Two reports from European authorities offer interesting observations on banks’ progress toward implementing IFRS 9 and helpful insights about what banks should be including in their 2016 and 2017 financial statement disclosures.
The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have recently issued two separate reports on IFRS 9. The EBA report offers interesting observations on banks’ progress toward implementing IFRS 9, while the ESMA report includes helpful insights about what banks should be including in their 2016 and 2017 financial statement disclosures.
The EBA’s first report on results of its impact assessment of IFRS 9 (PDF 413 KB) was published on 10 November 2016. The EBA surveyed 58 banks across the EU to help it understand the estimated impact of IFRS 9 on regulatory funds and to support it in assessing the interaction between IFRS 9 and other prudential requirements. At the time the survey was conducted in April 2016 banks were at an early stage of preparation for the implementation of IFRS 9 and the information provided reflects this. Some of the high level findings include:
On the same day that the EBA published its report, ESMA released a public statement, Issues for consideration in implementing IFRS 9: Financial Instruments (PDF 260 KB) in which ESMA highlights the need for consistent and high-quality IFRS 9 implementation and the need for transparency on its impact to users of financial statements.
ESMA notes that IFRS requires disclosure of known or reasonably estimable information – both qualitative and quantitative - relevant to assessing the possible impact of applying a new IFRS. ESMA expects that, for most issuers, the impacts of the application of IFRS 9 in the period of initial application will be known or can be reasonably estimated at the time of preparation of their 2017 interim financial statements. It adds that if quantitative information on the impact of the application of IFRS 9 exists based on all information available as of a reporting date prior to 2018, this should be disclosed notwithstanding that the actual figures in the 2018 financial statements might be different owing to changes in the composition of the portfolios or different economic conditions.
ESMA expects that - when the impact of IFRS 9 is expected to be significant - an issuer will:
It also encourages issuers to disclose:
In its statement, ESMA includes an illustrative timeline and good practices for disclosure as well as specific considerations for financial institutions.
The EBA will continue to monitor the impact of IFRS 9, including conducting a second impact assessment exercise to further assess IFRS 9 implementation. This is expected to be launched in November (based on Q3 2016 numbers) and to be completed in February 2017. Based on the findings of this exercise, the EBA may issue additional regulatory guidance that banks should take into consideration.
IFRS 9 is a priority among all European supervisors. The ECB has made IFRS 9 implementation a high priority for H1 2017 and the ECB will monitor how banks have responded to the EBA’s and ESMA’s statements. Data management together with compliance with various requirements like BCBS 239 and dealing with regulatory expectations across multiple jurisdictions mean that banks will likely have to invest more in data quality.
Even as banks grapple with numerous regulatory initiatives and a challenging competitive environment, they will have to maintain focus on achieving a high-quality implementation of IFRS 9.