IFRS 9 and a European O.K: Hurry Up and Wait

The phrase “hurry up and wait” has been a rueful mantra uttered by soldiers and sailors for generations as they’ve gone about their duties.

For the International Accounting Standards Board, that fatalistic reading gained currency almost five years ago. At the time, IASB had taken extra measures after the financial meltdown of 2008 to quickly and diplomatically calm the fair value-based worries of the governing stewards of Europe (and the region’s powerful bankers).

IASB made changes to IFRS 9, the standard on financial instruments aimed at replacing the controversial and deficient IAS 39. The new standard – representing the first phase of the board’s repair work on instruments was issued during a critical time in November 2009.  Bad memories of the crisis were fresh. IASB also had an open wound from the year before:  its being compelled to ignore due process in October 2008 and change existing rules on instruments, IAS 39. IASB did so out of fear of seeing itself rendered moot by the EU. It quickly allowed for a bank-friendly reclassification of instruments that would burnish financial institutions’ financial statements during the meltdown.    

Still, as the calendar flipped from 2009 to 2010, the European Commission held off formally endorsing the new IFRS 9, effectively putting European banks outside of the rules’ reach. The delay in endorsement led to frustration at IASB.

Today, in mid-2014, EU endorsement remains on hold – “postponed,” according to an oft-used one-word status report posted on the timetable for work at the European Financial Reporting Advisory Group. However, the Euro-GAAP cognoscenti are getting signals that EFRAG is receptive to considering a thumbs-up –  most likely in 2015.  What prompted the more positive outlook? In July, IASB issued an updated IFRS 9 that contains prescriptions for impairment as well as classification and measurement.

Lack of endorsement means that European-listed companies – including big banks that care deeply about accounting for their financial assets and financial liabilities – haven’t been able to apply the half-decade-old classification and measurement prescriptions touted as improving IAS 39. The latter date back to the era, pre-2001, when the part-time International Accounting Standards Committee, IASB’s predecessor, was operating.

IFRS 9 Complete, But Still Parked on the Runway.

On July 24, IASB released its final improvements to IFRS 9. The new provisions cover more on classification and measurement and – especially significant – impairment. The latter includes the all-important topic of accounting for loan losses and how to set loss reserves.

The refreshed IFRS 9 is to be effective Jan. 1, 2018. That date signifies a long, torturous journey since the 2008 financial meltdown that helped spur standard-setting on instruments by IASB and the U.S. Financial Accounting Standards Board. The joint rulemaking has been marked by some policy discord, especially on impairment, and diplomatic strain.

The new IASB standard allows for early adoption if an enterprise so chooses. Euro-listed companies – including banks can not yet avail themselves of that option, however, as a Deloitte specialist in financial instruments noted in a recent webcast by the Big Four firm. There’s that lack of EU endorsement.

Deloitte’s Andrew Spooner suggested early adoption would hinge on a company’s governing authority. “Whether you go for early adoption is yet to be determined, but that might be influenced by your local regulators and what jurisdiction you’re in, depending whether they allow for early adoption,” Spooner said in the archived webcast. “For example, in the EU, we’ll have to wait for EU endorsement for it to apply.”

EFRAG Being Reorganized.

After Oct. 31, it will be a restructured European Financial Reporting Advisory Group that would render a verdict on IASB’s long-brewing financial instruments rules and present its views to the European Commission.

A new, 16-member EFRAG board will stake out the group’s formal positions in draft and final documents, with the help of a Technical Expert Group. The views of the latter – which has existed for some 13 years – may be less routinely stamped OK by the group overall than has been the case, according to expectations in accounting rulemaking circles. European accounting standard-setters are expected to have greater influence over the advisory body’s work than is the case today.

Optimism on Cannon Street, the home of IASB in the City of London, seems to be in the air as rulemakers look forward to what they hope will be the final months or a year-plus of the protracted EU endorsement process on IFRS 9.

By Steve Burkholder, Bloomberg BNA staff correspondent