IFRS 9 Financial Instruments
The introduction of an expected loss model for credit losses is the most important element of change in the Standard. Most constituents in Europe and around the world see this new model as a big improvement. It will lead to a more timely recognition of inevitable losses and will make it much more difficult for banks to hide problem loans on their balance sheets. At the same time, it does not go overboard by requiring banks to book big up-front losses when no losses have occurred yet. This would discourage banks from making longer-term loans.
Lease accounting
The current accounting for leases leads to a lack of comparability. An airline that leases most of its aircraft fleet looks very different from its competitor that bought most of its fleet, even when in reality their financing obligations may be very similar. There is no level playing field between these companies.
These problems will be resolved in the upcoming Leases Standard. All leases will be recognised as assets and liabilities by lessees. The accounting will better reflect the underlying economics.
This change is expected to affect roughly half of all listed companies and will not be popular with everyone. Accounting changes are often controversial and can be met with warnings of adverse economic effects and costs of system changes.
Insurance
The IASB expects to finish its deliberations soon and to publish a new Insurance Contracts Standard around the end of 2016. The importance of this Standard cannot be overestimated. Insurance is an extremely important business with substantial systemic risks. These risks are currently amplified by the current environment of persistently low interest rates.
Today’s accounting Standards for the insurance contracts are highly defective. There is no real global standard and there is a wide variety of practices around the world. Some of these standards provide information that is clearly wrong. Quite a few insurers still report at historical cost. That means they calculate their liabilities using interest rates of many years ago. Clearly, this is misleading information in a situation where interest rates are close to zero or even negative.
The new Standard will be based on current measurement and most insurers agree that this reflects economic reality much better. While there is broad consensus on this general principle, the insurance business is so complex that resolving all the accounting issues has taken us a lot of time.
Conceptual Framework
In 2016 the IASB also expects to publish a new version of the Conceptual Framework, which is the body of overarching principles that guides our standard-setting. Among the many important issues that we raise in the Conceptual Framework, two are of particular interest to many European stakeholders, namely Prudence and Stewardship.
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