Banks take a Forward View of Losses Under New IFRS Rule

International Accounting Standards Board (IASB) has introduced some reforms to IFRS 9 under which banks and financial entities are required to provide for doubtful financial assets much earlier. This will ensure fairer and more accurate representation of their financial strength.

IASB, by introducing reforms to IFRS 9, has discarded the ‘incurred loss model’ and has presented ‘future-looking impairment model’. Under this method entities will book credit losses which they expect to incur in future.

The reformed IFRS will be applicable in 2018 – 10 years after the time of financial crunch which highlighted entities failure of correctly recording credit losses. The new model requires entities to record anticipated losses on financial instruments at the time of initial recognition and to continuously assess the level of default risk.

Former standard, IAS 39, faced a lot of criticism at the times of financial crunch for allowing entities to escalate their incomes by not recording provisions against financial assets expected to default. It is anticipated that introduction of reforms will raise the provision for credit losses by 50% on entities’ statement of financial positions.

Lain Coke, head of ICAEW’s Financial Services Faculty, said that banks will be required to assess the impact of reformed IFRS on their regulatory capital.

Apart from changes in provision method, IASB has also introduced other changes which include a new method of how financial instruments are classified and measured and reformations in hedge accounting.

Chairman of IASB, Han Hoogervorst, stated that much needed reforms have been made in IFRS 9 and these changes are in line with demand of G20 for a future-looking method of recording provision against credit losses. He further said that these developments will escalate investor’s confidence.

All the efforts, between IASB and FASB (Financial Accounting Standards Board), to introduce a single standard went in vein. There was a difference of opinion with respect to recording of impairment against financial instruments.

Chris Spall from KPMG stated that failure of convergence between IFRS and US GAAP will raise comparability issues for investors and it will also increase costs for entities which are required to prepare financial statements under both standards. The reformed standard will be effective from 2018 with an option of early adoption.