24 June 2016

IASB/Hans Hoogervorst: Living on borrowed time

First of all, despite the financial crisis, the use of IFRS Standards around the world has continued to advance with great dynamism. The only disappointment in recent years was that the use of IFRS Standards in the United States has not progressed further. But this has not really affected developments in the rest of the world. Currently, 119 jurisdictions use IFRS Standards, lock, stock and barrel, while many others permit their use. China, India and Japan have recently made great progress towards the use of the Standards. IFRS Standards may now have become the most widely and uniformly used international economic standard. This has brought, and will continue to bring, tremendous benefits to the global economy in terms of transparency, accountability and efficiency.

Also in terms of standard-setting the IASB has made a lot of progress. It has delivered a more solid revenue recognition Standard, a leasing Standard that marks the end to off-balance sheet leases and an urgently-needed insurance contracts Standard is close to completion.

The completion of IFRS 9– financial instruments Standard–was the IASB´s main response to the financial crisis. The replacement of the incurred loss model with a more forward looking expected loss model will make it much more difficult for banks to ‘pretend and extend’. Full lifetime losses will have to be recognised as soon as a significant increase in credit risk has taken place. The IASB has made clear this is an event that takes place well before a payment is missed.

Until now, pretty much every accounting framework in the world has been using an incurred loss approach, including IFRS Standards and US GAAP. However, in practice this Standard has been applied with some level of variance. Different jurisdictions seem to have taken different stances on when losses were considered to be sufficiently certain for those losses to be recognised. In some jurisdictions a regulatory overlay seems to have taken provisioning beyond the scope of the accounting standards. In others, banks recognised losses too little, too late. There seems to have been no strong reaction from auditors and market regulators in the light of this diversity.

IFRS 9 will take effect in 2018. Implementation of the expected loss model will require considerable effort, particularly in jurisdictions where the banking system is suspected of harbouring a lot of problem loans. In these jurisdictions, which can be found in both the developed and emerging part of the world, proper implementation of IFRS 9 could be a huge challenge for auditors, market and prudential regulators. Yet IFRS 9 removes the excuses to avoid booking loan losses on a timely basis.

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