Banks Dash to Finish Line to Adopt Financial Instruments Rule

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By David R. Jones

Some financial institutions find themselves scrambling to meet the fast approaching international accounting rule for financial instruments.

“There is a real concern in the banking and financial services industry that at least in some cases they may be pushing water uphill in terms of their preparedness,” Brendan Sheridan of Deloitte Ireland said May 5 said in an analysis posted on the Chartered Accountants Ireland web site.

‘Huge Skills Demand’

International Financial Reporting Standard 9: Financial Instruments—which comes into force for accounting periods starting on or after Jan. 1, 2018, with early application permitted—will mark a “new age” in financial instruments accounting, Sheridan said.

Sheridan—director of audit and assurance for Deloitte Ireland—said that “systems, skills and resources are in huge demand as we enter the final preparation phase” for implementing IFRS 9 to replace International Accounting Standard 39: Financial Instruments: Recognition and Measurement.

Changes to Impairment Model

Critical changes in the forthcoming standard include new approaches for classifying and measuring financial instruments—in particular, a shift from IAS 39’s impairment model based on incurred losses to IFRS 9’s impairment model, which must reflect expected losses.

Sheridan said the 2008 financial crisis showed the weakness in IAS 39’s reliance on a triggering event for impairment to be recognized. IFRS 9 aims to correct this flaw by requiring entities to acknowledge expected future losses on an instrument.

Recognizing Expected Losses

“The expected loss model requires an entity to recognise expected credit losses at all times and to update the amount of expected credit losses recognised at each reporting date to reflect changes in the credit risk of financial instruments,” he said.

IFRS 9 also will require more extensive disclosures about expected credit losses and credit risk.

Preparing for IFRS 9

The forthcoming standard will have an impact on a variety of businesses—not just financial institutions—that deal with financial assets and liabilities, Sheridan said.

He listed tasks that entities should undertake as they prepare to put IFRS 9 into practice, such as:

  •  identifying the major accounting judgments and interpretations they make in implementing the standard;
  •  determining whether any changes are needed to their data-collection systems and internal controls; and
  •  assessing how to document and gauge their reporting processes, “particularly where systems and data sources have not previously been subject to audit.”

Still to Be Determined

Though the International Accounting Standards Board approved IFRS 9 in 2014, some concerns remain outstanding.

“Some issues have remained under development, which include that part of IFRS 9 which was not completed in July 2014, in relation to accounting for macro hedging activities,” Sheridan said— specifically, how financial institutions handle dynamic risk management of open portfolios.

IASB split off consideration of dynamic risk management from IFRS 9 in 2012 after realizing that crafting a new accounting approach for dynamic risk management would conflict with its timetable for issuing IFRS 9.

Researching Macro Hedging

The board currently is conducting a research project on dynamic risk management/macro hedging that’s separate from the forthcoming standard.

IFRS 9 was drawn up so that entities that perform macro heading wouldn’t be penalized while the research project is underway.

“Therefore, an entity undertaking macro hedging activities can apply the new accounting model in IFRS 9 while continuing to apply the specific IAS 39 accounting for macro hedges if they wish to do so,” IASB said.

To contact the reporter on this story: David R. Jones in London at correspondents@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

For More Information

The analysis is available at http://src.bna.com/oDy.

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