Work towards introducing IFRS 9 has been going on for several years but was accelerated after the financial crisis in response to concerns that financial institutions were too slow when it came to recognising loan losses.
Introduced for all companies with accounting periods beginning on or after January 1, 2018 IFRS 9 will unquestionably create the biggest challenges for financial institutions; but will also have an impact on many other sectors – particularly because of changes around bad debt provisioning.
Likely the most challenging change within the new reporting requirements of IFRS 9 will be the introduction of a new expected credit loss (ECL) model, which replaces the incurred loan loss model of IAS 39.
The change means that companies will now need to account for future impairments, compared to previous years when they only had to account for impairments that had already been incurred.
Under IFRS 9 there are two approaches to the new ECL model.
The first involves a three-stage process to determine the amount of ECL to recognise while the second is more simplified but still requires entities to calculate the lifetime ECL from the beginning and could involve provisioning for greater expected losses.
It is not just these changes to ECL that will be a challenge for entities under IFRS 9 however.
The requirement also alters how companies are required to classify and measure financial assets, breaking them into three categories:
- Amortised cost
- Fair value through other comprehensive income
- Fair value through profit or loss
Another significant challenge of IFRS 9 is that, because companies will have to start assessing creditors in ways they have not had to do before, it means they will have to compile data which may not be easily accessible.
This lack of easy access to data is going to be particularly problematic for any company still relying on manual accounting processes or using antiquated systems involving programs like Word or Excel to compile accounts – which were never built with complex accounting equations in mind.
For more information about the changes introduced by IFRS 9, and how to deal with them using accounting technology, download our new eBook here.