Regulatory Technology Advice | Deployment | Development | Optimisation
IFRS 9 the International Financial Reporting Standard created by the International Accounting Standards Board (IASB) deals with financial instrument accounting and replaces IAS 39 when it becomes effective in 2018.
It deals with three primary areas:
1) The classification and measurement of financial instruments
2) Impairment of financial assets
3) Hedge accounting
IFRS9 was originally a joint project with the Financial Accounting Standards Board (FASB), the body responsible for accounting standards in the United States. The boards published a joint discussion paper in March 2008 proposing the 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).
Following the 2008 financial crisis, the boards decided to revise their accounting standards for financial instruments to overcome perceived deficiencies, believed to have contributed to the financial crisis. However the boards disagreed on several important issues, and took different approaches to developing the new financial instruments standard. FASB attempted to develop a comprehensive standard to address classification and measurement, impairment and hedge accounting at the same time and issued an exposure draft of a standard addressing all three components in 2010.
In contrast, the IASB attempted to develop the new standard in phases, releasing each component of the new standard separately. In 2009, IASB issued the first portion of IFRS, covering classification and measurement of financial assets. This was intended to replace the asset classification and measurement sections of IAS 39, but not supersede other sections of IAS 39. In 2010, IASB issued another portion of IFRS 9, primarily covering classification and measurement of financial liabilities and also addressing aspects of applying fair value option and bifurcating embedded derivatives.
Banks face two immediate challenges:
1) Ensuring readiness for adoption in 2018
2) Providing the required disclosures for this year and next.
The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have recently made announcements on these issues. The results of implementing IFRS9 will be that Bad Debt provisions will be higher under the new impairment requirements and it is recommended that banks disclose this promptly so analysts and investors are not surprised by the actual outcome when they are disclosed. Regulatory capital positions of banks will also be affected and likely to increase by up to 20%. Disclosures will need to reflect progress made on implementation and the expected impact.