Paul Chisnall, Director, Finance & Operations Policy, UK Finance
As many within finance and risk departments and some economists will know, one of the most resource-intensive implementation projects over the past three years or so has been the implementation of IFRS 9 Financial Instruments. This reflects both the complexity involved in the introduction of expected loss provisioning, which requires banks to model multiple economic scenarios, and the fact that larger institutions have taken the opportunity to integrate credit and finance systems as part of building up the granular data fields needed to meet the international standard’s requirements.
With the standard coming into play this year, both in terms of accounting requirements and regulatory stress testing, a further step has been taken in response to the financial stability agenda set by the G20 directly after the financial crisis a decade ago.
We have seen this week the publication by the Financial Reporting Council (FRC) of a report by the Taskforce on Disclosures about Expected Credit Losses (DECL Taskforce). The DECL Taskforce was convened by the Prudential Regulation Authority (PRA), Financial Conduct Authority (FCA) and FRC, and comprised a partnership between the preparer community – as represented by the seven largest UK credit institutions – and representatives of the investor and analyst community.
As the covering letter explains:
- Expected Credit Losses (ECL) provisions will be “different in nature and often in size” compared to incurred loss provisions at different points in the economic cycle. The change in total ECL provisions in any period will be the result of “a lot more ‘moving parts’ than was the case under incurred loss provisioning”.
- While there are already ECL disclosure requirements in IFRS 7 Financial Instruments: Disclosures, and the December 2015 report of the Enhanced Disclosure Taskforce (EDTF) contains some additional disclosure requirements on the subject, it will nevertheless still be challenging to develop a comprehensive set of appropriately detailed and targeted ECL disclosures.
- In preparing the report the Taskforce has sought to build on existing IFRS requirements, the EDTF recommendations, and related material. Its recommendations, however, do go further – and in some areas are more specific.
- The report is described as having set out a ‘stretching’ set of recommendations that not all of the UK’s biggest banks and building societies will be able to adopt immediately – but which should be feasible within two or three years.
The DECL Taskforce explains that it’s focus has primarily been on describing the disclosures that the UK’s largest credit institutions should provide, but that it considers that the recommendations will be of interest and value to a wider group of banks and building societies.