What are the key facts with IFRS9…

IFRS accounting rules change forces banks to alter view of losses

The new standard, issued by the London-based International Accounting Standards Board as IFRS 9 Financial Instruments, moves from an incurred loss model to an expected loss model, marking a big change for banks, insurance companies and the users of financial statements.

It follows the IASB’s exposure draft on limited amendments to IFRS 9 on classification and measurement of financial instruments issued in December 2012.

n 14 February 2013 the FASB published a proposed ASU on classifying and measuring financial instruments. It follows the IASB’s exposure draft on limited amendments to IFRS 9 on classification and measurement of financial instruments issued in December 2012.

On 14 February 2013 the FASB published a proposed ASU on classifying and measuring financial instruments. It follows the IASB’s exposure draft on limited amendments to IFRS 9 on classification and measurement of financial instruments issued in December 2012.

For the first time, banks will have to recognise not only credit losses that have already occurred but also losses that are expected in the future. This is designed to help ensure that they are appropriately capitalised for the loans that they have written.

IFRS rules are required to be used by listed companies in more than 100 countries, although the US is a notable exception, and in Japan the use of them is voluntary.

Concerns about impairment came under the spotlight during the financial crisis because banks were unable to book accounting losses until they were incurred, even though they could see the losses coming.

At times the incurred loss rule meant banks overstated profits upfront and did not make prudent provisions against expected losses, particularly in areas such as the loans they secured against real estate.

At the G20 summits in 2009, world leaders declared that improvements needed to be made to financial reporting, and the IASB took up the baton to address the weakness in existing standards, alongside its US counterpart, the Financial Accounting Standards Board.

The new standard, which comes into effect on January 1 2018, means that companies must make a provision for potential credit losses over the next 12 months. Where credit risks are deemed to have increased significantly, banks have to record the lifetime expected credit loss.