Understanding what should be included in disclosure and the level of detail required

Understanding what should be included in disclosure and the level of detail required

  1. Chris, can you tell the Center for Financial Professionals about yourself and your current role? 

 I am a Fellow of the Institute of Chartered Accountants in England and Wales and have been working in London for the past 10 years for Standard Chartered Bank, which is based primarily across Asia, Africa and the Middle East. In my current role, I am the IFRS 9 Technical Accounting and Reporting lead and prior to that I was Group Chief Accountant, responsible for the Group’s external financial reporting and accounting policy issues. 

  1. What experience have you gained in the banking field, specifically the IFRS 9 sector over the past few years?

I have been working in the banking sector for almost 20 years in a number of large UK banks, and have been involved in conversions of UK GAAP to both US GAAP and IFRS, before concentrating on IFRS technical accounting and financial reporting.  IFRS 9 has been a particular focus over the past few years, and I have been actively involved both in responding to exposure drafts and also with industry working groups.  As the IFRS 9 Technical Accounting and Reporting lead, I am responsible for ensuring the bank is complying with the requirements of the standard, the plethora of implementation guidance and developing the external disclosures.  I also chair the Group’s IFRS 9 project Technical Policy Panel.  I am also a member of the BBA IFRS 9 Impairment Working Group and the ICAEW Banking Committee.

  1. Why might there be a confusion over what should be disclosed and what is required to be disclosed?

Although this is an issue that impacts most areas of financial reporting, it is particularly the case for IFRS 9.  In general, the aim is to provide high-quality financial reporting disclosures that are relevant, reliable and decision-useful; unfortunately, sometimes the minimum disclosures mandated by the accounting standards may not wholly meet this need.  Therefore these may need to be supplemented to provide additional detail, especially where there is significant complexity or management judgement involved.

IFRS 7, which is the standard that contains all the disclosures for financial instruments including those related to IFRS 9, has a couple of requirements that try and tackle this – one being that an entity, in light of its own circumstances, should decide how much detail to provide, striking a balance between too much and too little information.  The other is that an entity should disclose additional information in order to meet the standard’s stated disclosure objectives if the minimum requirements are not considered to be sufficient.  For financial institutions, recommendations published by the Enhanced Disclosure Taskforce (EDTF), are aimed at bridging the gap between the minimum requirements and the additional information that users may find useful.

In the context of IFRS 9, with its reliance on forward looking economic information and multiple economic scenarios, it is very easy to quickly rack up a staggering number of tables, with the aim of providing useful information to users especially where an entity operates in multiple jurisdictions.  This may have the opposite effect, however, as important information could be obscured by the sheer volume.

The extent of management judgement involved in determining expected credit losses (ECL) also requires careful consideration as to what would be useful for users. To provide the appropriate context and transparency, these disclosures need to be informative but not complex – that is, bringing out the key assumptions and drivers of expected credit losses for example, but not the intricacies of the underlying machinery.  Less may well be more.

  1. What are the disclosure requirements for IFRS9 and how do they overlap with existing data requirements?

IFRS 9 introduces some fairly challenging and unique disclosures.  One of the core requirements is itself a very complex beast – the movement table for ECL and associated movements in gross assets.  This is a particularly critical disclosure that helps explain the period-to-period movements in ECL.  This table cuts across both risk and finance data, analyzing movements arising from changes in risk models as well as repayments and new lending.  In addition, it also incorporates the impact on ECL of movements between the stages.  Deriving the data to populate the table can be challenging and decisions also have to be made around the order in which items are determined, the timing of transfers between stages and the period over which movements will be aggregated.

A number of existing IFRS 7 disclosures have been carried forward and among the IFRS 9 disclosures; there are some areas of overlap with other regulatory requirements, such as those around modifications and their linkage to forbearance activities.

While IFRS 9 has further extensive disclosures around credit risk management, including analyzing the credit quality of the portfolio, it also introduces more granular disclosures around classification and measurement and hedge accounting.

  1. What are the main challenges that you foresee post full 2018 implementation?

There will be a number of challenges once IFRS 9 is fully implemented globally.

The first is the extent to which comparability between banks will be impacted – both nationally and internationally – and around the consistency of application.  A wide dispersion of outcomes may undermine confidence in IFRS 9 if the reasons behind this are not clearly explained.

Linked to this will be the level of market education required – for example, clearly setting out why the same borrower could have loans in stage 1 and stage 2 and why this makes sense. Banks and the markets will also get a feel for how expected credit losses can move and how volatile this may be.  Of course, this may not be so apparent in the early years of IFRS 9 if the macro-economic environment is relatively benign.

Although IFRS 9 is principally applied on a retrospective basis, there is no requirement to restate comparatives.  This will, of course, introduce its own challenges in describing period to period movements for the first year, and this will require high-quality transition disclosures.  However, if entities are continuing to use the IAS 39 hedging framework rather than that of IFRS 9, comparative information will be required for the additional hedging disclosures.

There will also be a string of second order challenges – the ability to report ECL in line with tight reporting deadlines; how to fully reflect ECL in planning and forecasting; incorporating IFRS 9 into stress testing (both internally driven and externally mandated) and capital adequacy plans; whether there will be (or should be) any adjustments required to the regulatory capital framework; and whether there will be any commercial implications, from product pricing through to performance and reward where these rely on financial performance metrics.

Clearly, implementation issues relating to IFRS 9 will continue beyond 2018 as entities further improve consistency and comparability, refining models, enhancing disclosures to reflect a broad spectrum of user feedback and adapting to any commercial implications that may arise.


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