Impact of GAECL guidance on IFRS 9

Impact of GAECL guidance on IFRS 9

KPMG's recent IFRS 9 Breakfast Forum focused on the Basel Committee’s Guidance on Accounting for Expected Credit Losses (GAECL) consultation document.



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On 26 March KPMG hosted an IFRS 9 Breakfast Forum where conversation was focused on the Basel Committee’s Guidance on Accounting for Expected Credit Losses (GAECL) consultation document, formerly known as the Sound Risk Assessment and Valuation of Loans (SCRAVL) guidance. Approximately 75 senior representatives from across the banking industry attended to hear perspectives from Stephen Cooper (International Accounting Standards Board), Ian Michael (Bank of England), Colin Martin (Head of Banking Accounting Advisory Services, KPMG in the UK) and Steven Hall (Partner in Banking Risk Consulting, KPMG in the UK).

The GAECL guidance, published for consultation on 2 February 2015, aims to drive consistency across financial institutions in the application of IFRS 9 by internationally active banks. The release of the guidance has slowed the progress of IFRS 9 programmes as institutions digest its implications. This is particularly important in the UK, given that audit firms of major banks will be required to report to the prudential regulator, responsible for supervision on banks, building societies, credit unions, insurers and major investment firms, on compliance with the GAECL guidance.

The prudential regulator’s desire to strengthen comparability across banks is a direct consequence of the financial crisis shortcomings and this is supported by both KPMG and the industry.  Notwithstanding this, practitioners would welcome clarity on whether the concepts of materiality and proportionality can be applied in connection with the GAECL. KPMG highlighted that there is also a potential risk that the level of discretion granted to individual national regulators, could endanger the important goal of greater comparability.

The IFRS 9 standard and the GAECL do not use identical language or phraseology because they have been written for different purposes. It is this variation which allows for potential divergence in the interpretation of the GAECL. The Basel Committee and IASB both want to avoid divergent industry interpretations as the Basel Committee’s intention was not to contradict the IFRS9 requirements, but rather to ensure high quality IFRS 9 implementation.

Over recent years the Basel Committee has explored the extent to which standardised and simplistic approaches should be further introduced to ensure high quality information is comparable across banks. Contrary to this direction of travel, GAECL encourages banks to apply complex and institution specific processes. There is a danger this will widen the divide between regulatory and financial statement reporting. As noted by analysts attending the forum, users of financial information would ideally like to mitigate this risk but understand it is a consequence of an IFRS true and fair view. The issue of regulatory and accounting divergence remains an issue much broader than IFRS 9.

In light of these matters there are a number of questions around how UK audit firms will provide an opinion on compliance with the GAECL guidance. While the BoE stated it has not yet decided on a specific reporting format, it also confirmed that auditors will be expected to provide a statement of compliance on behalf of the eight largest UK financial institutions. The extent to which this opinion will have to cover broader credit risk management practices, highlighted in GAECL, or whether opinions will be limited solely to implementation of the IFRS 9 standard, remains unclear and an ongoing concern.

The aim of GAECL, as highlighted by both the prudential regulator and the IASB, is to ensure high quality implementation of IFRS 9. The GAECL’s aim is to constrain complex institutions from unnecessary use of “practical expedients”, limiting application but never contradicting the principles of the IFRS 9 standard. It is this key message which should help to accelerate the industry’s digestion of the GAECL as the outstanding concerns are resolved well in advance of 2018.

This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.

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