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IFRS 9: Disclosures

The implementation of new reporting standard IFRS 9 from 1 January 2018 is a key priority for the banking industry. In July 2017, ICAEW's Financial Services Faculty brought together key stakeholders from the investor and analyst communities so that they might understand the respective challenges faced by banks in preparing IFRS 9 expected credit loss provisions. Here we report on the discussions around disclosures.

Key conclusions:

  • Investors are sceptical of bank reporting and drowning in bank disclosure; IFRS 9 is about to make that much worse.
  • Disclosures are as important as the ECL numbers themselves.
  • Required to provide disclosures to enable users of financial statements to understand banks’ credit risk management practices, changes in the ECL amounts and banks’ credit risk exposures.

The aim of IFRS 9 is to provide more information on the credit provision numbers and how they were developed. The disclosures, it is hoped, will better help investors forecast losses.

The intent is that disclosures around the assumptions, models and sensitivity will help demonstrate where management has exercised judgement and in what way. However, the standard is incredibly complex with the risk of uneven adoption. There is a consensus that good banks will provide meaningful disclosures, whereas struggling banks may not be able to match this level for fear of being pushed deeper into solvency issues as their weaknesses become more apparent to all.

Perhaps less of an issue for sophisticated and professional investors, the standard risks being overly complex for the retail investor and they may drown with so much information on different scenarios and probability weightings.

The role of sensitivity analyses 

Sensitivity analysis, disclosures showing a change in one variable (for example, unemployment), will become a very important feature. However, there is the risk that key sensitivity analyses may be ‘left out’ if not favourable to the bank as happened to particular banks during the financial crisis. There may be value, therefore, in developing some key mandatory sensitivity analyses and including coverage in the extended audit report.

The impact of events like Brexit

There was a hypothetical discussion on how IFRS 9 disclosures might have operated at the time of the UK referendum on EU membership and whether banks should have disclosed the impact in their Q2 reporting.

The Brexit vote took place on June 23 with immediate negative reactions and the Bank of England making adverse predictions. Such strong sentiments might have prompted expected losses to increase. This is notwithstanding that in hindsight, the economy was quite resilient. The discussion prompted some to say they would not have reacted, others said they should have or would have. It is clear that banks will be interpreting and implementing IFRS 9 in varied ways.

Many approaches

It will be difficult or impossible for auditors to police for consistency. Independence means they could not compare the approach of client bank A to client bank B. Further, audit firms were not building their own challenger credit models, to use to compare to management’s. Finally, individual auditors would only see a limited number of banks and only the bank regulator had access to all bank information.