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Implementing IFRS 9

01 February 2019

As per 1Jan 2018, IFRS 9 came into effect. This standard significantly changed the reporting of financial institutions as a direct response to the financial crisis in 2008. However, the introduction of new regulations for reporting of financial instruments also affects non-financial institutions, as they now also have to provide for e.g. loan losses of trade receivables claims.

IASB enacted the new standard in July 2014 and the EU’s endorsement took place in November 2016. Insurers have to apply the new IFRS 9 regulations with the introduction of IFRS 17 from 2021 on a mandatory basis.

Preparers under US-GAAP have to follow similar rules issued by the FASB from 2020 on.

IFRS mainly consists of 3 pillars with the main changes described in the scheme below:



IAS 39


Classification & Measurement

- L&R (AC)
- HTM (AC)

- Other liabilities (AC)

Separation of embedded derivatives

Classification depends on:

- Business model
- SPPI criterion

Measurement categories

- mortised Cost


No separation of embedded derivatives for assets, BUT for liabilities!

Loan Loss Provisioning

Incurred Loss Model: loan loss provisioning on non-defaulted portfolio applying “IBNR”

Expected Credit Loss Model: loan loss provisioning 1Y-ECL/Life Time ECL on non-defaulted portfolio, three-stage model, with a forward-looking approach

Hedge Accounting

IAS 39 can still come to use!

Restrictions regarding eligible hedge instruments, hedged items und eligible risks that can be hedged, strict rules on hedge efficiency

Less strict on eligible hedging instruments and hedged items, no hard thresholds for its effectiveness, rebalancing to prolong hedge relations

Lessons learned so far

Fears about a dramatic increase of loan loss provisions have barely materialized: when the first EBA-conducted impact study in April 2016 indicated a negative effect of 59 bps on CET 1, the average first-time application effect in the annual accounts of European banks reduced to 27.

 bps with the release of published transition effects by European banks as per yearend reporting 2017.

Reported effects based on first quarter results were very volatile with Italian banks having reported a negative effect of up to 102 bps, whereas the German Landesbanken reported positive effects of up to 70 bps. There is common agreement that due to the point-in-time method IFRS 9 provisioning will be procyclical and that the current macro-economic environment is rather positive.

Obviously most banks are still struggling to finalize their IFRS 9 models. A number of banks have therefore revised their in Q1 published transition effects including their half-year financial reports.

Besides the modelling of expected credit losses, modifications seem to be one of the biggest operational issues when implementing IFRS 9. This is due to the subtle distinction of substantial/non-substantial and contractual/non-contractual changes.

Another matter of concern for nearly all banks is the synchronization between local GAAP and IFRS in order to reduce operational complexity in the accounting area.

Most banks have not yet implemented the new IFRS 9 regulations on hedge accounting. They rather made use of the provisions to carry forward the IAS 39 general hedge model.


IFRS 16 New Accounting for Leasing

As of 1 Jan 2019, all companies have to apply the new accounting regulations set by the IASB for leases. This will bring dramatic changes for lessees, for the new standard requires the right-of-use to be recognized as an asset and the net present value of the lease liability as a liability.

In a first step, companies have to examine their rental and similar contracts in order to identify any leasing features under the standard. Rental contracts for real estate, vehicles and IT servers will typically fulfill the stipulated requirements of IFRS 16. Crucial for the fulfillment is the existence of a clearly identifiable asset and the sole right of the lessee to use this asset exclusively for the term of the rental.

This distinction may sometimes be cumbersome to apply. For instance, the exact number of parking lots in a garage specified in a rental agreement may trigger IFRS 16 lease accounting. The same number of undefined parking lots in a garage may not trigger lease accounting.

For the duration of the lease, assumptions of termination or extension rights have to be documented.

Leasing liabilities will have to be discounted applying either the interest rate inherent to the lease contract or the incremental borrowing rate of the lessee. As the inherent rate will practically be hard to determine by the lessee, the application of the incremental borrowing rate will be an important topic for most leases.

The expense arising from compounding the lease liability is to be reported under interest expense.

Lease cash flow adjustments (exercise of options, variable rate adjustments, etc.) during the lease term have to be accounted as modifications.

There are two ways to first-time application is either to be done retrospectively, which will be operationally difficult in practice. Alternatively, applying the modified retrospective approach under IFRS 16 is also possible. This method does not require restoring historical amounts for the leases.

Banks shall note that the right-of-use carries a 100% risk weight for RWA purposes.

IFRS 16 furthermore comprises regulations for sub-lease agreements as well as sale-and-lease back transactions.

US-GAAP preparers have to apply a similar leasing regulation from 1 Jan on, issued by the FASB under regulation ASC 842.