IFRS 9 is a new international standard that represents a package of reforms to financial instruments accounting, in part an international response to the G20 summits in 2009.
It includes requirements for the recognition and measurement of financial instruments, their impairment and derecognition, and general hedge accounting and will affect many organisations, including banks.
The standard will come into effect on 1 January 2018 and applies to all entities.
In Australia, the Australian Accounting Standards Board expects to issue the Australian equivalent of IFRS 9 by the end of 2014 and early adoption is an option.
Organisations that hold large portfolios of loans on their books, including banks, will be affected as the IFRS 9 expected loss approach to loan impairment provisioning is very different from the incurred loss approach to providing for bad debts that it replaces.
Patricia Stebbens, KPMG Audit Partner, notes that there are also implications for non-financial sector companies.
"Other sectors should not automatically assume that the impact of the classification and measurement and impairment requirements of the new standard will be small, as it depends on the exposures they have and how they manage them.
“We expect that planning for IFRS 9 adoption – including implementation of the new hedge accounting requirements published in 2013 – will be an important issue for corporate treasurers and accountants generally."
In June 2014, Deloitte issued its Fourth Global IFRS Banking Survey — Ready to Land, which reported the current views of 54 major banking groups from Europe, the Middle East & Africa, Asia Pacific and the Americas on the new IFRS 9 that replaces IAS 39 Financial Instruments: Recognition and Measurement.
The report’s key findings include:
- More than half of banks surveyed believe that the IFRS 9 expected loss approach will result in banks' provisions increasing by up to 50 per cent across all loan asset classes.
- 70 per cent of banks surveyed anticipate their IFRS 9 expected loss provision to be higher than current regulatory expected loss.
- Three years is most frequently cited as the necessary lead time for all phases of IFRS 9.
What some people will find surprising is that the impact on Australian banks’ balance sheets is likely to be very less severe.
Although historically the European and Australian banks have applied the same financial instruments accounting standard, the Australian approach to provisions for bad debts has generally been described as more conservative, with bigger loss provisions.
The Australian Accounting Standards Board expects to issue the Australian equivalent of IFRS 9 by the end of 2014.
Therefore, many of the Australian banks are highly likely to be coming from a different starting point when it comes to applying IFRS 9 and that in turn will affect their need to increase their provisioning, and the magnitude of any increase.
Besides, we should not overlook the relative strength of our own economy when compared to the economies of Europe. While global activity can sometimes overwhelm one’s appreciation of the importance of activity in our own economy, the current sound position of the Australian banks has benefited from the Australian economy, our own experience of the Global Financial Crisis and action by the Australian Prudential Regulatory Authority.
IFRS 9 will require changes by Australian banks. However, those changes are not likely to create the headlines seen in Europe nor are they expected to fundamentally change the Australian banks’ reported positions.
Dr Mark Shying is CPA Australia’s senior policy adviser, financial reporting