26 June 2015

EBA’s views on the adoption of IFRS 9 Financial Instruments

IFRS 9 is, overall, an improvement compared to IAS 39 in the accounting for financial instruments; the changes on credit loss provisioning should contribute in addressing the G20’s concerns about the issue of ‘too little, too late’ recognition of credit losses and improve the accounting recognition of loan loss provisions by incorporating a broader range of credit information.

In particular, the EBA supports the movement from an ‘incurred’ to an ‘expected’ credit loss model which should result in the earlier recognition of credit losses. In this respect, IFRS 9 is expected to address some prudential concerns and contribute to financial stability. The expected credit loss model is more aligned with existing regulatory practices (for banks using an internal ratings-based (IRB) approach) which require the calculation of expected credit losses rather than incurred credit losses in order to determine banks’ regulatory capital requirements.

The EBA conducted a preliminary qualitative assessment of the impact of IFRS 9 on investor and issuer behaviours including the impact on lending practices. The EBA found that whilst accounting may be one of the drivers of changes in these behaviours and practices, there are other aspects that have an influence on them (such as regulation, state of the economy and market competition) and therefore it is not possible at this stage to isolate the impact of the application of IFRS 9 on existing investor and issuer behaviour and lending practices.

The EBA acknowledges that the principles-based nature of some of the requirements of IFRS 9 may increase the use of judgment and that there are some aspects, related to the high quality and consistent implementation of IFRS 9, which should be addressed in the future in order to ensure that the application of the Standard is consistent with the objectives of IFRS 9. The EBA welcomes the work of the Basel Committee on Banking Supervision (BCBS) in the development of Supervisory Guidance on accounting for expected credit losses and the establishment by the IASB of the IFRS Transition Resource Group for Impairment of Financial Instruments (ITG) to provide support to stakeholders on the implementation of the impairment provisions of IFRS 9.

In addition to the support of the timely endorsement of the Standard, the EBA supports the application of the Standard on a single effective date for banks in the EU on 1 January 2018 in order to ensure, among other aspects, robust and high quality implementation of the Standard as well as comparability of banks’ financial position.

Finally, the EBA is aware of several interactions with the prudential regulatory framework which will have to be analysed further during the implementation period in particular when quantitative impacts of the Standard become available. 

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