The ICAEW has released new research on the accounting standard IFRS 9 and warned of the future challenges of bank reporting. IFRS will require banks to show their expected losses earlier than in the past, warning that this approach may make reporting and comparing each bank’s performance more problematic.

The ICEAW says that the application of IFRS 9 will substantially increase the amount banks set aside for bad loans, and will also make their results more unpredictable as economic predictions are made. The key challenges banks will face include difficulties predicting the future, complexities of calculations, and defining ‘significant’ changes in credit risk.

Zsuzsanna Schiff, manager, auditing and reporting at ICAEW, said: ‘One of the major outcomes of the financial crisis was a fundamental review of how banks account for loan losses. The model used prior to the crisis was heavily criticised for providing “too little too late”, and ultimately allowing a credit bubble to develop and an over-optimistic assessment of bank’s reported profits.”

“IFRS 9 is a more forward-looking approach. It will mean banks will be forced to estimate credit losses from the date the loan is taken out, and over the course of its lifetime. However, this model is complex and means that banks must look into the future and estimate the impact of possible economic events – and it is just that, an estimate. Providing enough information on year-on-year changes, assumptions and projections will be vital to allow users to compare banks.”

“The size of the impact of changes in assumptions and the different expectations of the future will make the explanation for the variation in expected losses from one year to the next extremely important for investors and other users of bank financial statements. Disclosures of changes made from one year to another will be important but also providing enough information on the assumptions and projections will be vital to allow users to compare one bank with another. The quality of disclosure will therefore be a key issue as banks start reporting their results under the new standard.”

The ICAEW report can be found here.