A specialist taskforce on disclosures about expected credit losses has published ‘stretching’ recommendations for the UK's biggest banks in meeting requirements under IFRS 9 Financial Instruments, which will have a significant effect on how they calculate loan loss provisions
The taskforce is a partnership between the preparer community and the investor and analyst community, sponsored by the Financial Reporting Council (FRC) together with the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA).
It was set up to support banks are building societies with the introduction of expected credit loss accounting (ECL) to replace incurred loss provisioning, by providing recommendations on the information that should be provided in the ‘comprehensive set of appropriately detailed and targeted disclosures’ required by the new standard.
The taskforce’s report set out the disclosure principles used in developing its recommendations, as well as considerations applicable to all the recommended disclosures in respect of the scope, timing, frequency, location and granularity.
It then summarises what the taskforce views as the most important ECL considerations and explains the related disclosures, why they matter to users, and set out a series of specific disclosure recommendations.
These include recommendations on how credit risk management practices align to the ECL approach; the use of new and existing terminology, definitions and data points; incorporating forward looking information; ways to track credit risk as the population moves through stages; creating a credit risk profile; understanding measurement uncertainty; and ECL’s impact on regulatory capital and governance.
In a letter to the CEOs of the FRC, PRA and FCA, the taskforce co-chairs stated: ‘Effective disclosure will be essential if an information vacuum is not to appear and ECL is not to come to be regarded as something of a “black box”.’
The FRC said it welcomed the report, but noted that ‘some of the recommendations are stretching and may require a number of years to be implemented.’
The taskforce originally intended its output to be used by partners on the project and the largest banks and building societies, and said that it expected most large lenders to have implemented the recommendations within two to three years.
However the FRC said it is encouraging all banks, building societies and credit institutions to consider the recommendation when preparing their disclosures in the forthcoming reporting season.
The taskforce will shortly be starting work on a short series of additional reports designed to provide guidance on how ECL information can be presented in a way that enhances comparability between firms.
Recommendations on a comprehensive set of IFRS 9 Expected Credit Loss disclosures is here.
Report by Pat Sweet