Regulators update disclosure guidance for IFRS 9

The joint FCA/FRC regulatory taskforce on disclosures on expected credit losses (DECL) has overhauled the guidance on best practice reporting requirements under IFRS 9 Financial Instruments

This is targeted at the biggest UK-headquartered banks and building societies in a bid to ensure comparability on expected credit loss accounting (ECL) disclosures.

The Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA) and Financial Reporting Council (FRC) set up the taskforce in 2018 in response to the requirement for banks and building societies preparing International Financial Reporting Standards (IFRS) accounts to provide for credit losses using ECL rather than the now discredited incurred loss approach.

The taskforce said the guidance was a ‘fundamental change’ to the current treatment of comparables, and involved additional complexity and greater judgment. It also stressed that a lack of familiarity with the new concepts meant that high quality, comparable disclosures were more essential than ever if users of financial reports were to understand the ECL numbers.

David Joyce, director at Lloyds Banking Group and taskforce co-chair, said: ‘Preparers want to help users understand their ECL numbers and the taskforce’s report enables them to do that in a way that has the potential to be reasonably harmonised from bank to bank.

‘The recommendations and guidance are stretching – I doubt that any institution will be able to adopt them in full immediately - but not unrealistic. Our report deserves to be read widely and I hope it will play a part in improving ECL disclosure practice generally.’

The latest guidance report focuses on the requirements in IFRS 7 Financial Instruments: Disclosures, specifically disclosures that help users to understand the types and extent of credit risk exposure a bank has and how that risk has evolved; the forward-looking information about macro-economic conditions used in estimating ECL; and the sensitivity of ECL provisions to different macro-economic conditions.

This includes guidance and illustrative examples to improve the quality of disclosures to enhance comparability between banks.

Simon Samuels, Veritum Partners and taskforce co-chair said: ‘It is not easy to provide ECL disclosures that shed light on the things that users need to understand. Our report will help preparers focus their disclosures on the things that matter, and to do so at an appropriate level of granularity.

‘Comparability from bank-to- bank is also essential but not easily attained and this will help preparers to find a way towards greater comparability in the way disclosures are presented.’

DECL taskforce second report and guidance 

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