From the IFRS Institute - August 2017
The adoption date of the new financial instruments standard1 is right around the corner: January 1, 2018 for calendar-year companies. However, the new US GAAP impairment model (current expected credit losses, or CECL2 ) is not mandatory until at least two years later. Both standards focus on expected credit losses, but the models are significantly different. This brings challenges for dual reporters.
Implementing IFRS 9, and in particular its new impairment model, is the focus of many global banks, insurance companies and other financial institutions in 2017, in the run-up to the effective date.
While both the IASB and FASB have long agreed on the need for a forward-looking impairment model for financial instruments, IFRS 9 and CECL differ significantly in many areas. Some of the main differences are summarized in the comparison below, but a detailed assessment is required to identify those that are relevant to your company.
We are seeing different challenges for:
Many of the large US banks have dual reporting requirements. When adopting CECL, they may find it desirable to avoid creating a completely independent reporting environment for their foreign branches and subsidiaries that already apply the requirements of IFRS 9. Rather, we envisage that US banks will consider IFRS 9’s requirements relative to their expected CECL decisions to limit undue organizational complexity and operational burden for foreign reporting purposes.
Given these considerations, KPMG recommends that US-based dual reporters take a hybrid approach to adopting IFRS 9 and CECL. The majority of the synergies and common components between CECL and IFRS 9 could be addressed by a centralized task force.
Foreign banks with US operations face different issues. Some may solely focus on IFRS 9 without considering future CECL requirements for their US operations. That approach could be a mistake – by not considering CECL, they may miss the ability to align both US GAAP and IFRS where possible, thereby being unable to realize some of the synergies from CECL adoption and ongoing governance.
In contrast, there may also be instances where following separate approaches may be optimal because it reduces complexity for either the US GAAP or IFRS 9 adoption. For example, IFRS 9 requires the use of multiple scenarios in forward-looking economic forecasts, while US GAAP does not. Consequently, a bank might choose to follow different approaches for the respective implementations.
As the adoption date approaches, foreign banks have the opportunity to work with their US operations to ensure that CECL’s requirements are considered when implementing IFRS 9’s guidance around staging, multiple economic scenarios and disclosures (see further reading below). Dual compliance may mean applying IFRS 9 while still functioning within the parameters of CECL.
While IFRS 9 and CECL will mostly affect banks and other financial institutions, their effects stretch into other industries that may not immediately come to mind.
Where banks have been and are increasingly more regulated, nonbanks often are not. As a result, their models, data, systems and processes might need a greater change to comply with IFRS 9. It is therefore key to tailor the level of sophistication of the IFRS 9 impairment model to the size, complexity, structure, economic significance and risk profile of the company. KPMG’s newsletter on a white paper of the Global Public Policy Committee (GPPC) provides guidance on the level of sophistication and key factors to consider (see further reading below).
In short, while the general concepts of IFRS 9 and CECL apply equally to nonbanks holding financial assets, each will pose its own specific challenges for companies in different industries.
The following is a high-level summary of some of the differences between CECL and IFRS 9; more detailed information about the concepts under each standard is available in the further reading below.
|Measurement of expected credit losses||12 months if the asset is in stage 1, or life of loan if the asset is in stage 2.||Life of loan.|
|Staging||Yes. An asset would move from stage 1 to stage 2 if it shows a significant increase in credit risk since origination.||No.|
|Macroeconomic factors||Multiple probability-weighted scenarios.||Does not specifically require either a single economic scenario or multiple economic scenarios.|
|Aggregation||Pool or loan level (for IFRS 9 staging).||Pooling required where similar risk characteristics exist.|
|For periods beyond reasonable and supportable forecast period||May extrapolate projections from available detailed information.||Reversion to unadjusted historical information at the input or output level is required.|
|Allowance for unconditionally cancellable loan commitments||Required when certain criteria are met.||Not permitted.|
|Effective date||Annual periods beginning on or after January 1, 2018.||Annual periods beginning after December 15, 2019 for public business entities that are SEC filers; one-year deferral for public entities that are nonSEC filers and all other entities.|
The following table provides some helpful resources on IFRS 9.
|Implementing IFRS 9: Considerations for systemically important banks||KPMG’s newsletter on the GPPC white paper.|
|Auditing IFRS 9: Considerations for audit committees of systemically important banks||KPMG’s quick guide to the GPPC white paper, to give audit committees and preparers an overview of the key contents and principles.|
|Q2 2017 IFRS – Global banking newsletter: The bank statement||KPMG’s quarterly banking newsletter, which includes a spotlight on IFRS 9.|
|CECL and IFRS 9: Preparing today to be compliant tomorrow||KPMG’s paper identifying steps dual reporters can take to begin their IFRS 9 implementation, including staging, multiple economic scenarios and disclosures.|
|Credit loss accounting: To centralize or decentralize?||KPMG’s Q&A on CECL and IFRS 9 for dual reporters.|
|IFRS newsletter: IFRS 9 impairment||KPMG’s newsletter on the latest developments and status of IFRS 9.|
|EBA report: Results from the second EBA impact assessment of IFRS 9||The European Banking Authority’s report on specific IFRS 9 implementation areas for banks.|
|ESRB report: Financial stability implications of IFRS 9||The European Systemic Risk Board’s report on the financial stability implications of IFRS 9.|
1 IFRS 9, Financial Instruments
2 ASU 2016-13, Financial Instrument—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.