A fairy tale ending for your IFRS 9 story?

07 December 2016

IFRS 9 disclosures in 2016 annual reports are unlikely to begin ‘once upon a time…’ or make for light bedtime reading. The effective date of 1 January 2018 is approaching fast and banks need to tell their story. What will applying IFRS 9 in 2018 mean to them? 

Accounting standards require disclosure in 2016 and 2017 financial statements of ‘known or reasonably estimable information relevant to assessing the possible impact’ of IFRS 9. The disclosure considerations go beyond this. The Enhanced Disclosure Task Force (EDTF) raised the bar with its recommended IFRS 9 implementation disclosures. The recommendations are aimed at internationally active banks, but the principles are relevant for other financial institutions.

Regulators are also calling for more extensive, relevant and transparent, disclosure. ESMA has made IFRS 9 disclosures an enforcement priority in its assessment of 2016 financial statements. ESMA has also issued a public statement about the consistent application of IFRS 9 that includes their suggested disclosures for 2016 reports. Similarly, SEC staff have heightened expectations about the level of qualitative disclosures, which applies to Foreign Private Issuers as well as domestic US groups.

All this is no surprise given the fundamental change the new expected credit loss (ECL) impairment requirements will have on banks’ financial reporting.

Should banks disclose a number?

A bank should disclose a number in 2016 if it can reasonably and reliably estimate the possible impact of IFRS 9. This might be an estimate of the numerical range of the ECL provision or the expected percentage increase in the impairment provision under IFRS 9 compared to the existing provision. Not all banks will be able to do this now, given the likely stage of their implementation planning, lack of parallel running and current macroeconomic uncertainties. No-one wants to disclose a number that may be wildly inaccurate or misleading.

The EDTF and ESMA want banks to put numbers in their 2017 year end reports at the latest. Some may be in a position to disclose reliable numbers in their 2017 interims. Banks need to be prepared for this.

What narrative information is needed?

The larger banks’ 2015 disclosures varied in length from a handful of paragraphs to multiple pages. Most only gave a very high level generic overview of the key concepts in IFRS 9 and how they differ from the existing accounting requirements. This year, many are hoping to see more tailored and granular information on the application of those concepts to a bank’s specific products and circumstances. It’s a big gap to bridge. 

The EDTF and ESMA expectations go further. They recommend banks give a description in their 2016 annual reports of the credit risk modelling techniques and key judgements that will be used. For example, is the bank planning to use a probability of default approach leveraging on Basel models, a loss rate method or some other approach? And for which key portfolios? Banks should discuss how IFRS 9’s ECL requirements may impact its capital planning strategy and what the uncertainties are, to the extent that the regulatory requirements are unclear or not yet fully determined.

Finally, a bank should disclose its implementation strategy, including that for IT system development, governance and control processes. What is the current timeline for implementation and what are the significant implementation matters yet to be addressed? Many are worried that banks have not made enough progress with IFRS 9 implementation. Good quality disclosures in 2016 will help to reassure regulators and users.

Inevitably, the information disclosed in 2016 reports will vary from bank to bank, depending on each bank’s implementation progress. 1 January 2018 is barely a year from now. Banks should be able to tell us more about their IFRS 9 implementation.  Get it right and they will be one step closer to ending their story ‘…happily ever after’.

This week's blogger is Hannah King, Financial Instruments specialist at PwC. Contact her on LinkedIn.

For more on this topic, watch our Demystifying IFRS 9 Impairment video on IFRS 9 disclosures in 2016 financial reports.

 

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