Are we belittling the extent of IFRS 9?
IFRS 9 is an International Financial Reporting Standard (IFRS) promulgated by the International Accounting Standards Board (IASB). IFRS 9 addresses the accounting for financial instruments. It replaced the earlier IFRS for financial instruments, IAS 39.
Background
As a result of the 2007–2008 financial crisis, IASB and Financial Accounting Standards Board (FASB) joined hands to revise their accounting standards for financial instruments to address perceived deficiencies which were believed to have contributed to the magnitude of the crisis. In March 2008, A joint discussion paper proposed an eventual goal of reporting all financial instruments at fair value, with all changes in fair value reported in net income (FASB) or profit and loss (IASB). This is how IFRS 9 came into existence. IFRS 9 specifies how an entity should classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items.
In the beginning of the current year on January 1, 2018, IFRS 9 come into effect to be implemented by organizations for the fiscal year following the release date. However, early adoption is allowed. It should be applied retrospectively in accordance with IAS 8 accounting policies, changes in accounting.
Components
The new standard contains these critical components, below are the components which are different from IAS 39.
- Classification and Measurement of Financial Assets: Specifies and defines different valuation approach and methods to be used for different financial assets. Through initial recognition remains unchanged subsequent reclassification and measurement using various valuation methods has been revised.
- Impairment calculations for Credit losses: Introduces a new approach to calculating impairment based on expected credit loss (ECL) rather than incurred losses per IAS 139.
- Classification and Measurement of Financial Liabilities: Sparing a few changes the accounting, classification and measurement model for financial liabilities remain unchanged from IAS 39.
- Hedge Accounting: It redefines the requirements that allow the usage of hedge accounting. But it is optional and when an entity first applies IFRS 9, It may choose as its accounting policy choice to continue to apply all of the hedge accounting requirements of IAS 39 instead of the new requirements of chapter 6 of IFRS 9.
The derecognition component remains unchanged from IAS39 and hence omitted above.
Impact
IFRS 9 will change the way organizations will provision and manage the risks. Implementing it is a complex process involving accounting, IT, compliance, treasury and risk management teams to work in coordination.
The biggest challenge will be moving from an incurred loss model to an expected loss model. There are serious concerns about collecting the data right. For facilitating the correct collection of data we will be required to create new models to predict expected credit losses (ECLs), updating the earlier models used and this will necessitate enhancements of existing systems. Enhancements need sufficient resources and expert skills.
Data management is another such challenge. IFRS 9 is challenging the basics instead of being derived or rule-based standard it is more principle-based. forcing companies to create their own system and models that will generate good data, data that can predict the actual financial value rather than giving out a false sense of assurance when it comes to the financial health of the companies.
Other challenges which will come along are updating the legacy accounting systems, increased governance with greater scrutiny by auditors and integrating risk and financial management.
But these challenges also can lead to a journey that provides an opportunity to revamp the risk infrastructure, integrate risk and finance and making companies more transparent. With Canada’s largest Banks being the first to adopt and report under the standard. we shall know soon if we are belittling the impact of IFRS 9 or if we are ready for a transparent and more principle-based approach in the way we report.
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