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Getting to grips with IFRS 9 reforms

Friday 29 July 2011 - by Andrew Hickley

The International Accounting Standards Board has announced that the introduction of IFRS 9 standards, concerning complex areas such as impairment and hedge accounting, will be delayed until around 2015. Andrew Hickley looks at the issues that must be overcome during this time.

The International Accounting Standards Board was due to put forward proposals for both hedge accounting and impairment of financial assets standards in the third quarter of 2011, which form part of IFRS 9.

But inherent industry concerns over the direction of proposals has led the IASB and US Financial Accounting Standards Board to declare a two-year delay to the implementation of IFRS 9, allowing vital time for changes.

PricewaterhouseCoopers head of regulation Pauline Wallace says the original timetable - which would have seen the impairment project being released by the third quarter of 2011 - was "optimistic" given the complexities of the regulation.

Impairment proposals aim to better gauge the losses that a firm is projected to make, in particular on the loans it has issued and on the deterioration of its financial assets. Companies previously relied on an incurred loss model approach, which required a trigger to be activated before it could formally recognise these losses - even though often in the financial crisis they were considered a formality. The industry is now moving towards an expected loss model approach.

Wallace highlights impairment in particular as an "incredibly difficult area" to gain consensus on, given that every bank manages their credit exposures in different ways.

"That is their unique selling point if you like, because the better you manage your credit risk the more likely you are to be lending to the right people and the more likely you are to be profitable.

"You wouldn't expect there to be a unified system, because you would end up with pretty bland and comparable banks. Life is not like that."

Impairment proposals stumbled after the complexities of the good book/bad book loan loss system - put forward in January - were criticised by the IASB at a meeting in May. Instead, the IASB will now issue a review document in the second half of 2011.

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