IFRS 9 – too little too late?

01 August 2014

By Tony de Bell

My guest blogger Sandra Thompson, Global Accounting Consulting Services partner, takes a look at reactions to IFRS 9, the IASB’s new standard on financial instruments.

I look forward to hearing your thoughts on the subject.

The IASB issued its long-awaited new financial instruments standard last Thursday. IFRS 9 is designed to respond to some of the criticisms levelled at current accounting in the light of the financial crisis – in particular, that loan losses were recognised too slowly and in too small amounts – ‘too little too late’. But could the same be said of IFRS 9?

It is certainly not a short or easy read. Weighing in at some 238 pages (excluding the illustrative examples) and in the kind of technical language that only us accountants know and love, it is not for the faint hearted.  So in that sense it is not ‘too little’ (indeed some may think it is too big).  But will it actually change the numbers very much?  Well to some extent we will have to wait and see.  The standard is not mandatory till 2018 – that as a colleague of mine pointed out is “a nice round decade after the crisis”, so arguably ‘too late’.  But here are a few initial thoughts – taking each of the three key elements of the new standard. (For a quick overview see)

First loan loss provisions…the standard moves away from today’s incurred loss model (something definite needs to have happened that demonstrates less cash will now be collected) to an expected loss model (that includes forward looking information and what is expected to happen but hasn’t yet). So overall you would expect losses to be booked sooner. But other factors have been at work in the last few years. In particular regulators have put pressure on banks to recognise loan losses sooner within the constraints of today’s model. And economic conditions generally have improved – so if this continues through to 2018, even expected losses will be lower. So, by the time 2018 comes, the actual impact might not be as big as some are expecting. Though it seems pretty certain there will be an impact and most, if not all, banks’ loan loss provisions will increase. And it also seems pretty certain that were we to have another crisis, bigger loan losses would be booked quicker.

Second, classification and measurement of financial assets…IFRS 9 certainly reads very differently to its predecessor. Rather than today’s reliance on the terms of an instrument and whether it is traded or not, IFRS 9 looks to the company’s business model and how it is managing its financial assets to create value. But it has basically the same four accounting methods as the existing standard. And those companies who have spent time working through the impact have generally reported it to be marginal.

And finally hedge accounting. It seems likely this will a greater impact on non-financial services entities than on banks and insurers. But for those affected, IFRS 9 will bring welcome relief.  It moves away from a very rules based approach and will allow hedge accounting for some common hedging strategies that fail to qualify today. I for one am looking forward to no longer having to explain to companies why they are getting volatile profits from hedges that, from a risk management perspective, are economically sound. So, for at least that reason, I think the efforts will be worth it in the end.

Maybe the IASB would have done it differently if they could have predicted the path over the last decade. Hindsight is always 20/20. What do you think? Can the world get over ‘too little, too late’ and embrace IFRS 9 as a step in the right direction?

Tony de Bell
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