A new standard governing accounting for financial instruments has been completed with the publication of the final version of the International Financial Reporting Standard 9 (IFRS 9). Implementation planning now needs to begin in earnest. However, this will be a major challenge. The systems consequences are significant; and the implications go far beyond technical accounting changes.
The long process of introducing a new accounting standard for financial instruments reached a major milestone in July 2014, when the International Accounting Standards Board (IASB) finalized IFRS 9. This will replace International Accounting Standard 39 Financial Instruments Recognition and Measurement (IAS 39), which has been criticized by many for its complexity and a lack of congruence with how companies actually manage financial instruments, from straightforward loans to complex derivatives.
The financial crisis added greater urgency to projects which had been under way for some time at both the IASB and the US Financial Accounting Standards Board (FASB). Inadequate understanding and management of credit risk were seen as major factors in precipitating and then broadening the crisis. New regulations—Basel 3, Capital Requirements Directive IV (CRD) and in the US the Dodd-Frank Act—have aimed to improve the robustness of the global financial system by, inter alia, increasing capital requirements against potential credit loss. Accounting standard-setters have strived to ensure that financial statements provide users with greater transparency on credit risk and a more forward-looking perspective on asset impairment that will be more responsive to changes in the credit cycle.
While the project to revise accounting for financial instruments started as a joint project between the IASB and FASB, the FASB has gone in a different direction from the IASB. Consequently, companies applying both US GAAP and IFRS will be implementing different guidance—increasing the costs of implementation and lacking comparability.
Compliance with IFRS 9 will be mandatory as of January 1, 2018. While early adoption is permitted, many banks and insurers are expected to make use of the full implementation period to make the system and model changes necessary to put the new “expected credit loss” model for impairment into action and to parallel run new systems. However, this is not just a technical accounting change. Entities will want sufficient time to consider carefully the impacts on regulatory capital requirements, key performance indicators and communicate their planned response to stakeholders. To be continued