IFRS 9 – Are you ready?

We have been reading and speaking about IFRS 9 Financial Instruments since 2009. It was after the global financial crisis of 2008 that the need to improve accounting for financial instruments was realised. IFRS 9 replaces IAS 39 Recognition and Measurement of Financial Instruments from 1 January 2018.

This is a significant change, in particular for banks and similar financial institutions and could affect the way such entities manage their financial assets, price products and implement risk management. Non-banks must also assess the impact of the new standard as it applies to all entities that follow IFRS.

IFRS 9 introduces a logical, more principles-based approach to measurement of financial assets based on the business model and nature of cash flows.
The new forward looking impairment model requires earlier and more timely recognition, and ongoing assessment of credit losses. The hedge accounting requirements are more principles based and aligned to common risk management practices.

The implementation of IFRS 9 represents a fundamental change in approach and requires re-engineering of the financial reporting systems and processes. For example, the expected loss model requires recognition of loss allowance as soon as a loan is originated. This requires banks to put in place appropriate models and systems that capture relevant credit data to calculate this loss allowance.  

IFRS 9 impairment model also requires an overlay of forward looking macro-economic data (in addition to historical data adjusted for current conditions) in estimation of loss allowance. The use of forward looking macro-economic data in estimation of loss allowance will affect profitability of banks as economic conditions change. This may lead to volatility in the profit or loss.      

A recent Deloitte survey has indicated that banks expect loss allowance to increase by up to 25% on transition to IFRS 9/FASB impairment models. This however depends on the type of financial assets, including quality and liquidity of collateral, if any.

IFRS 9 is not just an accounting change. It affects auditors who will need to assess assumptions and management judgements made to estimate expected losses. The regulators need to understand the impact of the change on capital requirements and bank analysts would be keen to analyse the impact of the standard on financial statements.

In summary, IFRS 9 affects preparers and users like auditors, analysts and regulators.
We are less than a year away, so the key question is – Are you ready?

Saket Modi, CFA has spent considerable time working, advising and training on IFRS, in particular financial instruments. He has worked with delegates from over 50 countries in Europe, Africa, Middle East and Asia, and has been invited by the International Auditing and Assurance Standards Board® (IAASB®) to present on IFRS 9 at their board meeting in New York. He is a qualified accountant and CFA® charterholder.