GAAP filers have until 2020 before they must make public their first attempts at estimating credit losses under FASB’s CECL (Current Expected Credit Loss). However, there is a group of them – called “dual filers” – who have substantial businesses and regulatory reporting obligations both inside and outside the US, and must also file in 2018 under IFRS 9, the IASB’s separate loss-recognition rule.
IFRS 9’s deadline of January 1, 2018 means that dual filers undoubtedly spent much of last year extensively preparing for the deeper level of modeling, analysis and reporting required under the shift from an incurred loss model to a more forward-looking accounting of credit impairment. Because Canadian banks start the new fiscal year on November 1st, rather than January 1st, the first group of major banks to report under IFRS 9 are Canada’s “Big Five” -- Bank of Montreal, Bank of Nova Scotia, CIBC, RBC and Toronto-Dominion. They are all eventual dual filers.
CECL vs. IFRS 9 – The Major Difference
The primary difference between the two standards is that CECL calls for lifetime estimations on almost all classes of credit assets, both performing and non-performing, whereas IFRS 9 applies the lifetime standard only to assets that are either impaired (“Class 3”) or else substantially diminished in quality since acquisition (“Class 2). Under IFRS 9, the filer need only estimate credit losses over the next 12 months on the lion’s share of assets that remain as “Class 1” – assets performing satisfactorily. Nevertheless, IFRS 9 is more punitive than the standard it replaces, so that the marketplace anxiously awaits.
5 Inferences from “Big Five’s” Reporting Under IFRS 9
As the first IFRS 9 reporting approaches on or around March 1st, the marketplace will look to the Big Five for the first indications of IFRS 9’s effects on:
- Equity, P&L and capital.
- Quality of internal control implementation and management explanations of their decision-making.
- Level of poise the banks have brought to this historic exercise – several years in the making.
- Quality and consistency of guidance that the Big Five have received from the audit community and from national regulators.
(Away from Canada, some observers have looked askance at the European Banking Authority, which waited until January 12th to publish its final Guidelines on disclosure requirements of IFRS 9, taking effect in a matter of weeks.)