The International Accounting Standards Board is today issuing the fourth and final version of its new standard on financial instruments accounting – IFRS 9 Financial Instruments. This completes a project that was launched in 2008 in response to the financial crisis. It was hoped to have a single converged standard globally, but the IASB and US standard-setter FASB were not able to reach agreement, which will increase costs for banks operating under both frameworks.
The new standard includes revised guidance on the classification and measurement of financial assets, including impairment, and supplements the 2013 hedge accounting principles.
Internationally, the new standard is likely to have a significant impact on how banks account for credit losses on their loan portfolios. Provisions for bad debts will be bigger and are likely to be more volatile. But in Australia, the impact is likely to be less severe.
Paul Lichtenstein, KPMG Financial Risk Management Partner, said: "The impact of the new standard depends on the starting point for banks and how provisions are currently calculated. In Australia, banks have traditionally been conservative in provisioning approaches and levels. In addition, the strong state of the economy, the banks’ emergence from the depths of the GFC relatively unscathed and APRA’s regulatory scrutiny of provisioning levels have contributed to the current sound position of Australian banks in this area. As a result, the impact in Australia is likely to be less pronounced than in many other countries, certainly on issues like banks’ regulatory capital ratios."
But he added: "Nevertheless, Australian banks must not ignore the new standard and there will certainly be changes to provisioning methodologies, systems and models. Banks will also have to carefully consider how these changes are communicated to the market given the sensitivity of investors to provisioning levels."
For insurers too, the impact will be less dramatic here than overseas, but again there are issues that have to be carefully considered.
Scott Guse, KPMG's Asia Pacific IFRS insurance leader, said: "The release of IFRS 9 confirms that Australian insurance accounting has led the world with its emphasis on both fair valuing insurance contract liabilities and financial instruments. IFRS 9 will enable Australian insurers to continue their current practice of largely mitigating fair value movements through profit and loss. However, it can also provide insurers with options that would introduce more volatility to the profit and loss account. The extent to which this volatility in profit or loss and equity is mitigated will be highly influenced by the accounting choices made under IFRS 9."
The three options available now to companies under IFRS 9 are:
- measured at fair value through Other Comprehensive Income
- measured at fair value through profit or loss
- amortised cost.
Volatility in profit or loss and equity will be highly influenced by the asset-liability matching undertaken by an organisation i.e. whether the accounting for financial assets (which is now prescribed under IFRS 9) aligns or is linked to the financial liabilities those assets are held to cover.
Scott Guse added: "The initial difficulty for Insurers is that they have to plan for adopting new standards on both financial instruments and insurance contracts over the next few years, but the overall effect cannot be assessed until the insurance standard is finalised over the next 12 months. This could potentially be problematic and needs careful consideration".
There are also implications for non financial sector companies.
Patricia Stebbens, KPMG Audit Partner, said: "Other sectors 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. We expect that planning for IFRS 9 adoption – including implementation of the new hedge accounting requirements published in 2013 – will be an important issue for corporate treasurers and accountants generally."