The transition to IFRS 9 is one of the ECB’s supervisory priorities for the coming years. From the ECB’s perspective, IFRS 9 provides a better alignment between risk management and accounting practices. As an observer on the European Financial Reporting Advisory Group (EFRAG) Board, the ECB provided input on the EFRAG’s endorsement advice in June 2015, highlighting that the ECB has a keen interest in accounting standards that properly reflect the economic substance of transactions and do not compromise financial stability. The ECB input letter states: “The ECB believes that IFRS 9 is based on clear principles in the areas of classification and measurement of financial instruments, impairment and general hedge accounting, and constitutes an improvement over the rather rules-based IAS 39.”1 From a transparency perspective the ECB welcomes the business model classification rules and is of the opinion that the features of the financial instruments’ cash flows, provide more useful information to stakeholders. But it also criticized the explanation provided for the introduction of the prohibition to recycle P&L gains and losses on equity instruments that are accounted for at fair value through other comprehensive income (OCI). In addition, the ECB raised the point that the definitions between the various classification categories are not always straightforward and that “management judgment can be involved when estimating expected losses”2. Through the lens of financial stability, classification depends on various factors; consequently auditors have a “crucial role”3 to monitor the implementation of IFRS 9 and it is necessary to closely observe the application of IFRS 9 in practice.4
KPMG’s ECB Office is aware that several banks have already received meeting requests from the ECB to present their IFRS 9 projects and impact studies.
Other European Authorities are also looking at IFRS 9 and the impact of the implementation of the standard. For example ESMA 2015-1606 encourages issuers to explain in their financial statements the progress in implementing the new requirements and the main effects expected, such as qualitative information on the accounting policies that may potentially change. Where applicable, issuers should also disclose if they have decided to early apply a standard (§ 30 and 31 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors). According to our information ESMA will publish something in this regard in the first half of 2016. In January 2015, the EBA launched an Impact Assessment of IFRS 9 with 50 banks in the EU to provide quantitative and qualitative information out of their running IFRS 9 projects. According to the EBA’s questionnaire instructions, the objective of the Impact Assessment exercise is to obtain an understanding of the impacts of IFRS 9 Financial instruments on institutions across the European Economic Area (EEA). The EBA envisaged that they will perform a second stage of the exercise closer to the implementation of IFRS 9.5
When the EBA launched the IFRS 9 Impact Assessment there was a need for banks to understand how their peers responded to the request and a need for banks to collect relevant benchmark information. To help clients with this, KPMG member firms have held a survey, with aim of increasing transparency within the peer group on how banks responded to the EBA questionnaire, specifically on how they handle the EBA feedback process and certain technical issues. Approximately 60% of the EBA questionnaire participants responded to KPMG’s survey. Currently KPMG’s ECB office is in discussions on a potential extension of this survey to other European banks under direct ECB supervision.
1ECB letter regarding EFRAG draft endorsement advice on the adoption of IFRS 9 Financial Instruments as of June 30, 2015.
2ECB letter regarding EFRAG draft endorsement advice on the adoption of IFRS 9 Financial Instruments as of June 30, 2015.
3ECB letter regarding EFRAG draft endorsement advice on the adoption of IFRS 9 Financial Instruments as of June 30, 2015.
4ECB letter regarding EFRAG draft endorsement advice on the adoption of IFRS 9 Financial Instruments as of June 30, 2015.
5According to the EBA instructions.