Book Description

IFRS 9 is the new accounting standard for the classification and measurement of financial instruments, issued in response to the mandate received from the G20 in the light of the performance of accounting standards during the global financial crisis. The European Union endorsed IFRS 9 in November 2016 for mandatory application from 1 January 2018 onwards. This ESRB report has been prepared following a request by the European Parliament to consider the financial stability implications of IFRS 9. It analyses two main aspects of IFRS 9 from a macroprudential angle and with a focus on banks: the new approach to the classification and measurement of financial assets and the new expected credit loss (ECL) approach for measuring impairment allowances. IFRS 9 replaces the rules-based classification system under IAS 39 with a clearer principles-based approach. Measurement at fair value generally applies, except for instruments qualifying for amortised cost measurement according to two criteria. First, instruments must have cash flow rights consisting solely of payments of principal and interest (SPPI). Second, they must belong to a hold-to-collect business model. The report reflects a long debate on the use of fair value or historical cost for the measurement of financial assets and the suitability of these methods for different bank assets. It concludes that the classification of financial assets under IFRS 9 will, in principle, be clearer and sounder than under its predecessor and should not generally lead to a significant increase in the use of fair value by EU banks, at least at the aggregate level. The report identifies three areas in which there are significant changes relative to IAS 39 and which, for specific banks or periods of time, could entail relevant differences. First, debt instruments including embedded derivatives will no longer qualify to have their pure debt component separated and thus measured at amortised cost. Second, except for dividend income, none of the gains or losses from equity instruments measured at fair value through other comprehensive income will be reported in profit or loss. Third, highly liquid assets eligible for inclusion in the regulatory liquidity buffer but which, on the basis of their management during normal times, belong to a hold-to-collect business model may be measured at amortised cost, raising concerns about the emergence of unrealised fair value gains or losses if they need to be sold in times of acute stress. According to the assessment in the report, the aggregate quantitative importance of the assets affected by the first two changes is very small, while the importance of the third will depend on business model choices that are hard to anticipate on an ex ante basis.