Employee, holding tablet, shows colleague financial graphs on overhead screen

Under the new IFRS 9 financial regulations, calculating risk involves complex data modelling that must be updated at every reporting date. (Photo by kan_chana/Shutterstock)

Innovation | Technology

Teamwork is key for accountants working with new reporting requirements 

Working with risk and data modelling specialists can help measure P&L more accurately

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The International Financial Reporting Standards, developed by the non-profit International Accounting Standards Board, have been around for years. But the iteration that came into effect Jan. 1, 2018——is causing a certain amount of angst.

Issued in 2014 in response to the 2008 financial crisis, IFRS 9, according to the foundation, is “how entities should classify and measure financial assets, financial liabilities, and some contracts to buy and sell non-financial items. IFRS 9 requires an entity to recognize a financial asset or a financial liability in its statement of financial position when it becomes party to the contractual provisions of the instrument.” There's also a new model for hedge accounting, although entities can continue to use the old rules from IAS 39 in their hedge accounting, if they wish.

For accountants, IFRS 9 means that—in addition to the value of an instrument—12-month expected credit losses must be recognized in profit or loss when the instrument is purchased or originated, and a loss allowance must be established.

For financial assets, interest is calculated on the gross carrying amount. That’s Stage 1. Then, should the risk increase significantly, the full lifetime expected credit losses must be recognized in profit or loss. That’s Stage 2.

Stage 3 kicks in when the credit risk increases to the point that the asset is considered credit-impaired. Lifetime credit loss is recognized, but the interest calculation changes, and is based on the gross carrying amount minus the loss allowance.

Calculating the risk is where things get messy. It involves complex data modelling, taking into consideration the time value of money, probability-weighted outcome, and using “reasonable and supportable information that is available without undue cost or effort, and that includes information about past events, current conditions and forecasts of future conditions.” It must be updated at every reporting date.

That means accountants must work with risk specialists and data modelling specialists to determine the risk and expected credit loss for every instrument, in every reporting period, so they can add it to the profit and losses.

“IFRS 9 framework follows a very different paradigm than what accountants are used to,” says Dina Duhon, director, risk models, Scotiabank. “The best advice for accountants would be to learn to communicate with credit risk and quantitative specialists. The best implementations have both accountants and risk working together closely and effectively. Both areas need to try to understand where the other is coming from.”

For more

Learn about the impact of IFRS 9 on the financial services sector with Applying IFRS 9: Key Issues and Challenges in the Financial Services Sector on July 19, 2018. This free webinar will cover the complexities encountered in practice in applying IFRS 9, key metrics and internal controls, as well as IT and system considerations.

CPA Canada has also compiled a list of external resources on financial instruments to better help you understand and apply IFRS 9.