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The Impact of IFRS 9

Monday 21 August 2017

The key focus of the new international accounting standard IFRS 9 Financial Instruments is transparency of risks relating to expected losses in loan portfolios and how hedging practices mitigate financial risks. 

 “There is far more clarity under IFRS 9, much of which was driven by regulators saying they needed a better understanding of the impairment risk in loan portfolios,” Kris Peach, Australian Accounting Standards Board (AASB) Chair, told the GRC professional recently.

IFRS 9 was issued on 24 July 2014, and it is expected that affected businesses will have inculcated it into their systems for years ending on or after January 2018.  Set by the International Accounting Standards Board, the new standard replaces IAS 39 Financial Instruments: Recognition and Management. IFRS 9 has been issued in Australia as AASB 9.

“Under IAS 39, the hedging requirements were too rule-based, and some loan portfolio impairments were recognised too late,” Ms Peach said. “IFRS 9 is taking some of the concepts in IAS 39, and making the accounting for these risks more transparent.”

Key changes in the standard
The differences between IFRS 9 and IAS 39 are grounded in reducing accounting options, and improving risk transparency and foresight.

Some of the key issues on which Ms Peach focused were impairment and hedging.
“IFRS 9 has made the hedging criteria less stringent and more aligned with how entities manage their risks,” she said. She went on to explain that the changes were initially driven by Qantas, who made the point that the requirements in IAS 39 did not reflect the economics of what they were doing.”

“The new requirements are more aligned with the economics of how people think about their risk strategy. This is good for users because they will have a better understanding of the risks to which the entity is prone.”

Implementation challenges
Ms Peach suggested the impairment changes will present some challenges to businesses trying to implement the new standard into their systems.

“The impairment changes bring forward the recognition point of potential losses in loan portfolios. In the past, you might have waited until someone missed a payment before you even recognised potential losses; now, you are going to estimate losses in the portfolio from day one.”

Besides impairment and hedging changes, Peach acknowledged other positive changes.  “There are some simplifications to the recognition and measurement approach for loans and investments.”

Most positive is the fact that all these changes will facilitate a better understanding for users of what an entity’s use of financial instruments actually means.

What do businesses need to do? 
All entities need to consider the impact of IFRS 9 at an early stage, to identify potential system changes and possible financial statement impacts.

“A financial institution, or an entity with lots of loans, will now need to have those in the organisation initiating the loans work closely with those responsible for financial reporting, to make sure the appropriate judgements are being made regarding expectations of the loan portfolio as loans are originated.”

According to Ms Peach, this can facilitate good outcomes. “The better the reflection of an asset’s risk on the balance sheet, the better it is managed.  As there are more judgements required by IFRS 9, it is important these are identified early, responsibilities assigned and approval processes implemented,” she said.

Ms Peach emphasised the need for consideration of all the different parties involved. Thus, the focus needs to be on that delegation of authority and breaking down organisational silos.

Wolters Kluwer’s white paper, Achieving IFRS 9: A long way to go in a short time, states that “If your firm has been working to break down silos and foster communication among key departments, then the foundation for effective IFRS 9 implementation has already been laid and the task will be all the easier for it”.

Peach agrees. “It is certainly something we encourage people to start thinking about now, along with consulting their auditors in the early stages.”