IFRS 9 becomes a reality for financial instruments accounting

in Audit, Financial Services, 28.07.2014

The long-awaited IFRS standard on financial instruments is now finalised. After years of deliberations and revised proposals, the IASB has issued in its final form IFRS 9 Financial Instruments. This new IFRS will replace much of the current standard IAS 39.

Financial institutions should act quickly

As a general rule, banks, insurers and most other entities operating in the financial services sector are expecting a significant impact from IFRS 9. The only exception is entities that are already using full fair value through profit or loss to account for financial instruments, where implementation efforts will be more manageable.

Expected credit losses in focus

The reality of moving from an “incurred loss” method to a two-step “expected loss” method to record credit-related loss provisions is going to be the most significant focal point of financial institutions. IFRS 9 requires that estimations about credit losses are forward looking and probability weighted. A financial institution’s credit risk management department will need to be actively involved in determining these accounting estimates.

In addition to the changes to processes and need for enhanced data, there is a true financial impact when moving to an expected credit losses model. There will be an accelerated recognition of credit impairment provisions. In addition it is likely to introduce much more volatility into financial institutions’ results. This is because loss provisions will increase (and decrease) based on expectations about future credit losses, rather than based on incurred events.

The IASB plans to form a new committee to act as a discussion forum for practice issues on expected credit losses. The IFRS Transition Resource Group for impairment of financial instruments will discuss issues and make recommendations to the IASB, but will not itself issue guidance.

Hedge accounting

The IFRS 9 requirements addressing hedge accounting were already issued in November 2013. Most of the changes to hedge accounting have limited to no impact on what financial institutions are doing currently. And in an unusual step, the IASB will allow companies to keep using IAS 39 hedge accounting requirements until the separate project on macro hedging is finalized. The IASB released a discussion paper on macro hedging in April, and will continue to develop this project in the coming years.

When will IFRS 9 become mandatory?

The mandatory effective date for IFRS 9 is annual periods beginning on or after 1 January 2018. Financial institutions are already beginning to feel the ticking clock on this significant accounting change, when considering that it must be fully applied also to comparative periods. Financial institutions should be acting quickly and decisively on their implementation plans for IFRS 9. Regulators may well expect that supervised institutions already have plans and estimates of financial impacts by their next annual reporting date.

Companies may choose to early adopt IFRS 9. Few financial institutions are likely to do so, given the significant time and effort they will need to prepare for the expected credit losses requirements.

How KPMG can help

Even a quick read through IFRS 9 will make it clear that this is a complex accounting standard. There are many practical considerations, however, which can make a company’s assessment and implementation easier.

KPMG is actively involved with financial institutions in assessing the impacts of IFRS 9 on their businesses, and assisting with their development and implementations. We would be very pleased to work with you to understand your business areas that are most impacted by IFRS 9.

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3 Comments

  1. Alex

    Hi, I just want to know whether Hedge Accounting under IFRS 9 is mandatory. In other words, the entities may elect not to use Hedge Accounting for the preparation of financial statements.

    • Patricia Bielmann

      Hedge accounting will not be mandatory under IFRS 9 as it still needs a formal hedge designation and documentation. However, once designated a hedge relationship, the relationship cannot be terminated as easily as under IAS 39. Hedge accounting should be aligned with risk management and as long as hedging makes sense under risk management perspective, the hedge relationship should be rebalanced and adjusted.

  2. Billy Wong

    Hi, just wonder whether it is possible that the parent company early adopt the IFRS 9 but the subsidiary does not

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