 9 incorporating a new expected loss impairment model and introducing limited amendments to the classification and measurement requirements for financial assets. This version supersedes all previous versions and is mandatorily effective for periods beginning on or after 1 January 2018 with early adoption permitted (subject to local endorsement requirements).
IFRS 9 (2014) fundamentally redrafts the accounting rules for financial instruments. The various informational content and transition requirements of IFRS 9 will necessitate the need to gradually move towards its adoption from an early stage. This is because transition is retrospective, whilst still considering the provisions of IAS 8 (Changes in accounting policies, estimates and correction of errors).
IFRS 9 introduces a new methodology for financial instruments classification and the incurred loss impairment model is replaced with a more forward looking expected loss model. This is all in addition to the major new requirements on hedge accounting. These fundamental changes however, call for careful planning. For corporate treasurers and accountants generally, the planning for IFRS 9 implementation is going to be an important issue. A study/impact assessment phase is recommended as a starting point of the IFRS 9 journey and entities should focus on understanding the IFRS 9 financial and operational implications, with outcomes being key inputs to the design and implementation phases.
With the implementation of IFRS 9, entities will need to assess people, processes, technology and controls that will be necessary to drive an effective implementation.
The implementation of IFRS 9 will undoubtedly bring about a closer integration of different functions and skills (finance/treasury, accounting, risk management, quantitative modelling), inclusion of new instruments particularly under the new impairment framework (loan commitments and financial guarantee contracts) and the preparation of new methodological framework, policies and processes. This means that a large scale multidisciplinary project team will in many cases be required to implement IFRS 9.
The table below highlights some of the functions that may be involved in the various aspects of IFRS 9's implementation process:
Why Companies need to act now!
Though IFRS 9's mandatory effective date of 1 January 2018 may seem a long way off, entities are strongly advised to start evaluating the impact of the new standard now as well as the impact on reported results. Many entities will need to collect and analyse additional data and implement changes to systems. For banks and other financial institutions especially, implementing the new standard will tremendously affect how credit losses on loan portfolios are being accounted for. The expected impairment loss model will indisputably bring about bigger and volatile provisions and implementing the new model will require a lot of time. Non-financial institutions on the other hand should not automatically assume that the impact of requirements of the new standard will be lesser as this will depend on the financial instruments exposure they have and how they manage them.