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IASB issues final part to IFRS 9 

Singapore, 25 Jul 2014
Singapore’s turn to determine when IFRS 9 will be adopted by companies here

The International Accounting Standards Board (IASB) issued the fourth and final part of its new standard on financial instruments accounting, IFRS 9 Financial Instruments, on Thursday.

This marks the completion of a project launched in 2008 as a response to the global financial crisis.

The full suite of the new standard now includes a new impairment requirement and revised guidance to classification and measurement, alongside previously announced hedge accounting principles.

  • The impairment requirement: Recognition of losses will be accelerated by requiring provisions to cover both already-incurred losses and some losses expected in the future.
  • Classification and measurement requirement: The latest revision modifies how companies report financial instruments to cater for business models where assets were held both to collect cash flows and for sale.

Said Mr Ong Pang Thye, Head of Audit, KPMG in Singapore: "After a long debate about this complex area, it is good that we finally have a complete standard. The implementation effort can now begin in earnest.

"We had hoped that the IASB and the US FASB could have achieved a single converged solution for banks and other entities globally, but this hasn’t been possible. Having different rules under US GAAP and IFRS will mean a lack of comparability for investors between the results of banks reporting under the different frameworks, and increased costs for those banks that have to prepare figures under both accounting frameworks."

Transition: When will Singapore adopt IFRS 9?
Although the international deadline for companies to adopt IFRS 9 is 1 January 2018, companies can chose to adopt the new standard early.

For Singapore, the Singapore Accounting Standards Council (ASC) has deferred the adoption of components of IFRS 9 as it was waiting for the complete standard to be issued.

Said Mr Ong: "ASC should decide on the Singapore adoption soon to allow ample time for companies to implement the standard. This is especially important given the planned convergence with IFRS in 2018.

"Many entities, especially those outside of financial services may want to adopt the standard early. However, that requires the ASC to make the standard available first."

Singapore corporates: hedge accounting principles in IFRS 9 most relevant
For corporates in Singapore looking to adopt IFRS 9, hedge accounting principles announced earlier would be most relevant.

The revisions also provide for a more principles-based approach that aligns hedge accounting more closely with risk management, allowing more relationships to be eligible for hedge accounting.

Most companies with significant commodity exposure such as airlines and shipping have welcomed the revised hedge accounting revision guidelines as the revised requirement allows them to better reflect how they manage risk in their financial statements.

Mr Ong said: "We expect that planning for IFRS 9 adoption – including implementation of the new hedge accounting requirements – will be an important issue for corporate treasurers and accountants generally.

"Companies should assess and formalise their risk management strategies and practices upfront. This will enable them to capitalise on the changes and apply the new hedge accounting requirements to better reflect their true economic activities."

New standard to make level of impairment in banks’ books more volatile
Commenting on the new requirement on impairment, Mr Ong said: "The new standard is a step change in accounting for impairment and will give rise to new challenges for banks adopting it."

Following the global financial crisis, concerns have been raised about ‘too little, too late’ provisioning for loan losses.

The new expected credit loss model aims to address these concerns, and accelerates the recognition of losses by requiring provisions to cover both already-incurred losses and some losses expected in the future.

Mr Ong said: "The new standard is going to have a massive impact on how banks account for credit losses on their loan portfolios. Impairment loss under the new standard will likely be more volatile."

The new standard is also likely to increase costs for banks.

Mr Ong added: "Adopting the new rules on impairment will require banks to put in a certain amount of time, effort and money. A major issue for banks will be how adopting this new standard will affect the level of impairments in their books and how the regulator will look at this change.

"On a very broad sense, relative to the current IAS 39 requirement, the new standard should result in a higher level of impairment in banks’ books. It remains to be seen whether there will be full alignment between the regulatory requirement and the new standard."

Challenges associated with new credit loss model
One such challenge is the increased need for judgement. Mr Ong explained: "Estimating impairment is an art, rather than a science. It involves difficult judgements about whether loans will be paid as due – and, if not, how much will be recovered and when. The new model widens the scope of these judgements."

The new standard adopts two different models to measure credit losses depending on the credit quality of the portfolio, one being losses expected in the next 12 months and the other being the expected credit losses over the life of the loan.

Mr Ong added: "Preparers will have to make new judgements, auditors will have to review them, and users of financial statements, including prudential and securities regulators, will have to understand them."

Banks in Singapore have largely followed Monetary Authority of Singapore (MAS) requirements on provision for loan losses. Should the local banks and branches of the international banks plan to adopt the impairment model under the new standard, they should not delay their assessment of the impact of the expected credit loss model on their business: "Credit risk is at the heart of a bank’s business and applying the new standard will depend heavily on a bank’s credit systems and processes," said Mr Ong.

Insurers to see major changes too
Insurers will also be significantly affected by IFRS 9. Mr Ong said: "Insurers have to plan for adopting new standards on both financial instruments and insurance contracts over the next few years. The overall effect cannot be assessed until the insurance standard is finalised over the next 12 months, but a sea-change in financial reporting for most insurers should be expected."

Other corporates should not automatically assume that the impact of the classification and measurement and impairment requirements of the new standard will be small, as it depends on the exposures they have and how they manage them, he added.

Classification and measurement
The final standard clarifies the principles already in IFRS 9 and introduces a new ‘fair value through other comprehensive income’ measurement category for financial assets.

The revision allows companies such as banks and insurance companies to account for their investments held both to collect cash flows and for sale at fair value with changes recorded through other comprehensive income. This would allow for better alignment with the company’s business model.

Mr Ong said: "However, the removal of the current ‘available-for-sale’ classification is a disappointment to investors with longer-term horizon. Under the fair value through other comprehensive income classification, results from equity investment recorded in other comprehensive income, for example, would not be allowed to recycle back to the income statement, even upon disposal.

"The amendment also means that the classification and measurement requirements of the new standard are at least as complex as the current IAS 39 standard that it will replace."

Disclosures
The standard introduces extensive new disclosures to address the concerns raised by users for transparency.

Mr Ong said: "The new disclosures introduced by IFRS 9 are extensive, and entities should not underestimate the effort that will be required to apply the new requirements, including having the systems and processes in place to collect data. Entities will need to think through how to incorporate the new information into the existing requirements to make sure that disclosures do not just add volume to the annual report but are part of a clear communication process with investors and other stakeholders. Preparing for the new disclosure requirements should be a key part of transition planning."

All in, full transition is likely to occur over a long time frame.

"The long lead time to mandatory adoption and the different possibilities for IFRS 9 adoption could mean a protracted but temporary period of diversity in practice.

"Similar to Singapore, in many jurisdictions including the European Union, companies will not be able to adopt the new standard until it is legally endorsed or permitted by regulators. Given the significance of the standard to the financial services sector, the road to endorsement may be longer and more winding than usual," Mr Ong said.