While IFRS 9’s mandatory effective date of 1 January 2018 seems a long time into the future, ADI’s should consider evaluating the implications of the new Standard now.
IFRS 9 is an extensive review of accounting for financial instruments combining the existing accounting standards IFRS 32 and IFRS 39. Major areas of change include recognition and measurement, impairment and hedge accounting. Our second publication in a series on IFRS 9 focuses on impairment, as a financial institution, is a critical area of consideration for your business.
Some of the key changes IFRS 9 will introduce include:
- recognition of impairment is no longer when a credit loss event is identified, rather a need to always estimate an ‘expected loss’
- requirement to develop a 3 stage model for assessing the level of expected losses
- potential for a ‘day one loss’ to occur as soon as an ADI buys or originates a loan
What are the implications to you?
- a need to gather reliable historical data to inform the provisioning methodology applied under IFRS 9
- developing a definition for ‘default’ suitable for IFRS 9 purposes
- consideration of whether early adoption will be of benefit to your institution
Get ready for IFRS 9 - The impairment requirements
At present APRA has not provided any guidance or commentary regarding the implementation of IFRS 9 and any consequences to the current methodology for the General Reserve for Credit Losses.
Get ready for IFRS 9 - Classifying and measuring financial instruments
Our first publication on IFRS 9 focussed on the classification and measurement of financial instruments. We believe this area will not have a significant impact to ADI’s as most financial assets can continued to be classified at amortised cost. The significant change is the removal of the ‘Available-for-sale’ classification which may impact any equity investments your business may hold. We expect many of these equity investments would be classified at Fair Value Through Other Comprehensive Income.