The global financial crisis that started in 2007 highlighted that credit loss recognition was too little, too late and the lack of transparency about the risks to which Banks/FI’s were exposed to, and therefore, accounting standard setters took an important step forward by moving towards Expected Credit Loss (ECL) accounting frameworks.
IFRS 9 introduces a new methodology for classification of financial instruments and the incurred loss impairment model is replaced with a forward looking ECL model. The new impairment model requires estimation of 12-month and lifetime ECL. The Standard also includes an improved hedge accounting model to better link the economics of risk management with its accounting treatment.
IFRS 9 will be effective for annual periods beginning on or after January 1, 2018, subject to endorsement in certain territories, and therefore banks need to analyze and evaluate the impact on the financial results by undergoing through a parallel run to ensure the readiness for 2018.
IFRS 9 has three main areas:
- Classification and Measurement
- Hedge Accounting