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In FEE’s view, one of the biggest challenges for Europe and other jurisdictions that apply IFRS is the proper implementation of financial reporting standards, especially those standards which introduce significant changes in the existing financial reporting requirements. IFRS 9’s expected credit losses (ECL) introduces a new model for impairment for financial instruments. Banks and other financial institutions will face specific implantation challenges as they are exposed to a wide range of different financial assets.
Broadly FEE agrees with the 11 principles included in the consultation paper. FEE sees the principles as an effort from the regulator to flag specific areas of an ECL model that a bank should be aware of as these areas of the model might cause implementation challenges. FEE also supports the principles for strengthening the control environment and the internal control systems of a bank to cope with the implementation challenges of the new model. However FEE does have some comments on the wording used in the explanatory text as well as some more detailed comments.
On the other hand FEE would like to stress that any intervention from regulators, market oversight bodies or any other bodies should not take the role of the standard setter or of the IFRS Interpretation Committee.
FEE firmly believes that, with the EU’s endorsement process for IFRS 9 still on-going and the establishment of IFRS Transition Resource Group for Impairment of Financial Instruments (ITG), the Basel Committee should use these guidelines to help implementing a robust, effective and high-quality ECL model by banks across different jurisdictions that will meet the principles of the financial reporting standards, and that they should not be viewed as tentative interpretations of IFRS 9.
FEE points out that the draft guidelines in some instances add complexity in the application of the ECL model. Some examples are: the different terminology used in the paper which sometimes mixes the regulatory and financial reporting terminology and the additional requirements that the guidelines ask for preparers in order to reconcile (or justify the differences) between the regulatory and financial reporting frameworks. This could lead to confusion among constituents in respect of the subject matter under discussion (for instance it is not clear whether paragraphs A35 and A36 refer to the need to align the accounting framework to the regulatory one or is just describing the regulatory requirements).
While FEE understands the regulators’ view that the use of the simplified solutions envisaged by the standard should be limited for international banks, FEE believes this use might be appropriate in some instances, for some portfolios/exposures without undermining the implementation of a high quality implementation of an ECL model (for instance for activities that are not significant at Group level where the use of such simplification might avoid undue implementation cost).