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IAASA publishes Information Note “Applying IFRS 9 Financial Instruments – expected credit losses”

IFRS 9 Financial Instruments, which sets out an impairment model based on an expected credit loss (ECL) model for financial instruments, became effective in 2018.

Since its first application, IAASA has examined how banks have applied the key judgements in IFRS 9. IAASA’s Information Note is based on observed trends in the application of IFRS 9 by banks and, in particular, since the start of the COVID-19 pandemic.

The key messages in the Information Note are:

  • Users of banks’ financial reports should carefully review and analyse the totality of ECL information disclosed by banks and, in particular, information about material post-model adjustments (management overlays), judgements surrounding significant increase in credit risk, and changes to forward looking information, ECL allowances and ECL sensitivity.
  • IAASA encourages banks to provide more entity-specific and granular quantitative and qualitative expected credit loss information to users of their reports.
  • IAASA encourages banks to strive for further improvements to the level of transparency for the topics identified in the Information Note.
  • IAASA expects that as COVID-19 pandemic relief measures and supports are withdrawn (and the longer-term impact of the pandemic on banks’ ECLs become more apparent) additional disclosures and greater transparency of these impacts on ECLs will be disclosed in banks’ financial reports.

The Information Note is available here.