The new financial instruments standard, IFRS 9, becomes effective in just 18 months’ time, and will require great effort and resource – as well as significant judgement – to implement.

It is one of the most momentous changes in accounting many banks have ever faced and audit committees will have a key oversight role during the implementation phase and beyond.

In a rare move, the six largest global accounting networks¹ – BDO, Deloitte, EY, Grant Thornton, KPMG and PwC – have published a joint paper that seeks to help banks’ audit committees fulfil their responsibilities.

The paper will help the two key groups that will be instrumental in ensuring a high quality implementation of IFRS 9:

• those charged with governance, who will set the tone for and oversee implementation, including related controls; and
• finance, risk management, IT and other executives who will implement the new requirements.

The paper is addressed to audit committees of systemically important banks, but the principles also apply in a proportionate way to other banks and financial institutions. It builds on some of the themes already outlined by banking supervisors.

Alongside the demand for transparent disclosures about impairment, the new impairment requirements pose three particular challenges that banks will need to address in order to maintain the confidence of investors and other stakeholders in their financial reporting.

Increased complexity for preparers

Under IFRS 9, banks will need to provide for expected credit losses (ECLs). While this notion is largely intuitive, it may be more difficult for audit committees to understand the detailed application, as well as the system and control implications.

The paper points audit committees to key implementation issues.

Diverse range of approaches and outcomes

IFRS 9’s principles-based approach aims to cater for the diversity of organisations within its scope and generally does not prescribe specific detailed methods.

Selecting techniques and estimating expected credit losses involves a high degree of management judgement, and methods may vary between institutions.

The paper outlines factors for banks to consider in developing implementation approaches and provides example approaches. It also stresses the importance of strong governance and controls over the way judgement is exercised.

Time and effort to implement

Only 18 months remain until IFRS 9’s effective date. Implementation programmes may be large, complex and expensive, so audit committees need to be active now.

The paper identifies key areas that banks’ audit committees should focus on, including:

• recommendations for governance and control frameworks to provide clear oversight;
• factors to consider when determining the sophistication of the modelling approaches to be adopted; and
• transition considerations.

The paper also illustrates the key modelling principles for an example sophisticated approach to implementation – outlining important concepts and parameters. It also explains considerations for simpler approaches, and gives examples of non-compliant practices.

The paper poses ten key questions for audit committees to discuss with management – if they have not started already, it’s time to engage.

The information in the paper is of a general nature, and banks will have to undertake further analysis to apply the standard to their own circumstances. It is expected that the six large accountancy networks will each use the paper when assessing the quality of individual banks’ IFRS 9 implementation.

Banks will also need to think about how to implement IFRS 9’s other accounting requirements – such as the classification and measurement of financial instruments, hedge accounting and related disclosures.

We encourage bank executives and board members to read the paper and consider how to incorporate its recommendations into their IFRS 9 implementation plans. Our quick guide to the paper, and an announcement, are available to download.

Visit our IFRS – Financial instruments hot topics page for the latest developments on the ECL accounting model in IFRS 9.

And visit our IFRS for Banks hot topics page for the latest on IFRS developments that directly impact banks, and the potential accounting implications of regulatory requirements.

¹ Represented by the Global Public Policy Committee (GPPC).