Related topicsInternational Financial Reporting Standards (IFRS)
On 22 November, the International Financial Reporting Standard (IFRS) 9 on Financial Instruments was adopted into EU law. Both the European Parliament and the Council supported its adoption, however, in a plenary debate in October the Parliament highlighted a number of concerns and asked for close monitoring of the impact of the standard after its implementation. The standard, which will be applicable from 2018, covers accounting for financial instruments and is particularly important for banks and other financial services companies.
The International Accounting Standards Board (IASB), an independent, accounting standard-setting body, developed IFRS 9 in response to the financial crisis. The existing standard had been criticised for leading to late recognition of losses on bank lending and bonds; in the words of the G20, the standard resulted in "too little, too late". The process involved to address the problem was extensive and lasted over five years, during which time the IASB received over one thousand comment letters and had hundreds of meetings with companies and their auditors, investors, regulators and other stakeholders. IFRS 9 was finally published in July 2014. It introduces a number of improvements compared to the existing standard, in particular, its new forward-looking impairment model for the recognition of credit losses, which is the most significant change.
While the existing standard relies on an incurred-loss model, the new impairment model in IFRS 9 requires that estimates for future losses should take into account relevant forward-looking information about credit quality including macro-economic forecasts. The standard also introduces a stepped approach for recognising expected future losses. Provisions relating to a likelihood of default in the next 12 months are recognised for all loans and bonds. Where there is a significant increase in credit risk, these 12-month provisions are increased to take into account full lifetime expected losses. In comparison to the existing standard, IFRS 9 will lead to the more timely recognition of expected credit losses and provide more transparency for investors and other users of financial information about the evolution of credit risk in portfolios.
The new standard received the support of the European Central Bank and all the European Supervisory Authorities and Member States. The European Financial Reporting Advisory Group (EFRAG), which analysed IFRS 9 against the legal criteria for adoption, found that the standard met them except for its application by the insurance industry from 2018 until the time when the new standard for insurance contracts should be applicable. Member States voted in favour of adopting IFRS 9 but agreed that the insurance issue should be dealt with. The Commission, which supports a temporary deferral of the standard for insurers, has already begun the process to adopt into EU law the IASB's solution to this issue. It is also considering whether to extend this deferral to insurance entities in banking conglomerates.
Some of the concerns highlighted by the European Parliament stem from the fact that despite extensive consultations, there is a lack of a solid understanding of the effects of the standard. The Commission will monitor whether the standard affects the behaviour of long-term investors to ensure that it does not affect their investment strategy. The European Banking Authority, meanwhile, is working to assess the quantitative effect of IFRS 9 on banks and to better understand the interaction with prudential requirements. The Commission is closely following this work too. It also proposed on 23 November a transitional relief for prudential capital on first-time application of IFRS 9 in the revision of the CRR to avoid any sudden capital impacts.